Introductory remarks on the euro and European financial integration, at the ECB Workshop “What effects is EMU having on the euro area and its member countries?”
Speech by Gertrude Tumpel-Gugerell, Member of the Executive Board of the ECB17 June 2005
Ladies and gentlemen,
It is my pleasure to welcome you this morning to the third session of the ECB workshop.
European financial integration is (slowly but surely) going forward. Right in time for our workshop two large banks, Italy’s Unicredito and Germany’s HVB, are about to merge, thus making the vision of a more integrated European banking market more concrete. But, mind you, it happens 13 years after the introduction of the single passport and six years after the creation of the single currency.
Why do need financial integration?
Financial integration is a key factor for the development and modernisation of the financial sector in Europe. It enables the industry to achieve higher productivity and more competitiveness. Obviously the introduction of the euro has been created an important but not sufficient trigger for change. So what can be done to advance integration?
First of all, it is important to recognise the huge potential for cost-saving and productivity increases that can be realised if further restructuring in the financial sector takes place. Restructuring has three dimensions: products, process and ownership.
On products, creativity of the firms is required to tailor their products towards the needs and desires of customers and to open up new markets. But a certain degree of standardisation is also needed in order to ensure that products are compatible as well as comparable across national borders.
On process, cross-border consolidation is an important issue, especially for infrastructure. With an increase in the volumes of transaction, firms realise economies of scale and make full use of modern technology. Research shows that settlement in Europe is 33% more costly than in the US. Settlement is more expensive because Europe is a more segmented market, and investors have recourse to international securities depositories when they settle cross-border trades. Retail services are another field where a restructuring of processes are needed. Prices for theses services differ considerably as well as the costs. Still less than 5% of euro area country total bank loans are granted cross-borders. Retail is one of our focuses where we - in line with the Commission - support the work of the European Payments Council for a Single Euro Payments Euro.
On ownership, further integration has been expected - for some time - but more seems likely to happen. The desire to realise scale economies, fear to fall behind the US, excess capital and limits reached in domestic consolidation will be the main drivers for cross-border takeovers and mergers in Europe.
What can policy makers and researchers do?
They can identify the fields for action, prepare the ground for change and explain the process to the actors involved and the public at large. This is our daily life in market operations, payment services, security and settlement services and in the regulatory debates that we are engaged in.
The Single Passport and the single currency opened the gate, but the race started with some delay: domestic consolidation took place first – the number of banks in Europe was reduced by a quarter from 8600 to 6600. Nevertheless, there are already some results:
With the single currency, the European unsecured money market is now perfectly integrated.
The active support of the ECB for standardisation has had positive impact, for example, on the short-term paper market. Underwriting fees for corporate bonds have reacted to the creation of the larger market. We have seen the reduction in the cost of capital and the valuation of large firms in the euro area has increased.
The euro has become the preferred international debt issuance currency. In the first quarter of 2005, sixty-three percent of the total net international debt issuance was denominated in euro.
The ECB recently took some first steps towards the introduction of a single list for the collateral, which market participants use for the ECB credit operations – 300 billion every week. The aim of the single list is to replace the current two-tier system of eligible collateral, in order to enhance the level playing field in the euro area, to further promote equal treatment for counterparties and issuers, and to increase the overall transparency of the collateral framework. For short, the Single List will improve European financial integration.
Most advances from the introduction of the euro on European financial markets I just reported are micro-financial in nature. Micro-financial research has an important role at the ECB, as we are called upon to contribute to the broader debate on the post FSAP strategy, to shape the best financial environment for Europe. Still the core business of the ECB is to conduct monetary policy for the euro area, to which macro-financial research can contribute. For instance, research on the yield curve for instance brings information on how expectations are changing across the business cycle.
Combining both the micro and macro financial research, Philipp Hartmann, Head of the Financial Research Division of the ECB, will now present a paper on “The impact of the euro on financial markets”, co-authored with Lorenzo Cappiello, Peter Hördhal, Arjan Kadareja and Simone Manganelli.
Their research focuses on stock and bond markets, a segment yet unexplored with regards to the impact of the euro. They investigate correlations among euro-area equity returns (the micro approach) and changes in government bond pricing (the macro approach).
The paper will be discussed by Professors Xavier Vives and Bruno Gerard.
Xavier Vives is Professor of Economics and Finance at INSEAD. He is also a Research Fellow of the Center for Economic Policy Research (CEPR) and served as Director of its Industrial Organization Program in 1991-1997.
Bruno Gerard is Professor of Finance at the Norwegian School of Management. He is also a Professor at CentER, the financial institute of Tillburg University in the Netherlands.