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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 Brief Review State of play in different market segment

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Financial Market Integration in Euro Area —— Development and Obstacles ——

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  1. 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

  2. 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

  3. 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

  4. 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

  5. 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)

  6. State of play in different market segmentIn money market • Increased money market financing Money Market Financing in Euro Shared More Than Doubled

  7. State of play in different market segmentIn bond market • Increased bond issue • High degree of openness • Active market participants • Increased liquidity

  8. 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**

  9. Estimated by authors (2001)

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. Brief introduction of two data analysis indexExchange rate volatility Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates

  18. 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

  19. 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

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

  21. Thanks

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