A further improvement in integrating retail banking markets and the development of European capital markets can strengthen the resilience of the region’s financial system, said the central bank in its annual edition on Financial Integration in Europe.
The report noted a continuation in convergence of retail bank lending rates but observed a slowing trend since spring/summer 2015, partly due to offsetting developments in different market segments.
"Notably, bank lending rates to firms and households continued to converge and cross-border loans to firms continued to increase mildly in relative terms, supported by the ECB’s unconventional monetary policy measures (including targeted longer-term refinancing operations), the gradual economic recovery and progress with the banking union," the report said.
The report found significant heterogeneity in equity market returns between late 2014 and mid-2015.
Rising risk aversion in global financial markets and changing economic fundamentals of countries have led a divergence in bond yields across the region, the ECB said.
"Looking forward, it is important that recent financial turbulence, for example as transmitted from the stock markets of emerging market economies or from economic and political uncertainties across euro area countries, do not bring the process of financial re-integration to a halt," the report said.
In such as a scenario, the Single Resolution Fund became operational this year, in addition to the expansionary monetary policy of the central bank, according to the report.
The ECB’s report calls for further strengthening of Europe’s more bank-oriented financial system by developing and integrating capital markets, notably in the equity space.
ECB vice-president, Vítor Constâncio, said: "We can reach the economic benefits of transforming the financial system, if the European Capital Markets Union is ambitious.
"At the same time, however, the perimeter of macroprudential supervision and regulation needs to be extended in order to address new financial stability risks associated with such a process."
The report also highlighted the Eurosystem’s support for the European Commission’s proposal to form a European Deposit Insurance Scheme (EDIS), saying that it is the necessary third pillar of the banking union.
Image: Euro bank notes. Photo Courtesy of User:Mattes/Wikipedia.
