Bank of England research finds that tightening prudential policy in EMEs dampens the spillover from US monetary policy by around a quarter.29  Moderating Push Factors and Fixing the Pipes in Advanced Economies At the same time, it is in the interests of advanced economies to moderate push factors, including risks in their markets and institutions. Their local financial stability are global public goods. For example, as Chair Powell noted in his speech ‘Monetary Policy in the Post-Crisis Era’ (July 2019), “since the crisis policymakers are even more keenly aware of the relevance of global factors to our policies. The global nature of the financial crisis and the channels through which it spread sharply highlight the interconnectedness of our economic, financial, and policy environments. U.S. economic developments affect the rest of the world, and the reverse is also true.” The Federal Reserve’s recent Conference on Monetary Policy Strategy, Tools and Communications Practices devoted a session to the global dimension of US monetary policy. 29 Coman, A, and Lloyd, S (forthcoming), ‘In the Face of Spillovers: Prudential Policies in Emerging Economies’. 28  11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  Consider a modern example of the Connally dictum: investment fund flows to EMEs. These flows now account for around one third of total portfolio flows to EMEs, compared to around one tenth pre-crisis.
An incomplete banking union is a key vulnerability for the EU banking sector and hampers progress towards greater financial system integration. Furthermore, as firms broaden their funding sources and diversify away from bank loans, there needs to be a greater focus on financing through marketable debt securities and equity instruments. This lies at the heart of the capital markets union (CMU) project. Implications for the capital markets union Completing the CMU is essential for three reasons. First, the CMU strengthens the resilience of the euro area economy through private risk-sharing. Deep and integrated capital markets provide opportunities for effective risk-sharing. This is essential for financing the real economy and limiting fluctuations in economic activity. However, recent ECB analysis  shows that, while euro area capital market integration has improved over the last 20 years, it remains rather modest. [4] We must also consider the challenges posed by climate change in the coming years. Enhancing the risksharing potential of capital markets will help to further improve the ability of the EU financial system to sustain investment flows during climate-related shocks. This will bolster the EU’s overall resilience to increasingly frequent and intense extreme weather events, which typically hit regions asymmetrically. Second, further developing EU capital markets boosts innovation, supports long-term growth and enables continued financing of the green transition. This is of paramount importance as the EU navigates rapid technological change and is faced with an increasingly challenging geopolitical environment.