FFrraaggmmeennttaattiioonn iinn eeuurroo aarreeaa bbrrooaaddllyy uunncchhaannggeedd iinn QQ33
Fragmentation in euro area financial markets has significantly diminished over the past two years, according to the latest report published by Moody’s Investors Services.
Moody’s Euro Financial Fragmentation Index shows that fragmentation decreased further in Q3 2014, to the lowest level since Q3 2010, as the divergent trends in banking deposit flows narrowed.
“Fragmentation is unlikely to decline all the way to precrisis levels, as some degree of differentiation in financial conditions across countries is warranted by differences in economic environments and creditworthiness,” said Marie Diron, co-author of the report.
In Q3 2014, bank deposits were higher than one year earlier in all peripheral countries, with the exception of Cyprus. Even in Cyprus, the pace of deposit outflows significantly slowed to 4.2% year-on-year, compared with 24% one year earlier. “Reduced dispersion in deposit flows across euro area countries is a sign of normalisation in banking sector conditions and adds to reduced financial fragmentation”, explained Diron.
Furthermore in Q3, the cross-country standard deviation of interest rates on loans to non-financial corporation’s (NFCs) and households was at its narrowest since 2009, owing to lower interest rates charged in the peripheral countries. For instance, in September, the average interest rates on new loans to NFCs up to EUR 1 mln were around 4.2% and 3.6% in Spain and Italy respectively, 30-40 basis points lower than in June 2014. Lower dispersion in interest rates, in particular via lower rates in the peripheral countries, is a sign of reduced fragmentation.
The MEFF Index aims to capture the degree of fragmentation of euro area financial markets based on measures of cross-country dispersion in price-based and quantity-based financial indicators. These indicators comprise yields on government bonds, bank interest rates charged to households and non-financial corporations (NFCs), cross-border banks’ exposure, TARGET2 balances and bank deposits.