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ECB says financial integration improves as crisis effect remains

By Alessandro Speciale

Financial markets in the euro area are still recovering from fragmentation caused by the debt crisis, according to the European Central Bank and the European Commission.

“The financial market integration recovery process that started in mid-2012 continued in most market segments in the first months of 2014,” the ECB and EC said in reports published today. “This improvement reflects the fact that there is no longer a re-denomination risk linked to the perception of a possible euro area breakup.”

The risk of the splintering of the currency bloc at the height of the debt crisis led banks to retrench behind national borders and unwind progress in financial integration achieved since the creation of the euro. Fragmentation started receding after ECB President Mario Draghi said in 2012 that he would do “whatever it takes” to save the currency union and announced OMT, a program to buy the bonds of stress nations if needed.

Even so, the euro area has not yet recovered to levels of integration seen before the crisis, according to today’s reports.

“Both the euro area and the single market are more economically and financially fragmented compared to the pre- crisis period,” the ECB and EC said. “There is room to promote further integration in specific segments such as corporate bonds, equity and banking markets.”

Factors that have improved financial integration include regulatory reforms, monetary policies such as the still-untapped OMT program, and “steady” reform process in euro-area countries, according to the reports.

The ECB is conducting a Comprehensive Assessment of the largest lenders in the 18-nation euro area before it takes over as the region’s bank supervisor in November, in a step toward a European banking union. The review, which includes a balance- sheet analysis and a stress test, spurred European banks to raise 30 billion euros ($42 billion) in extra capital so far, Morgan Stanley said in a note on April 8.

The reports underline the “crucial importance of implementing the banking union to restore the financial sector’s capacity to support economic activity,” EU Internal Market and Services Commissioner Michel Barnier said in a statement. “The new legal framework will ensure that banks will face the same market discipline as any other business, rather than being bailed out by European taxpayers.”

The ECB said that it has developed a new index of financial integration called SYNFINT. The indicator reflects developments in markets for money, bonds, equities and banking and shows the damage caused by the financial crisis, it said.

[Bloomberg]

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