THE IMPLICATIONS OF INTEGRATION FOR GLOBALISATION OF THE FINANCIAL SECTOR David G Mayes University of Auckland Bank of Finland

THREE ISSUES An open market is not necessarily globalised The extent of international contagion as a measure of globalisation How far does harmonisation have to go for a market to be integrated Indicators from the EU and Asia

AN OPEN MARKET IS NOT NECESSARILY GLOBALISED EU has technically had no barriers to the movement of capital since 1993 and in many cases earlier – does this make it an integrated market? Home bias Feldstein-Horioka (1980) puzzle still present but declining Structure is linked national not EU-wide

AN OPEN MARKET IS NOT NECESSARILY GLOBALISED Structure is linked national not EU-wide –Only 30 important cross-border banks –Many are linked rather than cross-border –Single European Payments Area –TARGET/TARGET2 Securities structure partly integrated – Euronext, OMX, Deutsche Börse Horizontal and vertical integration incompatible Network industry issues An internet style solution – no DTCC MiFID?

AN OPEN MARKET IS NOT NECESSARILY GLOBALISED Asia open to outside but not internally integrated Pressure since the Asian crises –Chiang Mai Initiative 2000 –Lack of financial depth leads to accumulation of foreign securities permitting greater global financial imbalance?

THE EXTENT OF INTERNATIONAL CONTAGION AS A MEASURE OF GLOBALISATION Asian crises caused difficulties for countries that were ‘sound’ Sub-prime crisis spread much further than the holding of sub-prime related securities The originate and distribute model spreads the risk round the world better Could have globalised benefits of lender knowledge – commoditisation Asset prices linkages – problem for independent monetary policy

THE EXTENT OF INTERNATIONAL CONTAGION AS A MEASURE OF GLOBALISATION Asset prices linkages – problem for independent monetary policy – differentials limited Reputational contagion – any mortgage lender at risk? Asia - stronger correlation of stock prices with US than each other – BUT also true of EU post 1999 – intra EU correlation higher than intra-Asia Strong comovement of stock prices and growth, so cyclical convergence will lead to greater stock price convergence

HOW FAR DOES HARMONISATION HAVE TO GO FOR A MARKET TO BE INTEGRATED? EU 1987 single market initiative not enough Lamfalussy process –Work of level 3 committees CEBS, CESR, CEIOPS –Local options within directives –Supervisory cooperation – Memoranda of Understanding – soft law not enough in crisis –Need Prompt Corrective Action on common basis? –Have an n+1th EU regime for cross-border banks?

CONCLUDING REMARK Openness not enough but recent events show markets are highly related Regulatory and financial stability responsibility national Reaction may be to insist on structural separation as in NZ Unless highly integrated like the EU may want to take a step back – NZ decision on Canadian 40% ownership of Auckland airport