Euro zone's integration fails to reach stock markets, ECB says

FRANKFURT, May 7 (Reuters) - Euro zone financial integration has made steady progress in the past few years but the region's equity markets remain stubbornly fragmented, lagging behind advances in debt and banking, the European Central Bank said in a report on Thursday.

The ECB and the European Commission are pushing to deepen integration and build a single market, starting with financial services, hoping it will channel more savings into investment and ultimately lift growth.

Indicators of financial inter-connectedness, such as cross-border lending, bond holdings and market spreads, have risen above long-term averages since 2022, supported by upbeat sentiment, the ECB said in a biennial report.

Broad improvements spanned across bonds, banking and some capital market segments, the report showed. Equity market integration, however, has deteriorated over the same period, with cross-border investment within the bloc falling to historically low levels.

"Empirical evidence points to a set of interrelated structural blockages that continue to limit the effectiveness of European capital markets in supporting innovation and long-term growth," the ECB said in the report.

Barriers, such as fragmented supervision, tax systems and market infrastructure, continue to deter cross-border investment, the ECB said.

The report highlights that euro area households keep a large share of their savings in bank deposits, with relatively small exposure to equities, further reducing the pool of risk capital available to companies.

The ECB backed Commission proposals - from tax simplification to pension reforms and stronger EU-level oversight - as steps in the right direction.

But it signalled that more decisive action will be needed to overcome entrenched national barriers, such as national corporate and securities laws. (Reporting by Francesco Canepa Editing by Tomasz Janowski)