Economic Integration and Financial Stability: A European Perspective

IMF Working Papers, December 1, 2006

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Economic Integration and Financial Stability: A European Perspective

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Bibliographic details

• Authors: Gianni De Nicolo, Alexander F. Tieman
• Published: December 1, 2006
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451865561.001

Executive summary

• This paper assesses changes in synchronization of real activity and financial market integration in Western Europe and evaluates their implications for financial stability.
• Key high-level conclusions:
  • Increased synchronization of real activity since the early 1980s.
  • Increased equity markets integration since the early 1990s.
  • Measures of systemic risk at large European financial institutions have not declined during the period 1990-2004.
  • Bank systemic risk profiles have converged.
  • The sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries.
  • Overall conclusion: the integration process does not necessarily entail an unambiguously positive effect on financial stability.

Findings on real activity and financial market integration

• Real activity synchronization:
  • Finding: increased synchronization of real activity since the early 1980s.
• Equity markets integration:
  • Finding: increased equity markets integration since the early 1990s.

Systemic risk measures and dynamics (1990-2004)

• Systemic risk levels:
  • Finding: measures of systemic risk at large European financial institutions have not declined during the period 1990-2004.
• Convergence:
  • Finding: bank systemic risk profiles have converged.
• Sensitivity to common shocks:
  • Finding: the sensitivity of bank and insurance systemic risk measures to common real and financial shocks has increased in most countries.

Implications for financial stability and policy-relevant insights

• Integration and stability:
  • Insight: increased economic and financial integration does not guarantee improved financial stability; effects are not unambiguously positive.
• Risk interdependency:
  • Insight: rising synchronization and market integration, together with converging bank risk profiles and greater sensitivity to common shocks, increase interdependency of risks across institutions and countries.

Content in this bundle

• 3. Insurance DDs
  • 3. Insurance DDs (Markdown version)
  • 3. Insurance DDs (PDF)