Thursday, April 14, 2016
Minuet (DoubleTree by Hilton Philadelphia Center City)
The financial crisis raised an important question about the nature of euro area financial integration: what aspects of integration ensure its resilience in the face of large shocks to economic and financial activity? For answering this question, the paper first reviews the evidence suggesting that certain types of capital flows tend to be more stable compared to others. In order to frame the discussion to the euro area context, it then analyses intra- and extra-euro area capital flow patterns before and during the European sovereign debt crisis broken down by category (portfolio flows, bank lending, and FDI) and by maturity. This exercise is conducted by looking at euro area aggregate, but also by looking at different patterns within the euro area. The paper then discusses the optimal balance between external debt and external equity financing for building a resilient financial integration and which type of integration is most conducive to the sharing of risks, both during booms and during busts. In the final section, the paper discusses the role of different policy initiatives envisaged in the Five Presidents Reports for fostering financial integration in the euro area, namely Banking Union and Capital Markets Union. In particular, this section discusses how the measures needed for completing Banking Union could increase the cross-border lending to non-financial corporations and households and why integrating the capital markets more deeply across national borders can improve risk sharing and contribute to the resilience of financial integration.
