Once bank lending gets affected, interest rates impact real variables such as consumption and investment, which in turn impact output and inflation levels. However, the government securities market is yet to emerge fully as a deep and liquid market across different maturities.
Deep and well-integrated cross-border funding would improve the private sector’s capacity to absorb local shocks, reducing the burden on fiscal policies. A capital markets union would provide various additional benefits. For example, harmonised insolvency frameworks would make it easier for banks to deal with non-performing assets, thereby facilitating orderly risk reduction.