Financial Market Integration in Euro Area——Development and Obstacles——
Zhang Jikang and Miss. Wang Xinhui
Center for European Studies, Fudan University
April 7~8, 2004
Financial Market Integration in Euro Area
Brief Review State of play in different market segment Brief introduction of two data analysis index Remaining obstacles Conclusion
Brief Review Definition and characteristics of integrated financial market
Removal of the relevant frictions and obstacles Facing a single set of rules Having equal access Being treated equally
Brief Review Historical development
Funding of EMU Removal of capital controls in1991 Start the single currency in January 1999 Fulfillment of FSAP( Financial Services Action Plan )
in 2004
State of play in different market segment In money market
Factors promoting money market integration
Common monetary policy TARGET, the common payment system Common information and communication system Accessible guarantee and collateral Swaps and forward rate agreements (FRAs)
State of play in different market segment In money market
Increased money market financing
Money Market Financing in Euro Shared More Than Doubled
State of play in different market segment In bond market
Increased bond issue High degree of openness Active market participants Increased liquidity
State of play in different market segment In equity market and stock market
Historical character of the Europe equity market
Dependency on the funds intermediated by banks
Relatively higher bank loans to corporate and lower stock
market capitalization**
Estimated by authors (2001)
structural change towards more market-based finance
Emerging integrated electronic trading platforms with less state exchanges
Registered record growth Whole new markets A number of Europe-wide equity indices established
State of play in different market segment In equity market and stock market
State of play in different market segment In equity market and stock market
structural change towards more market-based finance
Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates
structural change towards more market-based finance
From the table above, we can see
become highly integrated only since 1996
taken over from the US as the dominant market in Europe
State of play in different market segment In equity market and stock market
State of play in different market segment Related payments, clearing and settlement infrastructures
Mature infrastructure system
Simplification of payment system: Target Simplification of dealing currency: Euro Simplification of clearing and settlement system
State of play in different market segment Related payments, clearing and settlement infrastructures
Structural change in the trading platform
Number of Settlement System Comparison and Trend
Brief introduction of two data analysis index The efficiency of investment return
Less or no cross-market arbitrage opportunities
The law of one price
The expected same return of investment
Brief introduction of two data analysis index Exchange rate volatility
From Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates, we can see
Volatility in integration of stock markets remains A low degree of integration during 1992-93 and 1995 A very rapid increase between 1996-99 A leveling off in 1999-2000
Brief introduction of two data analysis index Exchange rate volatility
Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates
Remaining obstacles Impediment in market
Dealing preference
Growth prospect and expected return, instable bond issuance*
Transaction risk and cost though lower exchange rate risk
Home bias which resulted in the remained cross-border and industrial entry barriers such as retailing commercial bank industry
Remaining obstacles Political hindrance
Fulfillment of FSAP in 2004 Current structure of regulation and supervision Policy coordination among member states ECB policy implementation Different Fiscal Policies and ECB common
monetary policy
Conclusion
Though obstacles remaining, the trend towards a deeper, integrated and more mature financial market in Europe can not be reversed and will continue.
Thanks
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