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May 03, 2018

EC published a report on the results of the annual European financial stability and integration review. The report analyzes the recent economic and financial developments in the EU, along with their impact on financial stability and integration. The topics discussed in the report relate to a number of key initiatives that span the broader policy areas covered by the Capital Markets Union and the Banking Union.

The report describes recent developments in the financial sector. It highlights that the restructuring of banks’ balance sheets has brought them closer to a more traditional business model of deposit-taking and lending. Although the resilience of EU banks has improved, profitability remains an important challenge in view of the low-interest environment, tight interest margins, and high provisions for non-performing loans. The report shows that EC’s risk reduction effort is also being reflected on the ground. Banks have increased their capital position and limited their exposure to market risk by reducing bond and derivative portfolios. Moreover, the insurance sector is stronger and the insurance companies in EU have steadily improved their solvency position, as they have adjusted to the new Solvency II regime.

Next, the report provides a detailed analysis of the following two topics that impact financial stability and integration:

  • Merits of EU capital markets development, with a focus on member states in central, eastern, and south-eastern Europe. The analysis also reveals that member states in central, eastern, and south-eastern Europe are lagging behind other parts of the EU in terms of depth and access to capital markets. This implies that these member states are those with the most potential to reap the benefits of the Capital Markets Union. On the plus side, capital market integration is improving and firms' market-based funding has increased, in line with the objectives of the Capital Markets Union. 
  • Initial coin offerings (ICOs) as a new form of start-up funding. The report that the ICO market would benefit from more transparency, given that this market is still immature and is characterized by information asymmetries, skewed incentives, and a lack of a proper disclosure framework. Moreover, cooperation at the global level will be essential for developing regulation that allows ICOs to retain their global scope and avoid regulatory arbitrage. 

 

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Keywords: Europe, EU, Banking, Securities, Insurance, Financial Stability, Financial Integration, NPLs, Initial Coin Offerings, Capital Markets Union, EC

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