At the same time, we also need to remove the remaining obstacles to further integration within our banking union. Such obstacles are often due to regulatory fragmentation and ring-fencing of national markets. For example, a number of national options and discretions, such as diverging large exposure rules, are hindering the free flow of liquidity and capital in the banking union and should be harmonised further. Turning to other parts of the financial system, we can expect that the CMU will provide further impetus to the growth of market-based finance and may present new challenges to financial stability. Additional steps should be taken to strengthen the ability of European regulators and supervisors to address systemic risks stemming from the non-banking part of the financial sector. This could be achieved by expanding the mandate of relevant authorities and, in the medium run, by creating a single supervisor for the capital markets. Adequate macroprudential instruments need to be envisaged as well, including instruments targeted at market-based finance. Macroprudential tools for this area either still need to be provided to authorities or need to be further clarified in respect of their application. For Securities Financing Transactions (SFT) and derivative markets, macroprudential margins and haircuts have been identified as potentially powerful tools for reducing the excessive build-up of leverage and procyclicality in these markets.10 For alternative investment funds, the existing macroprudential leverage limit needs to be operationalised.
Financial integration in Europe and in the euro area had been growing steadily before the financial and sovereign debt crisis. However, the system was not structurally integrated and when the crisis financial erupted integration quickly reversed, exactly when it was most needed. In response to global and local shocks almost all financial markets became highly fragmented and retrenched inside domestic borders. These developments represented an existential threat to the Monetary Union and the single currency. That fragmentation has reversed along several dimensions in the last few years. But significant room for further improvements in financial integration remains, for example in the integration of retail banking services and in the financing of the corporate sector. Financial integration provides risk sharing mechanisms which can reduce the impact of countryspecific shocks and contributes to macroeconomic stability. Internationally diversified portfolios – cross-regional and cross-border asset holdings, including firm ownership claims – are more resilient to global and local shocks and can mitigate the impact of such adverse scenarios. This is particularly true when integration occurs also in the equity markets as opposed to the current bias towards debt finance intermediated by banks.2 For countries in a monetary union, this risk sharing mechanism is particularly important because the single monetary policy is unable to address asymmetric shocks, since other important adjustment mechanisms, for example related to fiscal policy and exchange rates, are limited.