The Five Years Ahead - A new action plan for Europe’s financial markets

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A lack of risk-sharing financial integration makes the financial system more prone to fragmentation when losses on financial claims materialise. Bank-based over-indebtedness in Europe's private sector has endangered the solvency of states and driven fragmentation. Banking union will not thrive without a fully-fledged fiscal backstop.

If not properly designed, new capital requirements on banks may have long-lasting effects on liquidity, but they are necessary to prop up the financial system against the risks we experienced during the last financial crisis. Law's elasticity also played a key role in creating the liquidity that financial markets needed to grow and, consequently, offer a space for central bank interventions. Nonetheless, policy-makers should pay more attention to pricing mechanisms. Illiquidity is not necessarily a problem if it is correctly priced.

Trading technologies have improved market liquidity and offered better price formation through increased competition among trading venues. Despite the unanimous view about the disruptive nature of those technologies advances, views still diverge about what the infinite race to be faster (continuous trading) may produce in terms of collateral damages for market quality. A proposal for discrete trading has reopened discussions about the future of market microstructure.

Led by social networks, crowdfunding has become a catalyst for the democratisation of innovation and finance. Its rapid development confirms that this social and financial phenomenon is here to stay and could soon complement traditional bank and capital markets funding, especially for start-ups and SMEs.