April 11 (Bloomberg) -- Euro-area financial stability weakens when banks retrench and cordon off assets behind business lines or national borders, European Central Bank Executive Board Member Benoit Coeure said.
The ECB should aim to reverse these instincts when it takes over as a common supervisor next year, Coeure said in an article prepared for a conference in Dublin today and obtained by Bloomberg News.
“In the current national-based supervisory system, domestic banks with subsidiaries abroad are often encouraged to repatriate capital and liquidity from a country under stress or to ring-fence certain activities or business lines,” Coeure said. “This is not conducive to the stability of the euro-area banking system as a whole and ignores the possibility of adverse feedback from instability elsewhere.”
Coeure said “unchecked” financial integration can amplify these risks because it increases complexity and the risk of cross-border contagion. This, in turn, increases the risk that financial markets will become fragmented in reaction to shocks.
The ECB will be able to bolster the quality of financial integration when it takes up its new duties, Coeure said. This may also help European economies return to growth, he said.
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