Financial Integration

Why is financial integration important

• facilitates risk sharing across countries

• It is a substitute for fiscal integration

• Easier to implement than fiscal integration

How does financial integration allow for risk sharing

• Imagine negative shock in france and positive shock in germany

• Germans hold some french stocks and vice versa

• Negative shock partly paid for by germans (less asymmetric)

How financial integration enables risk sharing using bonds

• french bank mixed portflolio of loans

• if french default then german loans they have offset this and german banks also own french so they take a hit too

Sorensen stat on financial integration

financial integration in the US is twice as important as fiscal integration

What do Financial institutions rely on

• large economies of scale

• Physical infrastructure

• High skill human capital

4 main aspects of financial markets

• money markets (interbank Lending)

• banking sector (deposits, loans)

• Bond Market (standardised large scale loans)

• Equity Markets (shares)

When did Money market integration go from

• 1999- 2010

• Sovergien debt crisis caused banks to lose trust with each other

What is Deadly embrace

• gov responsible for bailing out banks

• banks tied to governemnt as well through the ownership of bonds

• Vicious cycle if banks risky governments weak and so banks even weaker

• Investors lose faith higher borrowing costs

What did schemes did ECB introduce for financial integration

• OMT scheme

• TLTRO scheme

OMT scheme

• ECB makes purchases in soverign bond markets

• No bonds ever bought but credibility returned

TLTRO scheme

• Provides financial credit to stimulate bank lending

What is the main issue with bailouts in the EU

• ECB can’t bailout irish banks for example and the FED in america can bailout american banks

What should the euro do for the banking sector

• promote economies of scale

• allow larger financial institutions to form through competition

Why is banking sector in europe still segmented

• legal differences

• national regulators no incentive to open up banking sector

• People stick to known banks

• Banks mostly merge in thier own countries

What happened in bond markets pre crisis

• convergence had almost happenend

• investors mostly concerend about currency risk

Why greek bond interest rate higher

• Higher credit risk than Germany

What else did germany have

• higher competitiveness within eurozone

• Resulting in facr lower per unit labour cost

How are European equity markets in comparison to USA

• growing but are still much smaller than the US

What are the Three pillars of a potential banking Union

• single supervisor

• single resolution method

• deposit insurance

What is single supervisor

• single regulator , SSM monitors banks

• can it actually monitor 6000 banks

Deposit Insurance

• guarantee that banks will get there money back if they fail

Why does deposit insurance not come into place

• not enough political will

• German banks would have to bail out southern EU banks

Can the Euro take over from US as an international reserve currency

has to earn the facets of money in three ways

What are the three aspects of money a currency has to earn

• international unit of account

• international medium of exchange

• international store of value

What factors Effect if Euro can overtake the dollar

• size of economy

• size of equity and bond markets

• price stability

• financial stability

how is Euro inflation compared to USa

about the same

How is euro economy size and bond market size

USA slightly bigger on both

How is Euro fiancial stability compared to USA

similar as levels of government debt are on a similar level

Why will US dollar most likely remain reserve currency

Due to Inertia

What is inertia

When people do not switch international currencies easily, due to network externalities.

What are network externalities

• more people whouse a currency the more uselful it becomes

• so people stay in the currency

Does Euro have to be strong to become reserve currency

• no not necessarily as euro has doubled strength vs dollar but not doubled euro use internationally