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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

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financial market integration in euro area development and obstacles
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
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
Brief ReviewDefinition 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
Brief ReviewHistorical 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
State of play in different market segmentIn 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 market10
State of play in different market segmentIn 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
State of play in different market segmentIn 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
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**
state of play in different market segment in equity market and stock market15
State of play in different market segment In equity market and stock market
  • 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 market16
State of play in different market segmentIn equity market and stock market
  • structural change towards more market-based finance

Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates

state of play in different market segment in equity market and stock market17
State of play in different market segmentIn equity market and stock market
  • 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 related payments clearing and settlement infrastructures
State of play in different market segmentRelated 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 infrastructures20
State of play in different market segmentRelated 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
Brief introduction of two data analysis indexThe 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
Brief introduction of two data analysis indexExchange 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 volatility23
Brief introduction of two data analysis indexExchange rate volatility

Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates

remaining obstacles impediment in market
Remaining obstaclesImpediment 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
Remaining obstaclesPolitical 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
Conclusion

Though obstacles remaining, the trend towards a deeper, integrated and more mature financial market in Europe can not be reversed and will continue.