Every year, the European Commission publishes a report monitoring the evolution of the financial system as part of the European single market. One of the overall messages of this year’s European Financial Stability and Integration Review (EFSIR) is that the creation of a Capital Markets Union will benefit financial integration and stability in Europe. For a few years now, the report has traditionally been presented together with a sister report by the European Central Bank - “Financial Integration in Europe” - at a jointly held conference. This year the conference was held in Brussels on 27 April.

EFSIR: origins of the review

Although the free movement of capital was enshrined in the Treaty of Rome, a true single financial market in which funds could flow and market participants could trade freely across EU borders was a distant dream as recently as 15 years ago. Since then, significant developments have been achieved. European financial institutions and markets have become more interdependent and old ways of organising financial regulation and supervision have been re-examined. Recognising the need to monitor developments in the EU financial sector regularly, the Commission launched EFSIR in 2004. The review was intended primarily as a monitoring tool consisting of a set of indicators for financial integration. In response to the financial crisis, the Commission widened the scope of the review in 2011 to include financial stability developments.

In 2012 and 2013, EFSIR had a strong focus on the establishment of the Banking Union. The 2015 review, on the other hand, coincides with a consultation on Capital Markets Union and feeds into this discussion. The aim of the report, which contains a lot of information on how the European economy currently funds its activities, is to inform citizens and contribute to a public debate on financial regulation, including with other international regulators.

The 2015 edition is split into two main parts: a first part that is more data driven, and a second that focuses on specific policy areas that have an impact on European financial stability and integration. In the first part, the report studies financial market developments in 2014 and during the first quarter of 2015. It also provides a comprehensive picture of the EU's financial system and in this way can be seen as part of the overall discussion about the structure of the EU financial system in the context of building a Capital Markets Union. 

Focus on policy areas

The second part of the 2015 report focuses on issues related to current developments in financial market structure, regulation, and technology. For instance, there is a chapter looking at the role of private debt overhang in the EU. 'Debt overhang' refers to a situation of excessive or non-sustainable debt. The report explores possible remedies that have been put forward in public debate surrounding this issue as well as in academic literature.

The review also looks at some of the large financial risks faced by households. Financial risk, including longevity risk, is increasingly being shifted away from the government and onto households. However, if it transpires that private households cannot successfully manage or mitigate some of the largest risks, then the responsibility for them will eventually move back to the government.

The report discusses the interplay between competition and regulation in the financial system with a focus on banks. It argues for a closer coordination of financial regulation and competition enforcement to avoid, among other things, regulation itself becoming a barrier. Other chapters of the review examine cyber security risks and challenges in the financial sector, and provide an overview of the credit scoring landscape in the EU.

Read more on the high-level conferences on financial integration and stability