Cover -- Contents -- Foreword -- Acknowledgments -- Abbreviations -- 1. Toward a Single Financial Market -- Major Achievements, but an Unfinished Agenda -- Concepts and Rationale -- The Current State of Play -- Capital Market Integration and Development -- Banking System Integration and Risks -- Financial Stability Arrangements -- Navigating the Course Ahead -- Part I. Financial Integration -- 2. Key Concepts, Benefits, and Risks -- What Is Financial Integration? -- Benefits of European Financial Integration -- Risks of European Financial Integration -- Fostering Integration and Monitoring Financial Risks -- 3. Current State of Play -- Progress toward Financial Integration -- Financial Integration Policies -- Challenges Ahead -- 4. Comparing Europe and the United States -- The History of Bank Integration -- Structural Characteristics -- Productive Efficiency -- Competition -- Efficiency, Competition, and Financial Market Structure -- Conclusions -- 5. Equity Market Integration -- Recent Market and Policy Developments -- Measuring Equity Market Integration -- Impediments to Integration -- Policy Lessons -- Appendix 5.1 -- Appendix 5.2 -- Part II. Financial Stability -- 6. Risk Profiles of Financial Institutions -- Integration of Bank Credit Markets -- Evolution and Convergence of Risk Profiles -- Conclusions -- 7. Internationally Active Large Banking Groups -- Banking Sector Trends -- International Diversification -- Market-Based Financial Soundness Indicators -- Conclusions -- 8. Bank Business Correlations -- Data and Summary Statistics -- Clustering Europe's Banks -- European, Country, and Idiosyncratic Bank Dynamics -- Conclusions -- 9. Assessing Current Prudential Arrangements -- Methodology -- Analysis of Compliance with Principles -- Main FSAP Recommendations -- Conclusions -- 10. Financial Integration and Stability.

Building an EU Financial Stability Framework -- Pillars of Stability -- Charting the Course Ahead -- Conclusions -- References -- Boxes -- 1.1. Timeline of European Financial Integration Policies -- 2.1. Explaining the United States-Europe Productivity Gap -- 2.2. EU Consumption-Output Correlations -- 4.1. Securitization and the Integration of Local Housing Markets -- 5.1. The Euronext Model: Preserving Local Market Entry with Technical Unification -- 5.2. The Methodology for Deriving Efficient Portfolios -- 5.3. Cross-Listing and European Integration -- 6.1. Foreign Bank Penetration in Central and Eastern Europe -- 6.2. The "Portfolio" Distance-to-Default Measure -- 9.1. Cross-Border Issues in Financial Supervision: A Survey -- 10.1. Key Bodies in the EU Banking Sector Stability Framework -- 10.2. The Lamfalussy Process -- 10.3. Cooperation on Prudential Supervision and Crisis Management -- 10.4. The Case for a European Banking Charter -- Tables -- 2.1. Alternative Definitions of "Contagion" -- 3.1. Distribution of European Corporate Bond Issuers by Whole Letter Rating -- 3.2. FSAP: Main Issues in Wholesale Financial Markets and Prudential Supervision -- 4.1. Euro Area and United States: Banks and Markets, 2004 -- 4.2. EU-15 and U.S. Banks: Structural Indicators, 1997-2003 -- 4.3. EU-15 and U.S. Banks: Indicators of Profitability and Efficiency, 2003 -- 4.4. EU-15 and U.S. Banking Sector Indicators, 1997-2003 -- 4.5. Measures of Cost Efficiency: EU Banks Compared with U.S. Banks, 1997-2003 -- 4.6. Measures of Revenue Efficiency: EU Banks Compared with U.S. Banks, 1997-2003 -- 4.7. Measures of Competition for EU and U.S. Banks (a), 1997-2003 -- 4.8. Measures of Competition for EU and U.S. Banks (b), 1997-2003 -- 4.9. Measures of Competition for Small EU Banks Compared with Large EU Banks, 1997-2003.

5.1. Distribution of Monthly European Stock Market Returns, 1990-2005 -- 5.2. Ownership Distribution of Nonresident Equity Portfolio Investments in EU-15 Countries, 1997 and 2003 -- 5.3. Change in Equity Cross-Holdings between Euronext Countries, 1997 versus 2003 -- 5.4. "Home Bias" in EU Equity Portfolios -- 5.5. EU Equity Portfolio Diversification Efficiency -- 5.6. EU Equity Diversification Efficiency Gains -- A5.1. Alternative "Home Bias" Estimates in EU Equity Portfolios -- A5.2. EU Equity Portfolio Diversification Efficiency -- 6.1. Assets of Branches and Subsidiaries of Foreign Credit Institutions from European Economic Area (EEA) Countries -- 6.2. Balance Sheet Data for Individual Banks -- 6.3. Volatility of Income Growth Rates for Large Banks, 1997-2005 -- 7.1. Assets of Internationally Active Large Banking Groups in Sample -- 7.2. Cross-Border Exposures of ILBGs, 2004 -- 7.3. Operating Assets and Revenues of ILBGs: EU and Worldwide, 2004 -- 8.1. EU-15: Listing of Banks, 1997-2004 -- 8.2. EU-15: Country Distribution of Banks, 1997-2004 -- 8.3. EU-15: Sample Characteristics Compared with Overall Banking System, 2004 -- 8.4. EU-15: Pair-Wise Cross-Correlations -- 8.5. EU-15: Principal Component Analysis-Share of Variance Explained by 1 versus 2 Components -- 8.6. EU-15: Variance Decomposition of Bank Variables -- 9.1. EU Countries: Overview of FSAP Participation -- 9.2. Basel Core Principles for Effective Banking Supervision (BCP) -- 9.3. International Association of Insurance Supervisors: Insurance Core Principles (ICP) -- 9.4. International Organization of Securities Commissions (IOSCO): Objectives and Principles of Securities Regulation -- 9.5. Overview of Economies Included in the Survey in this Chapter -- 9.6. Financial Standards and Their Four Main Components -- 9.7. Banking, Insurance, and Securities Regulation: Overall Observance.

9.8. Least Observed Supervisory Principles -- Figures -- 2.1. Yield Convergence in EU Financial Markets, 1995-2005 -- 2.2. Spectrum of Financial Integration -- 2.3. Financial Integration and Its Benefits -- 2.4. Financial Integration and Its Risks -- 3.1. Convergence of Euro Area: Interest Rates -- 3.2. European Union: Long-Term Government Bond Spreads -- 3.3. Euro Area: Euro-Denominated Nonfinancial Corporate Bond Issuance -- 3.4. European Securitization -- 3.5. Three-Month Interest Rate Future Contracts: Evolution of Open Interest -- 3.6. Open Interest: 10-Year Treasury and 10-Year Euro Bund -- 4.1. Bank Profitability and the Economic Cycle -- 5.1. Dispersion of Euro-Area Stock Market Returns, 1990-2006 -- 5.2. European Stock Market Performance, 1990-2005 -- 5.3. EU-15 Efficient Risk-Return Frontier, 1990-2005 -- 5.4. EU-15 Efficient Frontier and Major Stock Indices, 1990-2005 -- 5.5. EU-15 Efficient Frontier and Country Portfolios -- A5.1. EU-15 Efficient Frontier and Short-Selling Constraints -- 6.1. Consolidated Foreign Exposure -- 6.2. Euro-Denominated Assets of the Banking System -- 6.3. EU Bank Distance to Default and Trend Component -- 6.4. Large Banks: Return, Volatility, and Capitalization -- 6.5. Insurance Distance to Default and Trend Component -- 6.6. Convergence of Bank and Insurance Distances to Default -- 7.1. Consolidated Foreign Claims of EU-15 Countries -- 7.2. Herfindahl Index for the Euro Area and Return on Assets -- 7.3. Herfindahl Index for the Euro Area and Return on Equity -- 7.4. Herfindahl Index for the Euro Area and Securities -- 7.5. Portfolio Distance to Default of 11 ILBGs -- 7.6. Bank Distance to Default of Individual ILBGs -- 7.7. Difference between the Distance to Default of the Portfolio of All Large Euro-Area Banks and the 11 ILBGs -- 7.8. Tree Structure of a Representative Hierarchical Clustering of the ILBGs.

8.1. EU-15: Cluster Analysis of Bank Variables(a) -- 8.2. EU-15: Cluster Analysis of Bank Variables(b) -- 9.1. Banking, Insurance, and Securities Regulation: Overall Observance -- 9.2. Basel Core Principles (EU-15 and NMS) -- 9.3. Basel Core Principles-Closer Look -- 9.4. EU versus Non-EU Countries: Basel Core Principles -- 9.5. EU versus Non-EU Countries: Insurance Core Principles -- 9.6. EU versus Non-EU Countries: IOSCO Principles.