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Newsletter18 June 2024Directorate-General for Financial Stability, Financial Services and Capital Markets Union3 min read

EU financial system

Annual review and conference take stock of financial stability and integration in the EU. 

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The European Commission and the European Central Bank are today co-organising their annual conference on European Financial Integration. The ECB will present its report on Financial Integration and Structure in the Euro Area, while the Commission will present its European Financial Stability and Integration Review (EFSIR). The Review aims to explore financial sector developments, identify potential risks and vulnerabilities, and monitor progress towards a well-integrated and stable financial system in the EU. This article provides some highlights of this year’s EFSIR report, in particular on the interconnections in EU financial services with non-EU-country providers and financial stability vulnerabilities arising from the growth of the investment fund sector in the EU. 

Looking back at economic developments and risks  

The EU has experienced nearly stagnant growth since 2023 due to factors such as geopolitical tensions, tighter financing conditions, and subdued confidence. However, unemployment decreased to 6%, the lowest level since the introduction of the euro. Financial markets fluctuated considerably in 2023.  

Financial stability risks surged at the end of the first quarter of 2023 but receded by the end of the year. Overall, the financial system has been coping well with the normalisation of interest rates and the EU banking sector in particular has benefited from increased net interest margins. However, certain risks, such as increased vulnerabilities in the corporate sector, sovereign debt sustainability concerns, and intensified financial stability risks in commercial real estate, need to be monitored closely. EU financial integration stabilised in 2023, despite some market segments becoming more fragmented.  

Investment funds growth in the EU requires financial stability risks to be monitored closely 

The size of the investment fund sector measured by assets has tripled in value since the 2008 global financial crisis. This rapid growth shows the increasing importance of the sector in financing the economy, but also means that liquidity mismatches and leverage in the sector could contribute to system-wide risks to financial stability. 

Prevailing levels of leverage in EU funds are overall low, but risks can build up quickly. Liquidity profiles and redemption behaviour also differ across type of funds and could diverge further in stressed market conditions, and should therefore be considered in liquidity monitoring. 

Sustained and sound monitoring remains important. The recent amendment of the EU legislative framework for investment funds obliges open-ended investment funds to manage potential liquidity mismatches via appropriate liquidity management tools (LMTs) and broaden the application of leverage limits to loan originating funds.  

Mapping the reliance of EU financial services on non-EU operators 

The EU's financial system is open and interconnected with global markets. Non-EU operators participate significantly in EU financial services including in commercial banking, reinsurance, derivatives clearing, credit ratings and card payments.  

Vulnerabilities could arise if sectors depend too much on a limited number of non-EU- providers that cannot be easily replaced. For critical financial services, this might pose financial stability risks, for example in the event of abrupt termination of a business. Likewise, limited EU regulatory, supervisory and resolution powers over financial services providers located outside the EU may limit the EU’s economic and financial autonomy, for example in the event of regulatory divergence between the EU and non-EU countries.  

At present such concerns are alleviated by the fact that non-EU dependencies mainly concern financial operators located in G7 partners’ jurisdictions that implement internationally agreed standards and cooperate with the EU on regulatory and supervisory matters.  

Monitoring the EU’s dependencies on non-EU countries remains important in the current context. Increased capacity to replace non-EU critical providers if needed will, together with a strong Capital Markets Union and Banking Union, contribute to the EU’s resilience and its ability to mobilise capital and attract foreign investment. 

Want to know more?

You can consult the full European Financial Stability and Integration Review (EFSIR) here or tune in for the presentation of the report and further discussions on financial integration at the Joint conference of the European Commission and the European Central Bank on European Financial Integration on 18 June 2024. 

Related links

European Financial Integration 2024
European Financial Stability and Integration Review (EFSIR)


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