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ECB: ‘Non-standard’ policies helped euro-zone financial integration

Unusual European Central Bank (ECB) monetary policies helped decrease financial fragmentation and boost asset classes across the currency union, according to a study.

The annual report from the ECB shows that financial integration among euro-zone countries has reached levels not seen before the currency bloc’s sovereign debt crisis, with non-traditional policies lending a helping hand.

While the report looks specifically at the situation in 2014, the ECB said its monetary policies, which have expanded to include quantitative easing, would enhance financial integration further in future.

The annual study, ‘Financial Integration in Europe’, says the price-based indicators of financial integration developed by the Bank reverted to levels seen before 2008 but are still below a peak seen in 2007.

This translates into financial integration across a range of asset classes including bond and banking markets but not equity.

“Apart from equity markets, where the most recent developments have shown some volatility, financial integration in money, bond and banking markets consistently shows a sustained increase,” the ECB said.

“The overall improvement in financial integration is expected to continue also as a consequence of the monetary policy actions taken by the ECB to restore the bank intermediation channel, as well as of the effective implementation of the Banking Union.

“At the same time, it will be important to monitor closely the process of increasing financial integration also in light of the past experience before the financial crisis.”

In 2014, the ECB introduced Target Longer-term Refinancing Options (TLTROs), brought deposit facility rates to negative 20 basis points and announced the purchase of asset-backed securities and covered bonds in the euro-zone.

In improving bond market financial integration, the ECB said its actions had underpinned confidence in markets, which combined well with a general decrease in confidence disparity across the currency members.

“The monetary policy stance was still accommodative overall,” the Bank said.

“This contributed to a search for yield in higher-risk assets and drove the sovereign spreads of several countries lower and may have contributed to a reduced fragmentation of the European sovereign debt market.”

In money markets, the ECB said its policies also helped increase integration, citing a decline in the level of excess liquidity.

The introduction of the negative 20 basis point deposit rate for banks, forward guidance, TLTROs and the original asset-purchase programme helped keep money market rates contained, the Bank said.

The ECB’s decisions over the course of 2014 have dismayed many European pension funds, with rate cuts affecting cash holdings, and asset-purchase programmes squeezing yields on sovereign bonds – affecting liability measurements.

Dutch pension funds recently lamented the ECB quantitative easing programme as several fell below required funding levels despite strong asset returns.

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