European Monetary System

БОЛЬШАЯ ЛЕНИНГРАДСКАЯ БИБЛИОТЕКА - РЕФЕРАТЫ - European Monetary System

European Monetary System

European Monetary System and European Currency

Based on selected papers kindly provided by the European Central Bank

Compiled by Dm. Evstafiev

for the students of the School of Political Science

at St. Petersburg State University

St. Petersburg

1999

Developments in the Financial Sector in Europe

following the Introduction of the Euro

Speech by Dr. Willem F. Duisenberg,

President of the European Central Bank,

to be delivered at the Third European Financial Markets Convention

Milan, 3 June 1999

1. Introduction

The period of the five months following the introduction of the euro

has been very rich in new events, with significant developments taking

place both in the continental securities markets and in the financial

system as a whole. Although experience has been gathered over a relatively

short period of time, I am tempted to make two observations of a

fundamental nature.

The first observation is that developments following the

introduction of the euro do not imply that the euro area is set to become a

financial fortress whose financial markets and institutions would be cut

off from the rest of the world. In fact, market participants residing

outside the euro area seem to be taking a keen interest in the financial

markets of the euro area. "Core Europe", so to speak, has become more

interesting to outsiders as the breadth and liquidity of its financial

markets has increased.

The second observation is that the euro can be expected to have a

significant influence on the structure of the financial system by bringing

about more securitisation. A traditional feature of the financial system of

continental Europe has been a marked dependency on the funds intermediated

by banks. This feature contrasts with the financial system of the United

States which is much more securitised. For instance, corporate bonds have

not been very widely issued in the euro area, and stock market

capitalisation - relative to the size of the economy - is much lower in the

euro area than in the United States. There are good reasons to believe that

a process of securitisation will gather pace in the euro area now that the

single currency is in use. This view seems to be shared by many observers

and I shall, in the course of my remarks, provide some arguments in its

favour.

In my remarks today, I should like to discuss the structural changes

in the financial sector, in particular those that have occurred as a result

of the launch of new product types and the changing nature of public and

private institutions. I shall address developments in the money markets,

the bond markets and the equity markets as well as the process of

adaptation of banking institutions to their new environment.

2. Money markets

The money markets of the euro area became rapidly integrated after

the introduction of the euro despite the fact that their structures had

previously been quite different at the national level. Transaction volumes

and measures of bid-ask spreads on the various money market instruments

both indicate that the markets reached a very high level of liquidity very

rapidly in the course of January 1999 and have subsequently retained it.

The high degree of integration of the euro area money markets is,

first of all, a result of the single monetary policy, which is conducted

through the harmonised operational framework of the Eurosystem. This

integration has also been made possible by the significant and increasing

integration of payment systems. Cross-border payments processed by TARGET

accounted for more than 37% of the value of all real-time payments

(domestic and cross-border) effected by credit institutions in March and

April 1999. Moreover, the continuously high use which our counterparties

make of the correspondent central banking model (or CCBM) for the cross-

border transfer of collateral in monetary policy operations is an important

indication of area-wide integration. This is evidenced by the fact that

cross-border collateral currently represents around 25% of the total amount

of collateral in custody in the context of the Eurosystem's monetary policy

operations.

Taking a closer look at the various instruments traded in the money

markets, a feature that is worthy of note is that market participants in

the 11 countries of the euro area have shown an increasing tendency to

demonstrate a similar reliance on each instrument type. For example, what

we call "overnight indexed swaps", which are swaps indexed on the overnight

reference interest rate EONIA, have become an important derivative