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Европейская денежная система

Европейская денежная система

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


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


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


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

instrument in the money markets of the euro area. This can be seen from the

low level of quoted bid-ask spreads and the high turnover relative to other

major international markets. Both indicators show a high level of liquidity

in this instrument. Another type of instrument of interest in the money

market (but also at the fringe of the bond market) is that of the

repurchase agreement. The development of more integrated repo markets in

the euro area will obviously accompany the development of area-wide

securities trading, settlement and custody systems. This will reduce

transaction costs and improve efficiency for the cross-border transfer of

securities through repurchase operations.

Looking ahead, other developments in the money markets are expected

in the coming months. There are aims to establish new area-wide standards

for the repo markets, with a view to overcoming the separation between

different models in the national markets. These new standards could

obviously co-exist with other standards and broader conventions for

international transactions. In fact, over the last few months the European

Central Bank (ECB) has been examining whether this co-existence could

affect the integration of money markets. We have come to the conclusion

that, in particular owing to the efforts of the sponsors of the different

standards, this should not be considered a threat.

Finally, it should also be noted that national and international

central securities depositories are currently developing links with one

another, which will enable participants in one country to make direct use

of securities deposited in other countries. Twenty-six of these links

(concerning mainly Belgium, Germany, France, Luxembourg, the Netherlands,

Austria and Finland) may be used by the Eurosystem.

3. Bond markets

I should now like to turn to bond markets and first to comment on

the position of euro area bond markets in the global market. Some data

sources on international securities issuance available so far show a

pattern of increased reliance on euro-denominated bonds at the beginning of

1999, in particular as opposed to US dollar-denominated bonds. While it

remains difficult to draw firm conclusions on the determinants of bond

denomination choices without considering information on the nature of bond

holdings and trading patterns, recent bond issuance volumes indicate that

the euro has the potential to become an important currency for

international bond issuance.

The importance of the euro area bond market is also apparent in

measures of secondary market activity, i.e. turnover or trading volumes. In

particular, trading volumes on exchange-traded bond futures are indicative

of the overall degree of market activity. Volumes traded in euro-

denominated bond futures were low shortly before the changeover to the

euro, when the bond markets in the euro area were exceptionally quiet.

Since then, volumes have increased markedly and they currently stand at

consistently high levels, which indicates a continuously high degree of

turnover in euro-denominated bond markets in general.

Turning to the internal structure of the bond markets of the euro

area, I should like to make an initial observation related to the recent

marked increase in euro-denominated corporate bond issuance, which was

accompanied by an increase in the average size of issues. This tendency is

likely to continue in the future, in particular to the extent that bonds

may be used by firms to finance increasing mergers and acquisitions

activity in the euro area. The underlying reasons for increased bond

issuance by euro area firms are clear, both on the supply and on the demand

side. On the supply side, large firms with good credit ratings will find

opportunities in the increased depth and liquidity of the euro area bond

market. On the demand side, the respect by governments of the parameters of

the Stability and Growth Pact over the medium term should leave more room

for the private sector to issue debt securities. In addition, the euro area

must be in a position to save in order to be able to take care of its

future pension payments, and a part of these savings is likely to be

invested in corporate debt securities. An increase in global demand for

euro-denominated debt securities is also expected as the euro becomes a

major reserve currency. Moreover, the demand for higher risk euro-

denominated debt securities is likely to increase, particularly as the

current low level of sovereign yields increases incentives to search for

higher yields.

With regard to the government bond markets, an issue of importance

for the euro area that I should like to stress is the fact that governments

now find themselves in a rather new position as issuers. This reflects a

number of developments, two of which I should particularly like to mention.

First, the major public issuers have attempted to position themselves as

providers of benchmarks for euro-denominated bond markets. Second, certain

issues of government bonds have effectively gained larger portions of

secondary markets, in particular in relation to developments that have

occurred on bond futures markets.

Market participants have responded to these developments in the bond

markets with a range of concurring or competing initiatives and alliances.

In the derivatives industry, market participants have established new

alliances. On the trading side, electronic cross-border platforms for bonds

have been created or are in the process of being developed. On the clearing

side, integrated platforms for different markets have been launched or are

being finalised, while, finally, on the securities settlement side,

initiatives have also been launched. It is important to note that while

some of these developments are internal to the euro area, others aim at

creating links with financial markets outside the euro area. One may

reasonably expect that all of these new circuits, as well as others, may in

the future be enlarged to encompass a growing number of market


4. Equity markets

Turning to equity markets, structural developments of most interest

relate to the infrastructure of stock exchanges on the one hand and equity

derivative exchanges on the other. First, within the euro area, equity

investment and trading activities appear to be less and less influenced by

country-specific factors and increasingly subject to area-wide

considerations. Consistent with this development, area-wide equity indices

have been developing. Market participants are showing considerable interest

in these area-wide indices, in particular as they are also now adopting

investment positions on area-wide industrial sectors, using the sub-indices

made available for that purpose. An indication of the degree of interest

raised by area-wide indices is the relatively fierce competition for

benchmark status that has developed between the various proponents of area-

wide indices.

Second, market developments in relation to stock index futures and

options will reflect the rise of area-wide indices. This may in turn lead

to either consolidation or product specialisation of equity derivative

exchanges. For my part, I consider the development of fair competition

between exchanges to be a positive factor in terms of the improvement of

the range of products and services available to the financial industry.

Third, in the equity market the euro has also provided a powerful

incentive for the creation of new - and possibly competing - alliances

among exchanges. Before the launch of the single currency, circuits had

been created for the launch of integrated "new markets" within and beyond

the euro area, encompassing the shares of small and medium-sized companies

with a high potential for growth. The development in the integration of

exchanges has also continued more recently, and, as you know, it has not

been limited to the euro area.

5. Banking

In the field of banking, the securitisation trend appears to demand

strategic and organisational adjustment on the part of banks. The relative

importance of the more traditional types of banking activity can be seen to

be decreasing, even though it should be mentioned that traditional banking

activities have nonetheless continued to grow at a rate exceeding that of

growth of nominal GDP. In the euro area, growth in recent years has been

much more rapid in assets under the management of mutual funds and other

institutional investors than in the assets of banks. This reflects a

tendency towards decreasing the relative weight of bank deposits compared

with securities in financial wealth.

The euro area banking industry has reacted to this development

already by diversifying into the asset management area. Banking groups have

been able to "internalise" a significant part of the securitisation

tendency as they control a large majority of the mutual funds. As a result

of the securitisation trend, there has been an increase in the share of

security holdings among bank assets, and an increase in the share of

capital gains - although those are quite cyclically sensitive - as well as

in fee income stemming from asset management services. Meanwhile, the

relative importance of interest income has declined correspondingly. At the

bank level, dividend income from equity participations has generally become

much more important, indicating an increase in the importance of the profit

generated by non-bank subsidiaries.

Beside the establishment of non-bank subsidiaries, there have been

other strategic and organisational changes that have resulted in banks

strengthening their securities-related activities. In particular,

significant motives behind the recent merger trend seem to include the

desire to increase bank size and hence to be able to operate efficiently in

wholesale securities markets as well as to be able to cater for the needs

of large international corporations for investment banking services.

The trend towards securitisation can be regarded as one of the

reasons for the structural changes in the banking system that appears to

have accelerated recently. There have naturally also been other reasons why

banks have sought to merge, predominantly the need to cut capacity and to

reduce costs. These cost-driven mergers have taken place primarily among

smaller banks.

6. Conclusion

In my remarks today, I have referred to a number of changes and

market initiatives in the euro area financial landscape. These developments

point to the increasing importance of the fixed income and equity markets

that many expected in Stage Three of Economic and Monetary Union (EMU),

providing new opportunities for borrowers and investors and causing

pressure to adjust for financial institutions. In this respect, I should

like to mention the importance of removing the remaining regulatory

barriers to the further development of the securities markets. To this end,

the European Commission has recently published an Action Plan of regulatory

changes to improve the single market for financial services that would

certainly - when implemented - boost the integration and market-driven

development of the European securities markets.

Finally, I should like to conclude with some remarks about the role

of the Eurosystem (the term that we use to mean the ECB and the 11 national

central banks of the Member States participating in Stage Three of EMU) in

the developments in the financial sector in Europe. First of all, the

Eurosystem contributes to developments in the financial sector by providing

it with a stable and credible monetary policy. With a strong and credible

commitment to its primary objective, price stability, the Eurosystem has

created a situation in which the financial sector can concentrate on those

issues that are of the greatest relevance to its activities.

The Eurosystem does not play a direct role in structural

developments in the financial sector. With its single monetary policy

framework and TARGET in particular, the Eurosystem has created an

infrastructure that has proved to be useful for the establishment of an

integrated money market in the euro area.

In addition, the Eurosystem carefully monitors structural

developments in the financial sector to the extent that they might have an

impact on the conduct of monetary policy. To make a final point, in

observing developments in the financial sector, the Eurosystem constantly

takes account of the fact that one of its tasks, laid down in the Treaty

establishing the European Community, is to "contribute to the smooth

conduct of policies pursued by the competent authorities relating to (…)

the stability of the financial system" [(Article 105 (5))]. Analysis of the

common developments in the European financial system represents such a



Economic and Monetary Union in Europe - the challenges ahead

Speech by Professor Dr. L.H. Hoogduin,

on behalf of Dr. Willem F. Duisenberg,

President of the European Central Bank,

at the symposium sponsored by the Federal Reserve Bank of Kansas


on "New challenges for monetary policy"

on 27 August 1999 in Jackson Hole, Wyoming

From the European perspective, the title of this year's Jackson Hole

symposium - "new challenges for monetary policy" - is particularly

appropriate. Economic and Monetary Union (EMU) in Europe is a unique

project and its consummation with the introduction of the single monetary

policy on 1 January 1999 took place less than eight months ago. Today,

given the time available, I will not endeavour to review all the challenges

which are raised by EMU comprehensively. I shall have to be selective,

largely focusing on the primary objective of the Eurosystem, which is to

maintain price stability in the euro area. In this context, let me briefly

explain our terminology, which may perhaps not be known to everybody as

yet. The "Eurosystem" is the name we gave to the European Central Bank

(ECB) and the currently eleven national central banks of those countries

which have introduced the euro. The "euro area" comprises these eleven


I should like to start with some observations on the objective and

limitations of monetary policy in the euro area. Owing to the successful

process of disinflation and convergence within Europe over the past decade,

the launch of the euro last January took place in an environment of price

stability that few observers would have predicted only a few years ago.

Consumers and firms are already reaping the benefits of this environment.

The relative price signals on which the efficiency of the market mechanism

relies are not obscured by volatility in the general level of prices. By

avoiding the costs and distortions inflation would impose on the economy,

price stability is contributing to the growth and employment potential of

the euro area.

This contribution is substantial. Unfortunately, it is all too easily

taken for granted. Memories of the still recent past relating to the

consequences of high and unstable inflation tend to fade rapidly. We are

sometimes already hearing the argument that, given that price stability has

been achieved, monetary policy should now be re-oriented away from its

primary objective of price stability towards other goals. One of the

challenges facing the Eurosystem is to maintain the support of the broad

public constituency necessary to resist these calls, which - as I hardly

need to point out to such a distinguished audience of central bankers and

monetary economists - are misguided and ultimately counter-productive.

However, it can be said that the situation is the same as that in the world

of sports; winning a championship and reaching the top is difficult, but

staying there is even harder.

The institutional framework for European monetary policy, as created

by the Maastricht Treaty (i.e. the Treaty on European Union, which has

become part of the Treaty establishing the European Community, or the EC

Treaty, in short) is well suited to meeting this challenge. Most

importantly, the single monetary policy has been clearly assigned the

primary objective of maintaining price stability in the euro area. To

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