Европейская денежная система

intellectual impediments to acting when needed. In stating this, I am aware

that central banks may be the only source of immediate and adequate funds

when a crisis requires swift action, while solvency remains an issue and

failure to act could threaten the stability of the financial system.

In these circumstances the various national arrangements would

continue to apply, including those concerning the access of central banks

to supervisors' confidential information. As is well known, such

arrangements differ somewhat from country to country.

29. The criticism I have referred to also underestimates the

Eurosystem's capacity to act. To the extent that there would be an overall

liquidity effect that is relevant for monetary policy or a financial

stability implication for the euro area, the Eurosystem itself would be

actively involved.

The Eurosystem is, of course, well equipped for its two collective

decision-making bodies (the Board and the Council) to take decisions

quickly whenever needed, whether for financial stability or for other

reasons. This readiness is needed for a variety of typical central bank

decisions, such as the execution of concerted interventions or the handling

of payment system problems. Indeed, it has already been put to work during

the changeover weekend and in the first few weeks of this year.

A clear reassurance about the capacity to act when really needed

should be sufficient for the markets. Indeed, it may even be advisable not

to spell out beforehand the procedural and practical details of emergency

actions. As Gerry Corrigan once put it, maintaining "constructive

ambiguity" in these matters may help to reduce the moral hazard associated

with a safety net. I know of no central bank law within which the lender-of-

last-resort function is explicitly defined.

The question of who acts within the Eurosystem should also be

irrelevant for the markets, given that any supervised institution has an

unambiguously identified supervisor and national central bank. As to the

access to supervisory information, the lack of direct access by the

Eurosystem should not be regarded as a specific flaw of the euro area's

institutional framework, as has been frequently argued, since this

situation also exists at the national level wherever a central bank does

not carry out day-to-day supervision.

30. Finally, the criticism reflects an overly mechanistic view of how

a crisis is, and should be, managed in practice. Arguing in favour of fully

disclosed, rule-based policies in order to manage crises successfully and,

hence, maintain market confidence, is almost self-contradictory. Emergency

situations always contain unforeseen events and novel features, and

emergency, by its very nature, is something that allows and even requires a

departure from the rules and procedures adopted for normal times or even in

the previous crisis. Who cares so much about the red light when there is

two metres of snow on the road? As for transparency and accountability,

these two sacrosanct requirements should not be pushed to the point of

being detrimental to the very objective for which a policy instrument is

created. Full explanations of the actions taken and procedures followed may

be appropriate ex post, but unnecessary and undesirable ex ante.

31. So far, I have focused on the provision of emergency liquidity to

a bank. This is not the only case, however, in which central bank money may

have to be created to avoid a systemic crisis. A general liquidity "dry-up"

may reflect, for example, a gridlock in the payment system or a sudden drop

in stock market prices. The actions of the Federal Reserve in response to

the stock market crash of 1987 is an often cited example of a successful

central bank operation used to prevent a dangerous market-wide liquidity

shortfall. This kind of action is close to the monetary policy function and

has been called the "market operations approach" to lending of last resort.

In such cases, liquidity shortfalls could be covered through collateralised

intraday or overnight credit, or auctioning extra liquidity to the market.

The Eurosystem is prepared to handle this kind of market disturbance.

VI. CONCLUSION

32. In my remarks this evening, I have looked at the euro area as one

that has a central bank which does not carry out banking supervision. This

would be normal, because in many countries banking supervision is not a

task of the central bank. What is unique is that the areas of jurisdiction

of monetary policy and of banking supervision do not coincide. This

situation requires, first of all, the establishment of smooth co-operation

between the Eurosystem and the national banking supervisors, as is the case

at the national level where the two functions are separated. The most

prominent reason for this is, of course, the scenario where the provision

of liquidity from the central bank has to be made in a situation that is

generated by problems of interest to the supervisor. But beyond that, I do

not know any country in which the central bank is not very closely

interested in the state of health of the banking system, irrespective of

its supervisory responsibilities.

33. In my view, we should move as rapidly as possible to a model in

which the present division of the geographical and functional jurisdiction

between monetary policy and banking supervision plays no significant role.

I do not mean necessarily a single authority or a single set of prudential

rules. Rather I mean that the system of national supervisors needs to

operate as effectively as a single authority when needed. While the causes

of banking problems are often local or national, the propagation of

problems may be area-wide. The banking industry is much more of a system

than other financial institutions.

34. I am clearly aware that we are far from having a common

supervisory system. But since the euro has just been launched and will

last, we have to look in prospective terms at what needs to be set in

place. There is no expectation, at least to my mind, that the division of

responsibility in the euro area between the central bank and the banking

supervisory functions should be abandoned. Although the Treaty has a

provision that permits the assignment of supervisory tasks to the ECB, I

personally do not rely on the assumption that this clause will be

activated. What I perceive as absolutely necessary, however, is that co-

operation among banking supervisors, which is largely voluntary but which

finds no obstacles in the existing Directives or in the Treaty, will allow

a sort of euro area collective supervisor to emerge that can act as

effectively as if there were a single supervisor. This is desirable in the

first instance to render the supervisory action more effective against the

background of current and future challenges and, second, to assist the

Eurosystem in the performance of its basic tasks.

TABLES

Table 1. Market share of branches and subsidiaries of foreign

credit institutions as % of total domestic assets, 1997

From EEA countries From third countries

TOTAL

Branches Subsidiaries Branches

Subsidiaries

AT 0.7 1.6 0.1 1.0

3.4

BE 9.0 19.2 6.9 1.2

36.3

DE 0.9 1.4 0.7 1.2

4.2

ES 4.8 3.4 1.6 1.9

11.7

FI 7.1 0 0 0

7.1

FR 2.5 NA 2.7 NA

9.8

IR 17.7 27.8 1.2 6.9

53.6

IT 3.6 1.7 1.4 0.1

6.8

NL 2.3 3.0 0.5 1.9

7.7

SE 1.3 0.1 0.1 0.2

1.7

UK 22.5 1.0 23.0 5.6

52.1

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 2. Assets of branches and subsidiaries of domestic credit

institutions in foreign countries

as % of total domestic assets, 1997

In EEA countries In third countries

TOTAL

Branches Subsidiaries Branches

Subsidiaries

AT 2.6 NA 3.7 NA

NA

DE 12.0 7.3 7.8 0.9

27.9

ES 5.5 1.4 2.1 5.9

14.9

FI 5.9 0.3 6.6 0.3

13.1

FR 9.1 6.9 9.4 3.8

29.2

IR 8.3 14.9 1.3 10.1

34.6

IT 7.2 2.7 3.8 1.5

15.2

SE 7.2 NA 5.4 NA

NA

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 3. Concentration: Assets of the five biggest credit

institutions as % of total assets

1985 1990 1997

AT 35.8 34.6 48.3

BE 48.0 48.0 57.0

DE NA 13.9 16.7

ES 38.1 34.9 43.6

FI 51.7 53.5 77.8

FR 46.0 42.5 40.3

IE 47.5 44.2 40.7

IT 20.9 19.1 24.6

NL 69.3 73.4 79.4

SE 60.2 70.02 89.7

UK NA NA 28.0

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 4. Number of branches and subsidiaries of foreign credit

institutions, 1997

From EEA countries From third

countries TOTAL

Branches Subsidiaries Branches

Subsidiaries

AT 6 20 2 11

39

BE 25 16 15 15

71

DE 46 31 31 45

153

ES 33 21 20 6

80

FI 9 0 0 0

9

FR 46 118 43 98

305

IR 18 21 3 7

49

IT 36 4 17 4

61

NL 11 8 11 19

49

SE 14 0 3 1

18

UK 106 18 149 114

387

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Table 5. Private non-financial enterprises' bonds, credit

institutions' bonds and government bonds outstanding as % of GDP,

1997

Private Credit Government

non-financial institutions' bonds

bonds bonds

AT 2.7 31.1 30.6

BE 10.0 38.3 111.0

DE 0.1 54.6 37.6

ES 2.6 4.5 52.9

FI 3.7 7.1 35.5

IE 0.01 1.6 32.2

IT 1.6 19.4 100.4

NL NA 43.1 53.4

SE 3.6 38.6 46.5

Source: ECB report "Possible effects of EMU on the EU banking

systems in the medium to long term" (February 1999).

Euro and European integration

Speech delivered by Eugenio Domingo Solans,

Member of the Governing Council and the Executive Board of the

European Central Bank,

at the "Euro and Denmark" exhibition in Aalborg, Denmark,

on 10 September 1999

INTRODUCTION

It is a real pleasure for me to participate in the "Euro and Denmark"

exhibition in Aalborg. It is the first time since my appointment as a

member of the Executive Board of the European Central Bank (ECB) in May

1998 that I have had the opportunity to speak in Denmark. Thank you for

your invitation and for asking me to share my views on the euro and on

European integration with investors and experts of this "pre-in" country.

I should like to refer to two main topics. First, and more

extensively, allow me to explain the ECB's view and my own view on the role

of the euro as an international currency. After this I intend to make some

brief comments on the key role that the euro and the Eurosystem are playing

in the process of European economic integration.

Before I begin, I should like to add that it goes without saying that

the institutional position of the ECB - and therefore my own official

position - concerning Denmark's entry to the euro area is one of strict

neutrality. This is an issue which has to be decided by the Danish people,

whenever and in whatever way they deem appropriate.

THE EURO AS AN INTERNATIONAL CURRENCY

The three basic functions of the euro

Every currency fulfils three functions: store of value, medium of

exchange and unit of account. Concerning the first function (store of

value), the euro is used and will increasingly be used as an investment and

financing currency by market players, and as a reserve currency by public

authorities. Regarding the second function of money (medium of exchange),

the euro is used and will increasingly be used as a payment or vehicle

currency for the exchange of goods and services and for currency exchange

itself. It will also have an official use as an intervention currency.

Finally, as regards the third function of any currency (unit of account),

the euro is used and will increasingly be used by economic agents as a

pricing or quotation currency and as a pegging currency by the authorities

responsible for exchange rate issues.

Let me give you some information about the present use of the euro in

each of these areas. I shall first refer to the private use of the euro,

after which I shall consider its official public usage.

The euro as a store of value

The available information seems to confirm that the euro already

plays a significant role as an investment and financing currency in

international financial markets. Without going into precise details (1),

regarding the international debt securities market (money market

instruments, bills and bonds), it can be said that in the first two

quarters of 1999 net international issues denominated in euro amounted to

EUR 83.9 billion, compared with EUR 74 billion for the US dollar and EUR

50.9 billion for former euro area national currencies and ECUs during the

same period of 1998. In other words, in the first two quarters of 1999 net

international issues of debt securities denominated in euro were 13.4%

higher than those denominated in US dollars, and 64.8% higher than those

denominated in former euro area national currencies and ECUs issued during

the same period of last year.

With regard to equity markets, the weight of euro area stock

exchanges in terms of capitalisation ranks a clear second, far behind the

United States.

As to the banking sector, the latest data show that, at the end DX

:>48@>2:0 ?;5=:8T- -#"+ !-+ 1999\DXCODE.HTof March 1999, above 40% of

deposits and loans vis-а-vis non-residents were denominated in euro, with

the share of the US dollar almost as high.

The euro as a medium of exchange

As for the second function of money (medium of exchange), the euro

needs more time to develop as a payment currency for goods and services in

international trade and as a vehicle currency in the foreign exchange

markets. Although no precise data are available at this stage, the value of

world exports denominated in euro is not likely to differ significantly

from that of euro area exports. By contrast, the value of world exports

settled in US dollars is nearly four times as high as that of US exports.

This difference can easily be explained by the combined and reinforcing

effects of network externalities and economies of scale in the use of a

predominant international currency, as is the case with the US dollar.

The euro as a unit of account

The use of the euro as a unit of account (its third general function)

is closely linked to its use for the other two main functions. The use of a

currency as a unit of account is, in a way, the basis for its use as a

store of value or as a medium of exchange. The value stored in euro, or the

payments made in euro, will tend to be recorded in euro. Therefore, we can

conclude that the euro is playing an ever larger role as a unit of account

for all the financial assets linked to the use of the euro as an investment

and financing currency, and has a much less relevant role as a standard for

pricing goods and services, owing to the widespread use of the US dollar as

a payment and vehicle currency in international trade. The convenience of

using a single standard for pricing commodities in the international

markets, allowing traders to make direct comparisons between prices, makes

it difficult for the euro to acquire a significant role in this respect. We

can conclude that the development of the euro as a unit of account will

follow the pace at which the issuers or suppliers of assets, goods or

services priced or quoted in euro obtain a predominant position in the

international markets.

The official use of the euro

The euro also has official uses as reserve, intervention and pegging

currency, all three functions being strongly interrelated in most cases.

With regard to its official use, the euro is currently the second

most international currency after the US dollar, this being a legacy of the

former euro area national currencies.

Compared with the former euro area national currencies, there has

been a technical decline in the share of the euro as a reserve (and,

therefore, as an intervention) currency, mainly owing to the fact that such

former national currencies became domestic assets within the euro area.

However, there are good reasons to expect an increase in international

public use of the euro as a reserve and intervention currency, inasmuch as

the public authorities understand that it is worthwhile to allocate their

foreign reserves among the main international currencies and to give the

euro a relevant share in accordance with its internal and external

stability and the economic and financial importance of the euro area.

In connection with the use of the euro as a pegging currency,

approximately 30 countries outside the euro area currently have exchange

rate regimes involving the euro to a greater or lesser extent. These

exchange rate regimes are: currency boards (Bosnia-Herzegovina, Bulgaria,

Estonia); currencies pegged to the euro (Cyprus, FYROM [the Former Yugoslav

Republic of Macedonia] and 14 African countries in which the CFA franc is

the legal tender); currencies pegged to a basket of currencies including

the euro, in some cases with a fluctuation band (Hungary, Iceland, Poland,

Turkey, etc.); systems of managed floating in which the euro is used

informally as the reference currency (Czech Republic, Slovak Republic and

Slovenia); and, last but not least, European Union currencies pegged to the

euro through a co-operative arrangement, namely ERM II. As you well know,

Denmark and Greece joined ERM II on 1 January 1999 with a ±2.25%

fluctuation band for the Danish krone and a ±15% fluctuation band for the

Greek drachma. Although the euro remains in second position after the US

dollar in terms of its official use, the role of the euro will increase in

the future, without a doubt.

The position of the Eurosystem concerning the international role of

the euro

As a general conclusion stemming from the previous analysis of the

use of the euro in the world economy, we can affirm that the euro is the

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