Integration
EU markets are in different stages of the financial integration process; while integration is advanced in the money and bond markets, particularly within the Euro area, retail services still remain local, with major price differences and low levels of cross-border transactions. Especially in the New Member States there seems to be room for consumers and businesses to benefit from further integration. Yet, the financial integration process continued to advance in 2008 and further impetus is likely to come from the implementation of the Markets in Financial Instruments Directive (MiFID), the Single Euro Payments Area (SEPA) and the adoption of the single currency in an increasing number of EU-12 Member States.
Market structures and competition
Recent initiatives have contributed to enhanced competition in certain segments of the EU financial system. The post-trading Code of conduct for securities has injected momentum in the market by improving price transparency and lowering post-trading fees. This has been further strengthened by implementation of the Markets in Financial Instruments Directive (MiFID). The latter has brought about considerable structural changes, especially in relation to the number of trading venues and the division of market shares. However, in some New Member States, the combination of higher margins, costs and profitability for financial services in general, seem to reflect that customers could benefit from a more competitive environment.
Efficiency
Over the last few years, the largest euro area banks were more profitable but less efficient than the largest US banks. It is expected that these higher levels of efficiency could be linked with the ability of US banks to better exploit economies of scale given the size, scope and level of integration of their domestic market. As a result of the financial crisis, both efficiency and profitability have deteriorated for the large euro area banks.
Financial stability
2008 has been an exceptional year for the EU financial sector, dominated by the financial crisis that originated in the US sub-prime market. Apart from the housing and credit boom, fuelled by lax monetary policy, a combination of different factors amplified the crisis, i.e., flaws in risk management, regulatory loopholes, weak supervision, misalignments of incentives, and psychological factors. The crisis has underlined the important task that market participants and regulators have in ensuring that appropriate rules and incentives are in place to increase the resilience of the financial system. What is particularly pressing is the need to better locate and mitigate risks arising from cross-border institutions.
The external dimension
In recent years, the EU and US financial sectors have become comparable in terms of global financial market shares. New structural changes are on the way; China, India and the Middle East are increasingly developing as global financial centres and their demand for global financial services are also increasing. These changes stress the importance of developing the international dimension in EU financial services policy – to reap the new business opportunities while promoting the resilience of financial markets. International cooperation must clearly be reinforced in order to safeguard global financial stability and avoid any regulatory loopholes.
