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Euro zone wasting benefits of financial integration: ECB

European Union flags flutter outside the European Central Bank (ECB) headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

FRANKFURT (Reuters) - The euro zone is wasting many of the benefits of financial integration by retaining barriers that hold back cross-border banking and investment, the European Central Bank said on Thursday.

“It is a big waste to have taken the huge step to adopt a single currency and continue to forgo the benefits that could be reaped by creating a true banking and capital markets union,” ECB Vice President Vítor Constâncio said in a report.

The ECB argued that cross-border interbank trading in the 19-member currency bloc remains relatively low, cross-border equity or bond holdings are not increasing, and retail banking integration is limited.

“Recent progress in risk reduction should be matched by steps towards risk sharing through a credible common fiscal backstop for the Single Resolution Fund and the introduction of a European deposit insurance scheme,” the ECB said.

“The evidence ... does not suggest that all the economic benefits that might be expected from financial integration are already materialising,” it added.

Euro zone officials have long debated setting up a deposit insurance scheme but Germany opposes this, fearing that German taxpayers would be asked to foot the bill for bailing out weaker banks on the currency bloc’s periphery.

But cross-country differences in equity returns declined to pre-crisis levels while the range of yields on debt securities issued by banks and by non-financial corporations also narrowed, suggesting that there is some integration at least in prices of financial instruments.

“The improvement in financial integration was particularly visible in the case of price-based indicators, especially those covering the capital markets,” the ECB said.

“The sustainability of the resumed trend in price convergence is yet to be confirmed by the usually slower moving volumes of cross-border activity.”

Reporting by Balazs Koranyi; Editing by Gareth Jones