Graph of the week: Cross-border financial instruments in the euro area

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The rapid financial integration between the creation of the Economic and Monetary Union and the start of the global financial crisis provided conditions for better cross-border risk sharing in the euro area. The creation of the common currency and lower borrowing costs gave an additional impetus in comparison with other advanced economies.

Not all cross-border financial instruments in the euro area have experienced the same fall due to the crisis. Judging from the level of cross-border loans and deposits today, the common currency plays an important role in risk sharing through cross-border provision of financial services. The recovery of cross-border equity assets to pre-crisis levels has taken much longer; also the cross-border equity market is much smaller than the one for loans and deposits.

The euro facilitates private risk sharing through lower transactions costs and deepening financial markets. However, the crisis has shown that a well-functioning Banking Union is also needed. This includes in particular a European Deposit Insurance Scheme (EDIS).

Once operational, the EDIS, together with a credible common backstop to the Single Resolution Fund, will create further conditions for more cross-border presence of euro area banks by ensuring consistency in regulatory treatment and by shielding the financial sector from country-specific shocks. It will therefore be another supporting factor in increasing competition in the financial sector, lowering costs and increasing cross-border risk sharing.

Related publication: Quarterly Report on the Euro Area (QREA), Vol.15, No.2 (2016)