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Brussels, 6th May 2004

Financial services: Commission report shows progress in integrating European markets

The integration of EU financial markets is progressing across the board, albeit at a very different pace depending on the product, the end-user and the market. That is the main conclusion of a first comprehensive report (The Financial Integration Monitor, or FIM) published by the European Commission and setting out indicators on the state of integration in all areas of European financial business. Along with reports on the practical effects of integration by four sectoral expert groups, published for consultation simultaneously with it (see IP/04/600 and MEMO/04/106), the FIM report provides input for the future policy debate on financial services. It measures not only integration but also looks at its associated impacts in terms of competitiveness, efficiency and stability.

Internal Market Commissioner Frits Bolkestein said: "The EU cannot tick off the adoption of the final measures under the Financial Services Action Plan and then just walk away as if the job was finished. Much of the legislation agreed under the FSAP is still being implemented and its impact on integration is only beginning. To ensure the proper enforcement of that legislation, so that it can make markets in 25 Member States more efficient, we need to monitor the implementation process on the ground. That means keeping track not only of the way the process is experienced by market operators but also of economic indicators on market integration, which is what this first FIM report is for. It will also help us with a more evidence-based approach to regulating EU financial markets in the future".

The European financial system has evolved considerably in the past decade, developing new market structures and financing techniques. However, progress in opening up national markets to operators and customers from other EU countries does not mean that those markets have become homogenised - they remain very diverse and differences between Member States in the types of financial vehicles used remain in place. The recent enlargement can be expected to accentuate this diversity further.

The report analyses the different segments of EU financial markets from the following perspectives: price convergence, provision of cross-border intra-EU services, cross-border intra-EU establishment, emergence of pan-European infrastructures and developments in product availability.

The report concludes that integration has progressed quite significantly over the past decade but that progress is very different from one market to the next and according to the market participant.

From a market perspective, it is clear that full or close to full integration has been established in the euro-denominated unsecured money and government bond markets. Most of the other wholesale markets, involving securities, are becoming more integrated. On these markets, the share of foreign participation is clearly on the rise, regional rather than national patterns are emerging and market infrastructure allows for cross-border operations.

From the perspective of market participants, financial institutions operate in the most integrated markets where cross-border operations represent an important share of total volume (e.g. cash management operations on the unsecured money market). Non-financial companies now have access to a wider range of products and cross-border operations are possible.

Direct cross-border activity first and foremost takes place in markets characterised by "big volumes per individual transaction". Markets catering for retail customers, such as the market for consumer loans to households, have kept their local character. But this is not to say that there is no integration at all in these markets, as integration does not always take place directly cross-border through service provision but also indirectly through service providers establishing themselves in other Member States.

According to the report, not only the single currency but also a number of other factors have been contributing to the advance of integration where it has occurred. These factors include market forces leading to the establishment of common pan-European infrastructures, global trends, the search for consolidation-based efficiency gains and, of course, the early stages of the implementation of the FSAP.

The report also has a section on the new Member States and concludes that strong linkages exist already today between the financial systems of new and incumbent Member States, and that the majority of those countries represent potential for further financial development within an enlarged EU financial market.

Background to the Financial Integration Monitor 2004

The FIM report is a follow-up to the July 2000 request from the EU's Council of Finance Ministers to develop indicators to assess the state of financial integration and the next step in the process set out in the working document "Tracking financial integration"(SEC (2003) 628). At the same time, it is a response to a demand for more evidence-based policy making. From an Internal Market perspective, the ambition of EU financial services legislation is to create an efficiently functioning Internal Market in financial services. This means monitoring the application of the four freedoms (persons, capital, establishment, goods and services). In the FIM report, the freedom to provide services and the freedom of establishment are most touched upon.

The indicator approach in the area of financial services is still evolving, which means that indicators are continuously being developed and put to the test. The choice of indicators and material will continue to evolve in future versions.

Conclusions on the advance of integration cannot be based on price and volume indicators alone. That is why the Commission, in a complementary exercise, is undertaking a broad consultation of stakeholders on regulatory and other obstacles to the internal market for financial services.

Reports by four expert groups on banking, insurance, securities and asset management, which will provide a basis for the open phase of this consultation process, are published simultaneously with the FIM report (see IP/04/600 and MEMO/04/106) This will provide qualitative insight on whether a lack of integration where it occurs is due to policy barriers or to economic and structural considerations.

The full text of the FIM report is available at:

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