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European Monetary System

European Monetary System.
European Monetary System European Monetary System and European Currency

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,
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