03 March 2020

ECB pushes for EU capital markets integration and development

According to the new European Central Bank report on “Financial Integration and Structures in the Euro Area”, the financial structure of the euro area continues to be dominated by non-marketable instruments, despite an increase in financial integration in 2019.

The share of listed equity and debt securities in the total financing of euro area countries remained relatively low compared with that of bank loans and unlisted equity, and has not changed much for many years now. Given that overall financial integration has not yet reached a satisfactory level and that euro area households, firms and governments would benefit from broader and deeper capital markets, the ECB expresses strong support for recent initiatives to advance with the European capital markets union (CMU) project.

The size of the euro area financial system has remained broadly unchanged in recent years, at six to seven times gross domestic product. The strong dominance of banks has been on the decline since the early 2000s, but this has been more than offset by a rise in the importance of non-money market investment funds and other financial institutions. Non-bank financial intermediaries, of which investment and pension funds are the fastest growing type, now account for almost 60% of total euro area financial assets. The report notes that this deserves attention, as it could reflect not only financial development, but partly also a migration of risks from the banking sector to less regulated sectors.

The continuing dominance of non-marketable financing instruments, such as loans and unlisted equity, is indicative of the need for capital markets to broaden and deepen. Only certain marketable instruments, notably debt securities issued by non-financial corporations, are showing a slight medium-term upward trend in the euro area, while the amount of public equity listed on exchanges remains relatively small.

The last decade also saw rapid growth in fintech entities, with the euro area now hosting around one-fifth of the total number worldwide. Most of the 2,800 fintech firms in the euro area are locally owned, and many are located in smaller, technology-oriented countries. However, the sector lacks a statistical classification, which is key to being able to analyse it better and compare it with other sectors of the financial industry.

In order to foster financial integration and development, it is necessary to complete the banking union and progress towards a real CMU. In the policy section of the report, it is argued that, when it comes to the CMU, there is scope to increase the proportion of public equity in firms’ funding. Furthermore, euro area private equity markets should become a more dynamic source of risk capital, providing better growth opportunities for young and innovative companies.

Full press release on ECB

Full report on ECB

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