Deeper and More Integrated Financial Markets to Foster Growth and Resilience in Europe

Luis Brandão-Marques, Damien Capelle, Diego Cerdeiro, Adriano Fernandes, Alexandra Fotiou, Yueling Huang, Claire Li, Rui Mano, Alberto Musso, Ese Onokpasa, Richard Varghese and Maryam Vaziri

No 2026/002, IMF Staff Discussion Notes from International Monetary Fund

Abstract: Persistent fragmentation and limited depth in EU financial markets constrain firm growth, innovation, and cross-country risk sharing. This Staff Discussion Note documents policy-induced barriers that impede cross-border bank lending and suppress the scale of venture capital, alongside broader real-sector frictions that restrict the amount of investable projects. Obstacles examined in the Note include heterogeneity in banking regulation and safety nets (notably deposit insurance), as well as insolvency regimes, and rules limiting the provision and allocation of risk capital by pension funds and insurers. Financial reforms could raise long-run EU GDP by about 3 percent, with two-thirds from deeper banking integration and the remainder from reducing cross-border barriers to and expanding the supply of risk-capital. In addition, these financial reforms would magnify by an additional percentage point of GDP the gains from a broader set of domestic structural reforms that improve business dynamism and innovation. Smaller EU economies and younger firms benefit disproportionately.

Keywords: Banking union; capital markets union; cross-border banking; venture capital; capital allocation; firm growth; risk-sharing (search for similar items in EconPapers)
Pages: 48
Date: 2026-06-10
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