The price-based integration process was driven in particular by convergence to similar levels across countries in equity returns and, to a somewhat lesser extent, in bond yields. The main force behind this capital market-oriented process was the strengthening and broadening of the economic expansion in the euro area, which was quite uniform overall.
Reasons why quantity-based financial integration is not yet recovering are that euro area cross-border interbank trading remains relatively low and cross-border equity or bond holdings do not show particular trends up or down over the reporting period. Investment funds, however, tend to play a favourable role in quantity-based financial integration, as many of their portfolios are quite geographically diverse, enabling them to help other investors spread asset holdings across countries.
Overall, euro area financial integration has become more resilient to adverse shocks over time. This is reflected in medium-term increases in foreign equity investment relative to foreign debt investment within the euro area, and in foreign direct investment relative to portfolio equity investment.
Also the proportion of cross-border retail bank lending relative to interbank lending has gradually increased over a longer period of time. The only exception is the development in cross-border short-term debt holdings, which have recently increased relative to long-term debt holdings.
As there is room for further financial integration and as the extent of cross-border private financial risk sharing remains relatively low, the completion of the European banking union and further progress with the capital markets union should remain policy priorities.
Further improving and harmonising insolvency frameworks can significantly enhance the functioning of both the banking and the capital markets union. Moreover, new research by the ECB and others outlined in the report suggests that initiatives to further develop equity markets in Europe would promise to foster innovation, growth and cross-country risk sharing.
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