The transformation of the European financial system : second ECB Central Banking Conference, October 2002, Frankfurt, Germany

Banking In Europe: Past, Present And Future / Jean Dermine --relationship Lending In The Euro Area / Otmar Issing -- Banks And Markets: The Changing Character Of European Finance / Raghuram Rajan, Luigi Zingales --european Financial Integration And Equity Returns: A Theory-based Assessment / Kpate Adjaoute, Jean-pierre Danthine -- Central Banks And Financial Stability: Exploring A Land In Between / Tommaso Padoa-schioppa. Editors: Vítor Gaspar, Philipp Hartmann, Olaf Sleijpen. Includes Bibliographical References. The transformation of the European financial system......Page 1 Contents......Page 4 Foreword......Page 6 1 Introduction......Page 8 Introduction......Page 9 Figure 1: Euro area cross-border interbank lending, 1990-2002......Page 10 Figure 2: Net issuance of debt securities by euro area corporations, 1990-2002......Page 11 1. Implications of Financial System Transformation for Central Banks......Page 12 2. Banking in Europe: Past, Present and Future......Page 15 3. Banks and Markets: the Changing Character of European Finance......Page 18 4. Integration of Bond and Equity Markets in Europe: The End of the Portfolio Investment Bias?......Page 22 5. Central Banks and Financial Stability......Page 24 Acknowledgements......Page 28 References......Page 29 2 Banking in Europe: Past, Present and Future......Page 32 Introduction......Page 33 1.1.2 Harmonization of Banking Regulations (1973-1983)......Page 34 1.1.3 The Completion of the Internal Market (1983-1992)......Page 35 1.2 Banking with a Single Currency......Page 37 1.2.2 EMU and Credit Risk......Page 38 1.2.3 Banking in a Low Inflation Environment......Page 39 1.4.1 Deregulation......Page 40 Table 2: Minimum reserve requirements in selected countries in 1990......Page 41 Table 3: Introduction of negotiable money market instruments in selected countries, 1981-1987......Page 42 1.4.2 European Integration......Page 43 Table 5: Potential falls in financial product prices as a result of completing the internal market......Page 44 Table 6: Charges on cross-border payments......Page 46 Table 8: Intermediation margin,1980-2000......Page 47 Table 9: Market share of foreign banks in 1999......Page 49 2. Single Banking License, Single Home Country Regulator, Single Bankruptcy Proceedings: A Great Illusion?......Page 51 Table 10: Number of foreign branches and subsidiaries......Page 52 Table 11: Nordea AB, group structure......Page 53 3. The Economics of Bank Mergers......Page 57 Table 13a: A selection of major domestic mergers in Europe......Page 58 3.1 The Economic Rationale for Bank Mergers......Page 59 3.2.1 Cost-based Economies of Scale......Page 61 3.2.6 Revenue-based Scope Economies......Page 62 Table 14: International diversification of credit risk, a simulation exercise......Page 63 3.2.9 Market Power......Page 64 3.2.12 The Benefits of M&As: A Dynamic Analysis......Page 65 3.3 M&As in European Banking: Evaluation and Future Outlook......Page 66 4.2 Bank Runs and Systemic Risk......Page 67 4.2.2 Freeze of Deposits......Page 68 4.2.3 Bailing Out Costs: Too Big?......Page 69 4.2.4 Home versus Host Country......Page 70 4.2.5 Corporate Subsidiary Structure and Risk Diversification......Page 71 4.3 Concentration and Market Power......Page 72 Table 17: Market shares per type of institution in selected euro-area countries......Page 73 Table 19: EU employment in small and medium size enterprises (SME) by country......Page 75 Conclusion......Page 77 References......Page 79 Table 20: Belgium, General statistics......Page 87 Table 21: Denmark, General statistics......Page 88 Table 22: Finland, General statistics......Page 89 Table 23: France, General statistics......Page 90 Table 24: Germany, General statistics......Page 91 Table 25: Italy, General statistics......Page 92 Table 26: Netherlands, General statistics......Page 93 Table 27: Spain, General statistics......Page 94 Table 28: Sweden, General statistics......Page 95 Table 29: United Kingdom, General statistics......Page 96 The Assignment of Banking Policy Responsibilities in the EU......Page 98 Table 1: Assignment of banking policy responsibilities for international banking......Page 99 Should an International Bank Opt for a Branch and a Subsidiary?......Page 100 Table 3: Episodes of systemic banking crisis......Page 101 Table 4: Is there banking policy interdependence?......Page 103 Policy Interdependence within a Single Banking Market......Page 104 Policy Interdependence in the International Banking Market......Page 105 Table 6: Estimates of inputs into the banking system subject to VAT (with no input credits available) as a share of VAT-exempt output......Page 106 The Tax and Regulatory Burden on EU Banking: Past, Present and Future......Page 107 References......Page 109 Integration of Banking Markets and Bank Structure......Page 110 Table 1: New England bank holding companies with more than $5 Billion in New England deposits......Page 111 Risks to European Banking......Page 112 Figure: Delinquency rates for commercial and industrial loans at U. S. banks, by asset size......Page 113 Table 3: Major European banks in U.S. 2001......Page 114 Policy......Page 115 Conclusion......Page 116 General Discussion......Page 118 3 Relationship lending in the euro area......Page 120 1. Relationship Lending in Europe......Page 121 2. What then are the Main Characteristics and Trends of the European Banking Sector?......Page 122 3. Increased Competition in Banking Seems to be Reducing the Availability of Relationship Lending in the Euro Area......Page 123 4 Banks and Markets: The Changing Character of European Finance......Page 124 Introduction......Page 125 1. The Financial Revolution in Europe......Page 126 Table 1: Different indicators of financial development in 1980......Page 127 Table 2: Different indicators of financial development in 2000......Page 129 Figure 1: European share in the total derivative market......Page 130 Figure 2: European share in the different derivative markets......Page 131 Figure 3: The increase in securitization......Page 132 Table 4: Increased importance of corporate debt......Page 133 Table 5: Increased importance of international corporate debt......Page 134 2. Relationship-based versus Arm’s-length Financing......Page 135 2.1 Theoretical Differences Between the Two Types of Systems......Page 136 2.1.1 Response to price signals......Page 137 2.1.3 Market power......Page 138 2.1.5 Risk......Page 139 2.1.7 The Types of Firms Financed in Each System Not all firms can take equal advantage of the two systems. Financing in an arm’s-length......Page 140 2.1.8 Financing of Innovation......Page 141 2.1.9 Political Controllability......Page 143 2.2 Relative Efficiency of the Two Financing Modes in Different environments......Page 144 2.3 Financing Modes and Financial Systems......Page 145 3. The Political Economy of Financial Markets......Page 146 3.2 Relationship-based versus Arm’s-length Finance......Page 147 3.4 When does Arm’s-length Finance Develop?......Page 149 4.1 Central Bank......Page 150 4.2 Central versus Local Authority......Page 152 5.1 How did Europe Fall Behind?......Page 153 Table 7: Concentration of the banking sector in 1930......Page 154 5.2 What Triggered the Change in the 1980s?......Page 155 Table 8: Corporate debt before and after the euro......Page 157 Figure 4: Net bond issues around the introduction of the euro......Page 158 5.5 What is the Right System for Europe?......Page 159 Table 9: The north-south institutional divide......Page 161 5.6 How to Present a New Reversal?......Page 163 Conclusions......Page 164 References......Page 165 Comment Franklin Allen......Page 170 References......Page 173 Comment Martin Hellwig......Page 174 Is Market Finance “More Advanced” Than Bank Finance?......Page 175 Is “Good Governance” a Precondition for “Good Finance”?......Page 177 Independence of Corporate Management – A Feature Common to Different Systems......Page 178 What Drove the Revolution in Financial Systems?......Page 179 References......Page 181 General Discussion......Page 182 5 European Financial Integration and Equity Returns: A Theory-based Assessment......Page 186 1. Introduction......Page 187 2. A Stylized Interpretation of the Institutional Changes......Page 188 3.1 Fundamentals......Page 191 Table 2: Historical returns and volatilities: equity and bonds......Page 192 3.3 Quantity Adjustments......Page 193 Table 3: Net bond issuance by euro area central governments......Page 194 Figure 1: Convergence of EMU government bond redemption yields......Page 195 Table 4: Volatility of government bond redemption yields......Page 196 Figure 3: Inflation differentials vis-à-vis Germany......Page 197 Figure 5: Monthly real yield dispersion......Page 198 Table 5: Volatility of real yields......Page 199 Figure 7: Post-1999 yield differential: France versus Netherlands......Page 200 Figure 8: Monthly government bond return dispersions......Page 201 4.1 Fundamentals......Page 202 4.2.1 A Unified Risk Premium?......Page 205 4.2.2 A Multi-factor Decomposition......Page 206 Figure 9: Country versus sector effects......Page 207 4.3.1 General Description of Portfolio Flows......Page 208 Table 7: Possible pension fund equity market flows as a result of EMU......Page 209 Figure 11: Pension funds: Foreign equities as a percentage of total equities invested: Euro area countries (1992-1999)......Page 210 Table 9: Portfolio investment in euro area......Page 211 Figure 13: CHF: Swiss global equities......Page 212 4.3.2 The shift in asset allocation paradigm......Page 213 4.4.1 A Lower Risk Premium......Page 214 Figure 16: EMU countries HP-filtered equity returns......Page 215 Figure 17: Evolution of country pair correlations (GDP growth rate): before and during convergence......Page 216 Figure 18: Quarterly GDP growth rate dispersions......Page 217 4.4.3 Diversification Opportunities after EMU and the Practice of Asset Management (Part 1)......Page 218 Figure 19: Country index pair correlations – pre-convergence vs. convergence......Page 221 Figure 21: Evolution of country pair correlations: pre-euro versus euro......Page 222 Figure 22: Global EMU sector correlations: pre-euro versus euro......Page 223 Figure 23: Filtered country and global EMU sector dispersions......Page 224 4.4.4 Diversification Opportunities After EMU and the Practice of Asset Management (Part 2)......Page 225 Figure 24: EMU filtered dispersions: country, global sectors and country-sectors......Page 226 Table 11: Descriptive statistics of portfolios......Page 227 Table 12: Country mean-variance optimization results......Page 228 Table 14: Country-sector mean-variance optimization results......Page 229 5.2 Firms......Page 231 5.3 Consumers and investors......Page 232 Figure 25: Evolution of country pair correlations (consumption growth rate) – before and during convergence......Page 233 Figure 26: Quarterly consumption growth rate dispersions......Page 234 References......Page 235 Appendix A: Standard deviation of national market indices versus MSCI EMU......Page 237 Appendix B: Condition for a non monotonous relation between covariances of sector and country indices and the variance decomposition......Page 241 Figure B: Global 10 EMU sector return dispersions......Page 242 Figure C: Country sector correlations: pre-convergence versus convergence periods......Page 243 Figure D: Country sector correlations: pre-convergence versus convergence periods......Page 244 Figure E: Country sector correlations: pre-convergence versus convergence periods......Page 245 Appendix E: Implied Portfolio Weights in the Mean-Variance Optimization......Page 246 Development of the European Bond Markets Bruce N. Carnegie-Brown, Matt King......Page 248 Figure 1: Securitization in different markets......Page 249 Figure 3: Corporate bond supply......Page 250 Figure 4: Loan issuance......Page 251 Figure 6: The outlook for issuance......Page 252 Figure 7: Net new issuance of debt and equity in the United States......Page 253 2.4 Impact of the Loan Market......Page 254 Figure 10: Shifts in loan financing......Page 255 Figure 11: The global pension problem......Page 256 3.3 Asset Allocation......Page 257 Figure 13: Distribution of all retail savings......Page 258 Figure 15: The fall of equities......Page 259 Figure 16: Asset allocation in future......Page 260 3.4 Investment Styles......Page 261 Conclusion......Page 262 Comment Axel A. Weber......Page 264 General Discussion......Page 268 6 Central Banks and Financial Stability: Exploring a Land in Between......Page 270 1. Introduction......Page 271 2. History and Theory......Page 272 3. Recent Challenges......Page 276 4. Crises: Old Patterns. . .......Page 280 5. . ..and New Ones......Page 282 6. The Land in Between.........Page 287 Table 1: Tools for maintaining price and financial stability......Page 289 7. . ..Monetary Policy. . .......Page 290 8. . ..and Prudential Supervision......Page 294 9. The Eurosystem. . .......Page 297 10 . . ..and the Tools for Action......Page 299 11. Summary and Conclusion......Page 305 References......Page 307 C.A.E. Goodhart......Page 312 Introduction......Page 313 Being part of the Eurosystem also has important implications......Page 314 Co-operation and convergence......Page 315 Convergence......Page 316 The Meaning of Financial Stability and Public Policy......Page 317 Implementing the Interest in Financial Stability......Page 318 Table 1: Financial Stability As An Explicit Central Bank Objective Among Other Countries......Page 319 The Degree of Activism in Pursuing Financial Stability......Page 320 Andrew Crockett......Page 321 Central Banks and IFIs......Page 322 Central Banks and the Financial Stability Forum......Page 323 Alexandre Lamfalussy......Page 324 What, then, are my concerns?......Page 325 General Discussion......Page 327 1. Introduction......Page 330 3. The role of the ECB in financial market integration......Page 331 4. Conclusions......Page 333 List of Contributors......Page 334