By reducing concerns over the liquidity situation faced by banks and by cutting banking sector systemic risk (which is reflected, for instance, in a sharp decline in EU bank CDS premia), the LTROs contributed to reopening funding markets. In money markets, the EURIBOR-OIS spreads have reversed their widening trend from last year, by narrowing substantially, thereby suggesting that the operations have successfully lowered risk premia. More generally, the whole euro money market curve has flattened. In the secured segment, repo rates in selected euro area government bonds, which had been progressively increasing since August 2011 compared with those based on collateral from AAA countries, declined and continued to remain low, indicating that the funding of Italian and Spanish government bond positions in the repo market has become much cheaper. Although turnover in the repo market has remained relatively subdued, there are signs of a moderate pick-up in the volume in Spanish and Italian markets from their levels at the end of 2011. The widespread perception of lower liquidity risk and improved capital adequacy thanks to the European Banking Authority capital exercise also brought a welcome reduction in US dollar funding costs via the FX swap market. US prime money market funds increased their exposure to euro area banks in January 2012 for the first time since April 2011, with an additional increase of 21% between the end of January and mid-March, and exceeding 12% of total assets under management.
Repairing the single market for capital is a collective endeavour in which the ECB has a role to play – but to be fully effective that role needs to be coordinated with the European Commission, European Supervisory Authorities and market participants themselves. Breaking the feedback loop between bank and sovereign credit should also be a priority. To this effect, steps should be taken towards a unified regime for bank resolution and beyond that, towards establishing a single European banking resolution authority. Finally, the “Financial Compact” should also include the completion of the single euro payment area. Payments are at the very heart of a corporate’s activity and I am not sure that they always get the attention they deserve. Nowadays, more than 50% of the trade of the 27 EU countries takes place within the EU – and that trade is mainly based on cashless payments. With the introduction of the single currency there could no longer be any differentiation between national and cross-border euro payments: they should all be “domestic”. The Single Euro Payments Area project, in short “SEPA”, came to fill this void; its aim is to establish a single market for retail cashless euro payments by overcoming technical, legal and market barriers, so that people can make euro payments throughout Europe as easily, securely and efficiently as within their own countries. Using the SEPA payment instruments, companies can make all euro-denominated payments centrally, from a single account, using the same format.