The currency union and financial integration Klaus Regling, - PowerPoint PPT Presentation

The currency union and financial integration Klaus Regling, Managing Director, ESM EBI Annual Global Conference Frankfurt, 27 October 2016

Firewalls against the crisis: ESM and EFSF Maximum lending capacity of € 700 bn  • Total disbursed to five countries so far: € 262 bn • Ireland, Portugal, Spain, Cyprus, Greece  Four success stories: • Ireland, Portugal, Spain and Cyprus have exited programmes • Greece is a special case • It entered a new programme of up to € 86 bn last year 1

Insurance against income shocks in EMU remains low Percentage of shock smoothed by different channels Source: Bruegel and IMF 2

ECB indicator of financial integration in euro area 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Note: The price-based FINTEC aggregates ten indicators covering the main market segments such as money, bonds, equities and banking. The input series measure price dispersion in EA countries. The quantity based FINTEC aggregates five indicators, covering intra-EA cross border holdings expressed as a % of EA total holdings.The FINTEC is bounded between zero (full fragmentation) and one (full integration). Increases in the indicators signal higher financial integration. Source: ECB 3

Cross-border banking assets are still trending down Share of EA cross-border bank assets in total EA banking sector assets 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: ECB 4

European banks are gradually catching up with the US Profitability is returning … … and c apital ratios have continued to increase... 14% 16% 12% 14% 10% 12% 8% 10% 6% 8% 4% 6% 2% 4% 0% 2% -2% 0% -4% dec-07 dec-08 dec-09 dec-10 dec-11 dec-12 dec-13 dec-14 dec-15 jun-16 dec-07 dec-08 dec-09 dec-10 dec-11 dec-12 dec-13 dec-14 dec-15 jun-16 USA EA USA EA Tier 1 Ratio. Source: Standard & Poor’s (SNL Financial), banks’ Return on Equity. Source: Standard and Poor’s (SNL Financial), banks’ annual reports, ESM calculations annual reports, ESM calculations 5

Europe: Non- Performing Loans are stalling at a high level… … but provisions cover more than half EURbn 1.000 70% 900 60% 800 50% 700 600 40% 500 30% 400 300 20% 200 10% 100 0 0% dec-07 dec-08 dec-09 dec-10 dec-11 dec-12 dec-13 dec-14 dec-15 jun-16 Gross NPLs (LHS) Reserves on NPLs (LHS) NPL Coverage ratio (RHS) Source: Standard & Poor’s (SNL Financial), banks’ annual reports, ESM calculations 6

More financial integration is important to make EMU work better 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Note: The price-based FINTEC aggregates ten indicators covering the main market segments such as money, bonds, equities and banking. The input series measure price dispersion in EA countries. The quantity based FINTEC aggregates five indicators, covering intra-EA cross border holdings expressed as a % of EA total holdings.The FINTEC is bounded between zero (full fragmentation) and one (full integration). Increases in the indicators signal higher financial integration. Source: ECB 7