The Five Years Ahead - A new action plan for Europe’s financial markets?

Thursday, 8 January 2015
ECMI Research Reports
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The 2014 ECMI Annual Conference brought together more than 350 academics, policy-makers and market participants from across Europe and beyond. The event focused on important challenges for Europe’s financial markets. Financial fragmentation remains a drag over some national economies and a session questioned whether the creation of the Banking Union can reverse the trend without a fiscal backstop to the resolution mechanism. The second session discussed how the law can shape liquidity in the financial system before a financial crisis, with its implementation, and after, with its relaxation. Nonetheless, more robust action to increase capital provisions for banks and to pursue similar actions into shadow banking activities is needed. Third session discussed financial markets microstructure and how highfrequency trading is reaching the end of its speed race with risks for market functioning. The panel discussed whether we are approaching the end of continuous trading. The last session offered an overview of the challenges that crowdfunding faces as a more important source of funding for advanced economies.


Key takeaways

  • A lack of risk-sharing financial integration makes the financial system more prone to fragmentation when losses on financial claims materialise. Bank-based over-indebtedness in Europe's private sector has endangered the solvency of states and driven fragmentation. Banking union will not thrive without a fully-fledged fiscal backstop.
  • If not properly designed, new capital requirements on banks may have long-lasting effects on liquidity, but they are necessary to prop up the financial system against the risks we experienced during the last financial crisis. Law's elasticity also played a key role in creating the liquidity that financial markets needed to grow and, consequently, offer a space for central bank interventions. Nonetheless, policy-makers should pay more attention to pricing mechanisms. Illiquidity is not necessarily a problem if it is correctly priced.
  • Trading technologies have improved market liquidity and offered better price formation through increased competition among trading venues. Despite the unanimous view about the disruptive nature of those technologies advances, views still diverge about what the infinite race to be faster (continuous trading) may produce in terms of collateral damages for market quality. A proposal for discrete trading has reopened discussions about the future of market microstructure.
  • Led by social networks, crowdfunding has become a catalyst for the democratisation of innovation and finance. Its rapid development confirms that this social and financial phenomenon is here to stay and could soon complement traditional bank and capital markets funding, especially for start-ups and SMEs.

Detailed information about the annual conference is available here.