Vítor Constâncio: Reflections on financial integration and stability Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the Joint ECB-EC Conference on “Financial Integration and Stability in a New Financial Architecture”, Frankfurt am Main, 28 April 2014. *  *  *  Ladies and gentlemen, Dear colleagues and friends, It is indeed a pleasure to participate in this joint presentation of two important policy reports: the European Commission’s European financial stability and integration report 2013 and the ECB’s Financial integration in Europe 2014 report. Both studies illustrate that some steady, albeit uneven, progress is being made towards financial stabilisation. Banks are reducing their liquidity buffers, repaying our LTROs and regaining confidence from the markets. Money market integration is slowly improving, particularly in the secured segment. Quantity-based indicators confirm a stabilisation in bond markets and improved integration in equity markets. Given where we stood barely two years ago – on the edge of redenomination risks – such progress is encouraging. However, it does not mean we are entirely out of the danger zone. If we look at banking markets, there is still a large dispersion of borrowing costs for nonfinancial corporations across euro area countries. Thus, significant financial fragmentation still remains in the euro area. This is a concern for the recovery and also for monetary and macro-prudential policy. Under the pressure of the global financial crisis and the sovereign debt crisis in the euro area, several solutions – both global and European – have indeed been adopted.
Stronger crisis prevention mechanisms are now in place and a new crisis management framework has been developed. We have financial backstops. A Single Supervisory Mechanism and a Single Resolution Framework have been decided. Most of the countries in IMF/EU/ECB adjustment programmes are “graduating” successfully, and several other stressed countries are implementing structural reforms and financial consolidation. These are important steps forward, towards a more stable and equitable functioning economic and monetary union. We have certainly turned a corner and stabilised the situation. It is an important achievement but it is not the end of the road as it is too soon to declare that the crisis is over. The euro area still faces large challenges in terms of lacklustre growth, excessive unemployment, remaining fragmentation and a low inflation period that threatens to aggravate the burden of the debt overhang still besetting governments and private economic agents. That the stressed countries were able to restore fundamental equilibria, like their external accounts, and to resume positive economic growth is of great importance. However, we face now structural medium term challenges that impair the European potential growth rate. In my remarks today I will concentrate on issues such as the changing financial integration and financial stability nexus, on how to restore a sound and resilient financial system and finally on the need to improve our analytical tools and policy instruments.