European Capital Markets

The achievements of the FSB and the global standard-setting bodies since the financial crisis are remarkable. By rolling out international standards and new principles for regulatory cooperation, they have made global financial markets more integrated and our financial system safer and more resilient, protecting taxpayers from costly bailouts.

We have also made significant progress at a regional level. In the euro area, we now have a single banking supervisor that harmonises supervisory actions across participating countries. At the level of the European Union (EU), the Commission and the co-legislators have also strengthened the single rulebook and launched an ambitious agenda for creating a CMU.

But with the financial crisis gradually disappearing in the rear-view mirror, ambition for further reforms is weakening and reluctance to implement already agreed standards is rising.

Hidden forms of financial protectionism, or a relaxation of regulation, would turn back the clock on internationally agreed rules, revive distrust, and risk regulatory arbitrage and a race to the bottom.

As a result, market fragmentation has become one of the more pressing issues for global standard-setting bodies and the financial community in recent months. The Japanese G20 presidency has identified market fragmentation as a key priority, and the FSB published its report on the matter just ahead of the G20 Finance Ministers and Central Bank Governors Meeting in Fukuoka on 8 and 9 June. ISDA itself prominently discussed the topic at its 34th Annual General Meeting in Hong Kong earlier this year.

Market fragmentation can arise for a number of reasons, such as technological differences, divergent tax regimes or differences in local financial structures. Diverging regulation and supervisory practices can also play a role here.

Not all types of market fragmentation are harmful. Stricter financial regulation in some parts of the world, for example, may help promote financial stability more widely by mitigating perilous cross-border spillovers, insofar as it does not increase risk taking in foreign markets. Other types of fragmentation may come with real economic costs, however.

In Europe, for example, financial integration has gone into reverse since the crisis broke and is only very gradually coming back. Today, intra-euro area cross-border risk sharing is at uncomfortably low levels. And without private risk sharing, country-specific shocks will continue to cause persistent dispersion in economic outcomes across euro area countries, undermining real convergence and hampering the conduct of the single monetary policy.