Global Perspectives on Capital Market Integration

JVSpeech by José Viñals, Financial Counsellor and Director, IMF
Launch by the European Central Bank of Target2-Securities
Milan, Italy
July 2, 2015

Good afternoon to all of you.

It is my pleasure to participate in the launch of Target2-Securities.

I would like to congratulate the European Central Bank on reaching this important milestone and to thank President Mario Draghi and Executive Board member Yves Mersch for their kind invitation to contribute to this event.

Also, let me say “grazie” to Governor Ignazio Visco for welcoming us to Italy in what I am told is a magnificent setting.

Italy provides splendid venues for events, given its architectural beauty. And Italy is a particularly fitting place to launch a new securities undertaking.

It is a cradle of capital markets. Stock trading in Italian cities is documented from at least the early 14th century.

Back then, of course, there was no financial integration, and individual cities had their own—rather illiquid—markets.

Capital markets have come a long way since, but an integrated European capital market has remained an elusive dream for long. What we are witnessing today is an important step toward making that dream a reality.
Today’s celebration gives me the opportunity to provide you with a global perspective on three key questions related to today’s launch:

• What is the right balance between bank-based and market-based financial systems?

• What are the opportunities and challenges of capital market integration?

• How can Target2-Securities contribute to making European capital markets more integrated, accessible to foreign investors, and beneficial for economic growth?

1. Balance between bank-based and market-based financial systems

First, to put today’s event in a broader perspective, let me address the long-running debate on bank-based versus market-based financial systems.

Bank-based systems are inherently good at mobilizing savings, identifying good investments, and exerting corporate control.

At the same time, capital markets can also play a vital role in allocating capital, providing risk-management tools, and mitigating the problems associated with oversized banking systems.

In a recent study, we at the IMF have reexamined the international evidence on the effects of financial systems on economic growth and stability.1 We find that there is no one-size-fits-all when it comes to prioritizing banks or markets. Bank-based systems are not uniformly better than market-based ones, or vice versa.

However, the evidence is clear on one point: as economies develop, they can reap benefits in terms of both growth and financial stability by relying less exclusively on banks and moving toward a more balanced financial system with capital markets playing an increasingly important role.

But even more fundamental than achieving the right balance between banks and markets is that banks be strong and capital markets be efficient and resilient.

Let me turn now to the European financial system.

Banks are substantially better capitalized nowadays, following the successful comprehensive assessment carried out by the European authorities and the actions taken by the Single Supervisory Mechanism. This, together with implementation of the necessary measures to address the remaining non-performing loans, is a key pre-condition for banks to play their role in adequately supporting the ongoing European economic recovery.2

At the same time, market-based finance needs to become more important in supporting funding through both debt, and particularly equity.

But increasing the depth of capital markets in Europe requires greater integration.

Only a handful of European economies are big enough to support capital markets that reach critical mass in a full range of asset classes. For Europe’s many small economies, cross-border integration of markets is especially valuable.

Against this background, the IMF is very supportive of the European Capital Markets Union.

2. Opportunities and challenges of capital market integration

This brings me to the second question that I want to tackle today; the opportunities and challenges of capital markets integration.

Cross-border financial integration offers a number of important economic benefits. Growth is enhanced through better allocation of savings while stability is enhanced through better risk sharing.

For instance, regarding the latter, in economies like the United States where capital markets are both deep and fully integrated, nearly 40 percent of shocks to states within the country are smoothed through capital markets, three times more than what is smoothed through the Federal Budget.3 These numbers suggest substantial potential for capital markets to enhance risk-sharing in Europe.

As regards the challenges associated with capital markets integration, there is always potential for the cross-border transmission of shocks. This underscores the need to accompany the increasing role of non-bank financial intermediation and market-based financing by adequate regulatory and supervisory frameworks to safeguard financial stability.

3. How does Target2-Securities fit into all of this?

Let me now turn to the third question: where does Target2-Securities fit into all of this?

An essential feature of a deep, smoothly functioning, well-integrated capital market is a clearing and settlement system that provides for the efficient and safe transfer of ownership from the seller to the buyer.

In this context, Target2-Securities is a vital part of the Capital Markets Union. One of its objectives is to reduce the cost of settlement of securities, in particular for cross-border transactions, some of which have been ten times more expensive than domestic transactions.

Target2-Securities will be a catalyst for further harmonization of post-trade practices and regulations across Europe.

Not only that, but due to reduced settlement costs, increased competition and greater harmonization, it is also expected to have a broader positive impact on efficiency. Issuers will gain easier access to a more diversified investor base, and investors will benefit from more diversified bond and equity portfolios.

Yet, the concentration of settlement transactions at the Target2-Securities platform calls for strong oversight and supervision to effectively identify and manage any potential legal and operational risks.
Close cooperation among all relevant authorities is essential to promote the safety and efficiency of Target2-Securities.


Let me conclude by emphasizing that the progress achieved thus far bodes well for the future but there is still much work ahead in fully developing and integrating European capital markets.

And we should not forget that the economic benefits from deeper and more integrated capital markets will be much greater if other needed structural reforms are also carried out in labor and product markets. These are key for finance to be channeled to the most efficient activities and thus to elevate potential growth.

Thank you.


Asdrubali, P., B. Sorensen, and O. Yosha. 1996. “Channels of interstate risk sharing: United States 1963–1990,” The Quarterly Journal of Economics 111 (4): 1081–1110.

International Monetary Fund. 2015. Global Financial Stability Report: Navigating Monetary Policy Challenges and Managing Risks, April.

Sahay, R., M. Čihák, P. N’Diaye, A. Barajas, R. Bi, D. Ayala, Y. Gao, A. Kyobe, L. Nguyen, C. Saborowski, K. Svirydzenka, and S. R. Yousefi. 2015. “Rethinking financial deepening: stability and growth in emerging markets.” IMF Staff Discussion Note 15/08. Washington: International Monetary Fund.

1 Sahay and other s (2015).

2 For more on this point, see International Monetary Fund (2015).

3 Asdrubali, Sorensen, and Yosha (1996).