Economics, 3rd Edition

Financial Capital Mobility

In discussing financial capital mobility, a distinction must be made between the wholesale and the 

retail capital markets. The wholesale financial markets are the capital markets in which only financial 

institutions such as banks and investment funds operate, as well as very large corporations, while 

the retail financial markets (such as high street banks) are those open to individual households and 

to small and medium-sized corporations. Prior to the introduction of the euro, financial integration 

among euro area countries was probably quite low, in both the wholesale and retail sectors. However, 

following the introduction of the euro, integration of the wholesale financial markets has increased 

dramatically. In particular, a liquid euro money market with single interbank market interest rates 

was established so that a bank in, say, Luxembourg can now borrow euros just as easily and at the 

same rate of interest from another bank in Frankfurt as it can from a bank located in the same street 

in Luxembourg. In the government bond market, the degree of market integration is also high, and 

this is shown by the fact that the interest rates on government bonds of the different euro area 

countries are very close to one another and tend to move very closely together. On the other hand, 

the integration of retail market products, such as loans to households and small and medium-sized 

enterprises, is lagging behind compared with the wholesale market products. This becomes evident 

from persistent cross-country differences in bank lending rates and the rather limited cross-border 

retail banking activity. Indeed, national banking sectors have remained largely segregated with only 

marginal cross-border penetration.

---