'We need joint responsibility and transparency in financial markets' 

The recent market turmoil has shown that financial crises can spread quickly around the globe. What are the risks Europe is facing due to an increasing integration of financial markets worldwide?

First, there is a lot of diversification, which means that the risk will actually decline, but the nature of the risk changes. What you have now is that financial troubles in one spot will travel to another spot much more quickly than they used to before. And that is something that is presenting a challenge for supervisors and regulators.

So on the one hand risks are balanced out, but on the other hand, if a crisis occurs it will have a greater impact?

What I would say is that risks decline overall because there is more diversification, but there is a potential when an event strikes that it travels much more quickly across different countries and could therefore also become more severe. 

What lessons could we draw from the most recent crisis with regard to financial market integration in Europe?

The financial turmoil is still ongoing, and to draw lessons you need distance. Therefore, it will take time until we know exactly what is needed. Definitely, what we are learning is that because of securitisation, credit and market risks are becoming much more two sides of the same coin. And therefore, events in one country can very quickly travel to another country, and that of course raises the challenge for regulators and supervisors: They need to collaborate much more, and much more information exchange is necessary in order to be on top of these events. 

Looking at the reaction to the crisis, politicians in Europe seem to be out of control of what is happening in their own financial markets, which are also affected by the US sub-prime crisis. Most recently German Chancellor Angela Merkel and French President Sarkozy spoke out in favour of more supervision and transparency of financial markets - is this a challenge in the face of increasingly integrated markets?

I do not think that there is a contradiction between integration on the one hand, and transparency on the other. Indeed, transparency is almost a prerequisite for integration. Otherwise, you risk running into a backlash against integration, as is happening right now. Transparency is crucial for markets to operate in an efficient manner and there are various features of the regulatory framework in place to ensure transparency, such as international accounting standards, for example, which represent an important step forward.

Through our own initiatives, we at the IMF are trying to contribute to transparency. In the context of the financial sector assessment programmes, we have codes on monetary and financial policy transparency. Through monitoring of the implementation of standards, such as the BASEL II core principles and our reporting, we try to contribute to transparency.

But there are many initiatives on the way and we are just one part of this. There are international accounting standards that are being put in place and stock markets are also becoming the centre of attention. For example, there is an initiative by the Commission, the Prospectus Directive, which seeks to ensure that prospectuses are sufficiently transparent and standardised across Europe so that people are not being promised things that in the end are not being delivered. So there are many efforts on the way to ensure more transparency. 

How could this new type of supervision take shape?

The debate at this stage is at a point where you need to explore various options first. The question is how to structure supervision, in order to achieve what we are calling for, which is more joint accountability and joint responsibility. This would ensure that supervisors duly take into account the external effects of their own actions on other countries, which will occur due to the integration of the financial market. As for how to reach this joint responsibility and transparency, I think that there are many ways to go. At this stage what is needed is for a lot of proposals to be tabled and then there has to be a debate on this. 

Retail financial services are increasingly becoming the Commission's focus. What do you think are the main challenges?

There are challenges at many levels. First, there is the extent to which one bank can take over another bank - mergers and acquisitions - and the Commission is working on increasing the transparency of the approval process of mergers and acquisitions. We strongly support the objectives behind that and think that they would also help integrate retail markets. 

Then there are also issues related to domestic laws, such as consumer protection laws, where there is more work required to harmonise policies and practices across Europe. There is much more that needs to be done there. 

There is probably also a need to ultimately harmonise rules on bankruptcy policy, because this is important for mortgage products and for banks that need to be able to offer the whole range of mortgage products in every country.

At this stage every country has its own mortgage products and only a few of these are offered across Europe.

You state in your publication that banking is the least "Europeanised" sector. Could you briefly illustrate this?

A typical large European manufacturing firm does business with many countries everywhere, including in and outside Europe. For banks, this is less the case. They mainly do business in their home country and then major banks on average do more business outside Europe, outside their home country, than they do inside Europe, outside their home-country. 

Looking at the degree of localisation, can there be a truly integrated market for retail banking services?

There is still a long way towards more integration to go before we hit limits. It is true that different national consumer protection laws, different taxation regimes mean that people in different countries will favour different products. But if you take for example mortgages, the variety of mortgage products on offer in each country is much smaller than the variety of mortgage products on offer everywhere in Europe if you take everything together. What integration of the retail market should achieve in this specific case is additional variety, at least at the country level, so that there is more choice for customers.