European Central Bank

This paper first reviews the literature on financial integration with a specific focus on the euro area. We discuss how to measure financial integration and describe the main legislative and regulatory harmonization policies that the EU member states have implemented in financial markets. Second, we present empirical results showing a positive impact of these policies and of the single currency on cross-border banking integration. We also find that banking integration increases consumption risk sharing. Our results, therefore, suggest that the increased cross-banking integration triggered by the euro has fostered ex-post the optimality of the currency union by improving cross-country risk sharing. ∗Prepared for the 5th European Central Banking Conference on The Euro at Ten: Lessons and Challenges. Essential parts of this paper were prepared while Sebnem Kalemli-Ozcan was visiting the European Central Bank as 2008 Duisenberg Fellow. She thanks the economists at the bank for providing a stimulating research environment. We thank Dimitrios Rakitzis for excellent research assistance, and Marco Lo Duca, Vladimir Lazarov, and Bernadette Lauro for help in obtaining part of the data used in this paper. We also thank Luca Dedola, Domenico Giannone, Philipp Hartmann, Michele Lenza, Roberto de Santis, and Frank Smets for helpful comments and suggestions. The views expressed in this paper are those of the authors and not necessarily reflect the views of the European Central Bank or the Eurosystem