Front Matter

Front Matter

Jörg Decressin, Wim Fonteyne, and Hamid Faruqee
Published Date:
September 2007
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Integrating Europe’s Financial Markets

Dedicated to Michael Deppler

©2007 International Monetary Fund

Production: IMF, Multimedia Services Division, Creative Services

Cover design: Noel Albizo

Typesetting and figures: Bob Lunsford

Cataloging-in-Publication Data

Integrating Europe’s financial markets / edited by Jörg Decressin, Hamid Faruqee, and Wim Fonteyne.—Washington, D.C.: International Monetary Fund, 2007.

p. cm.

Includes bibliographical references.

ISBN 978-1-58906-623-6

1. Europe—Economic integration. 2. Finance—Europe. 3. Financial institutions—Europe. I. Decressin, Jörg. II. Faruqee, Hamid. III. Fonteyne, Wim. IV. International Monetary Fund.

HC241 .I584 2007

Price: US$24.50

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The following conventions are used in this publication:

  • In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
  • An en dash (–) between years or months (for example, 2005–06 or January-June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
  • “Billion” means a thousand million; “trillion” means a thousand billion.
  • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.


During the first three decades after WWII, Europe enjoyed rapid economic growth, fueled by reconstruction, integration, and a supportive international environment. The next three decades brought more challenging times. External conditions became less propitious and, with the capital stock largely rebuilt and labor supply increasingly restrained by demography and policies, growth became dependent on total factor productivity. While Europe’s highly regulated, segmented, and often government-controlled financial systems had been instrumental in mobilizing resources to rebuild the capital stock after the war, they needed reform in order to better deliver the continuous reallocation of capital necessary to support productivity growth and adaptation to a rapidly changing world. The lack of integration in the financial sector was also increasingly at odds with the market integration occurring in other areas. During the 1980s, Europe’s growth challenge and the Treaty of Rome’s single-market objective combined in pushing forward the need to transform national financial systems into a modern European Union–wide system. Correspondingly, financial integration became a policy priority.

By and large, the European Union’s financial integration policies have been a success story. Its financial system has become much more modern, innovative, and competitive, and is in important dimensions largely integrated. The euro-denominated bond market has become the world’s largest, London is vying with New York as the world’s leading financial center, and consumers and businesses have never enjoyed such a wide range of financing and investment options. The positive effects of these developments on the EU economies are also becoming increasingly visible, perhaps most so in the new member states.

New progress on European financial integration offers the European Union the double opportunity to build an innovative, state-of-the-art financial system that would improve the EU’s growth performance. However, much remains to be accomplished to turn this opportunity into reality. Key parts of the Financial Services Action Plan still need to be completed or fully implemented; important market segments are yet to be fully integrated; and Europe’s financial market infrastructure remains segmented, due in large part to the fragmentation of clearing and settlement systems. These obstacles only will be overcome if policymakers resist the temptation to cater to vested interests. The benefits that still lie ahead for the European Union’s 493 million consumers provide a compelling argument to do so.

Financial market integration requires a financial stability framework that will contain evolving risks, facilitate cross-border business, establish a level playing field, and remove the remaining disincentives to financial integration. Given the IMF’s mandates, this book focuses on financial stability issues and their interaction with the financial integration process. This interaction is a fascinating and underexplored area that will become increasingly relevant, and not only in the European Union. The main message that results from this work is that financial integration policies and reform of the financial stability framework need to be undertaken as a package.

This book is an interim stock-taking exercise by a team of IMF staff, and reflects many fruitful discussions on financial integration between IMF staff and their European counterparts. It is by no means the final word on the dynamic and long-term financial integration process. Nonetheless, the hope is that this work can help Europe to push forward on the road that remains ahead.

European financial integration will remain a particular focus for the IMF, and not just because it is crucial for the European Union’s long-run economic performance. Europe’s efforts at financial integration have been unique, but in their details they are highly relevant to a world that is undergoing a broad financial integration process. I join the authors in hoping that this book will help policymakers and academics in studying the European experience.

John Lipsky

First Deputy Managing Director

International Monetary Fund


This book is a reflection of the greater prominence of financial integration and stability issues in the policy agenda of the International Monetary Fund’s European Department. However, it is based on work that has been conducted over the past few years in a number of IMF departments, including in particular the Monetary and Capital Markets Department and its predecessors. Our coauthors, Martin Čihák, Robert Corker, Gianni De Nicolò, Francois Haas, Beata Kudela, Alexander Tieman, and Jan-Willem van der Vossen, and contributing authors Marcello Estevão, Elias Kazarian, and Emil Stavrev, made this book possible, not only with their valuable ideas and many hours of work, but also with their readiness to turn their contributions around under short deadlines during various stages in the editorial process.

The production of this book involved many other people, too, as well as exemplary interdepartmental and interpersonal cooperation. In particular, the book owes much to John Lipsky for bringing financial sector issues to the top of the IMF’s policy agenda, and for his inspiration, foreword, and readiness to contribute to the success of our conference, “Putting Europe’s Money to Work” (Brussels, February 21–22, 2007); to Michael Deppler for his support, advice, encouragement, and wisdom; to Axel Bertuch-Samuels, Robert Corker, and Todd Groome for their crucial support and guidance at the early stages of this project; to Linda Griffin Kean and Archana Kumar for their excellent and patient editorial assistance; to Marina Primorac and Sandy Donaldson for their editorial assistance and help in finalizing the book; to Mark Swinburne for supervising work on several of the contributions to this book; to Vanessa Abrea Ince for her always-good-humored administrative, editorial, and all-round assistance; to Chanpheng Dara, Yoon Sook Kim, Oksana Khadarina, Marianne El-Khourri, and Kalin Tintchev for research assistance; to Catherine Willis for marketing advice; to Michaela Schrader for public relations advice; to Camilla Andersen and Olga Stankova, for their help in organizing outreach for the book; to the Bruegel Institute, who co-organized the Brussels conference with us, and in particular to Mario Monti, Jean Pisani-Ferry, Nicolas Véron, Matt Dann, and Martin Saldías Zambrana for doing so much to make our joint conference a success; and to the presenters and participants in our conference for their valuable intellectual contributions.

This book benefited from the constructive and frank discussions on financial integration that the authors and members of the IMF’s EU Policies team have had in recent years with staff at the European Central Bank (ECB) and the European Commission and with many other experts in Europe. Without implicating anyone and with inevitable risks of omission, we would like to extend special thanks to Joaquín Almunia, John Berrigan, Per Callesen, Olli Castrén, Bernard Delbecque, Servaas Deroose, Frank Dierick, Carlos Egea, Andrea Enria, Sebastian Fairhurst, Gillian Garcia, Mauro Grande, Philipp Hartmann, Baron Alexandre Lamfalussy, Karel Lannoo, Fabienne Lefebvre, Philippe Moutot, María J. Nieto, Peter Nijsse, Loukas Papademos, Patrick Pearson, Peter Praet, Guido Ravoet, Klaus Regling, Delphine Sallard, Roberto de Santis, Wolfgang Schill, Dirk Schoenmaker, Imfried Schwimann, Panagiotis Strouzas, Pedro Gustavo Teixeira, Elemer Tertak, Jean-Claude Trichet, Freddy Van den Spiegel, and David Wright. The book also benefited from input from participants in various seminars held at the European Commission, the ECB, and the IMF. The views expressed in this book are those of the authors, and should not be attributed to the International Monetary Fund, its Executive Board, or its management.

Jörg Decressin

Hamid Faruqee

Wim Fonteyne




asset-backed security


asset-to-employee ratio


autoregressive conditional heteroscedasticity

Basel II

Revised international capital framework for banks agreed by the Basel Committee on Banking Supervision in June 2004


Basel Core Principles for Effective Banking Supervision


Bank for International Settlements


equity-to-asset ratio


capital asset pricing model


correspondent central bank


Correspondent Central Banking Model (Eurosystem)


central counterparty


Committee of European Banking Supervisors


Committee of European Insurance and Occupational Pensions Supervisors


Clearing and Settlement Advisory and Monitoring Expert group


Committee of European Securities Regulators


collateralized debt obligation


commercial mortgage-backed security


collateralized mortgage obligation


commercial paper


core principle (Chapter 9)


Coordinated Portfolio Investment Survey (IMF)


Capital Requirements Directive


central securities depository


Copenhagen stock exchange


distance to default


deposit-to-liability ratio


Depository Trust & Clearing Corporation (U.S.)


European Banking Committee


European Commission


European Central Bank


Economic and Financial Affairs Council


European Economic Area


Economic and Financial Committee


European Insurance and Operational Pensions Committee


Emergency Liquidity Assistance


European Economic and Monetary Union


European Securities Committee


European Union


15 member states that comprised the EU until May 2004 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom)


25 member states comprising the EU from May 1, 2004 until December 31, 2006 (EU-15 plus Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, and Slovenia)


current membership of the EU since January 1, 2007 (EU-25 plus Bulgaria and Romania)


Euro Interbank Offered Rate


Financial Conglomerates Committee


Financial Conglomerates Directive


Federal Deposit Insurance Corporation (U.S.)


Federal Deposit Insurance Improvement Act


Financial Services Authority (United Kingdom)


Financial Services Action Plan (of the European Commission; Chapters 18, 10)


Financial Sector Assessment Program (of the World Bank and IMF; Chapter 9)


Financial Services Committee


Financial System Stability Assessment (of the IMF)


Financial Stability Table


generalized autoregressive conditional heteroscedasticity


global minimum variance


government-sponsored enterprises


Helsinki stock exchange


Hodrick-Prescott (filter)


Insurance Core Principles, issued by the International Association of Insurance Supervisors (IAIS)


international central securities depository


information and communication technology


International Financial Reporting Standards


internationally active large banking group


International Organization of Securities Commissions


Investment Services Directive


loan-to-asset ratio


large, complex financial institution


London International Financial Futures and Options Exchange


London Stock Exchange


Monetary Financial Institution


Markets in Financial Instruments Directive


multilateral trading facility


Mixed Technical Group


national central bank


Nordic Central Securities Depository


New York Stock Exchange


Organization for Economic Cooperation and Development


Office of Federal Housing Enterprise Oversight


ordinary least squares


Stockholm-based owner of Nordic and Baltic stock exchanges


over the counter


principal component analysis


Paris Interbank Offered Rate


Payment System Directive


residential mortgage-backed security


return on assets


return on equity


saving and loan association


Societas Europae


Securities and Exchange Commission


Single Euro Payments Area


small or medium-sized enterprise


special-purpose vehicle


Short-Term European Paper


Trans-European Automated Real-Time Gross Settlement Express Transfer System


Undertakings for Collective Investment in Transferable Securities

White Paper

European Commission’s “White Paper on Financial Services Policy 2005–2010”

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