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

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 and 1995 A very rapid increase between A leveling off in

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.

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