Financial market fragmentation in the euro area: State of play

We take stock of the current evidence on fragmentation in financial markets in the  euro area and discuss policy options to facilitate further integration. We find that the situation in money, bond, equity and banking markets has generally improved, with remaining signs of divergence in bond and banking markets potentially explained by differences in fundamentals rather than fragmentation. With respect to policy, it is argued that breaking the bank-sovereign nexus is paramount and existing initiatives to weaken this link should be supplemented by further measures, which could include exposure limits for government bonds, a carefully designed joint deposit insurance scheme and implementing the proposed Capital Market Union.