Where do we stand?
European Central Bank President Jean-Claude Trichet
speaks in Paris about the road ahead for the integration of European
financial services and the private sectors role in the changing
Pascal described the universe as "a circle whose
centre is everywhere and whose circumference is nowhere". This
definition can be applied fairly well to euro capital markets, which
are global markets as a result of the international use of the euro.
As such, they are not grouped around one financial centre alone, or
even a single main financial centre, but around a constellation of financial
centres spread over the euro area and beyond. Paris is naturally one
such centre and I must say that I am delighted to be back here for the
first time since my appointment as President of the European Central
Bank for this inaugural forum on euro interest rate markets.
Although the decentralisation of euro markets is a reality, their segmentation
should obviously not be seen as a foregone conclusion. On the contrary,
with decentralisation the need to integrate different markets and different
financial centres becomes even more pressing, and only through such
integration can the single market be a reality.
The ECB's and the Eurosystem's interest in the process of financial
Therefore, we at the European Central Bank and in the Eurosystem attach
great importance to pursuing the process of financial integration in
Europe. The main reason why we are so interested in this is because
the financial system evidently plays an essential role in the transmission
of monetary policy. From this point of view, an efficient and broadly
integrated capital market ensures that monetary policy is implemented
consistently and effectively.
This holds true for the whole financial system, but especially for markets
which are directly involved in the conduct of our monetary policy operations:
the money market, of course, but also the bond market, since the vast
majority of eligible assets which act as collateral in our credit operations
are from this market.
A high level of financial integration is also desirable in view of our
other key tasks, such as promoting the smooth functioning of payment
systems or contributing to the maintenance of financial stability.
But perhaps the most profound and significant reason for our attachment
to pursuing the integration process is that it could raise the non-inflationary
growth potential of our economy. This causal relationship is instinctive
in that as integration increases, there is a more effective allocation
of savings to the most profitable investment plans, while frictions
and transaction costs are minimised. In addition to this intuition,
the impact of financial integration on the growth potential is now solidly
supported by a considerable number of theoretical and empirical studies.
And finally, I do not really need to remind you that, in the more general
context of the single market, financial integration is the objective
of specific European policies that have been prioritised by the European
Council. In this context, and in accordance with the obligations assigned
to us by the Treaty, it behoves us to support these policies.
State of play
Given this background, I should now like to go back to the subject of
my speech today by looking at "where we stand". As is always
the case, there can be two different viewpoints. The first, which was
dominant in the first couple of years following the introduction of
the euro, was to highlight the considerable distance we have covered
so far. The example most often given is the almost immediate integration
of the money market concerning both the interbank market and
the derivatives market at the beginning of 1999. The remarkable
development of the bond market, excluding government securities, is
also a result of this integration. Throughout 2002, bond issues from
the private sector represented approximately half of all issues, whereas
before the introduction of the euro the market was dominated entirely
by public issues.
Moreover, the beneficial effects of integration have also been felt
in the government securities market. If further proof were needed, I
could mention the standardisation of issuance methods or even the development
of common trading platforms across the euro area. The development of
the different components of the MTS group, including of course the EuroMTS
platform, is perhaps the best example of this.
Furthermore, integration is continuing to advance in areas where it
appeared to have been delayed slightly, such as the repo market. Evidence
of this progress can be seen in the creation of the EUREPO benchmark
index, or in the development of a standardised legal document known
as the "European Master Agreement" (EMA).
A more pessimistic viewpoint is to highlight the inadequacy, and in
particular the apparent slowdown, of the process of financial integration
over the past few years. In this regard, we could highlight the level
of residual fragmentation of delivery-versus-payment securities settlement
systems. In spite of the many consolidation efforts, there are still
20 or so national delivery-versus-payment systems in the European Union
today, and roughly as many in the acceding countries set to join the
EU next spring. This is not normal.
Therefore, the process of integration is already quite remarkable, despite
the fact that it is incomplete. However, there are two reasons why,
in my view, it would be wrong to interpret this situation pessimistically.
First, it should be remembered that the period in which the easiest
progress was made in terms of integration naturally came immediately
after the changeover to the euro in 1999. As is reasonably logical to
expect, what remains to be done is what is most difficult, though not
But, more importantly, as Saint-John Perse once famously wrote, "pessimism
is not only a sin against nature, but an error of judgement as much
as a desertion" (From "Sur l'optimisme en politique",
an article which appeared in the Excelsior journal, 27 February 1935).
We should not look at the inadequacy of the process of financial integration,
but rather understand the causes of this inadequacy and identify means
to remedy it.
Two lessons arise from the road travelled so far.
The first is that integration can only be achieved if the barriers to
cross-border financial activities are effectively abolished. This is
the objective set by lawmakers in the Financial Services Action Plan
(FSAP), launched by the European Commission in the spring of 1999. 36
of the 42 original measures proposed by the FSAP have now been adopted,
and it is reasonable to expect the remaining measures to be adopted
before the European parliamentary elections next spring. This is a major
undertaking, the importance of which cannot be emphasised strongly enough.
The second lesson is that a legislative framework in itself is not sufficient
to achieve an effective integration of the market. What this framework
produces is a potential. It is then up to the different players involved,
whether public or private, to exploit this potential. This is what has
been done so far in many domains, and it would be advisable to carry
on in this way.
With the finalisation of the FSAP, it seems to me that we have therefore
reached a key moment in the integration of the European financial system.
We have a body of legislation which is coherent and relatively comprehensive
at European level. It is quite possible that there will be a need for
supplementary legislation in the future. But what should retain people's
attention and focus people's energies in the short term is undoubtedly
the translation of the measures that have been adopted into realities,
as well as the exploitation of the opportunities that these measures
create. In a word, what is important is no longer so much the FSAP itself
but the strategy to be applied post-FSAP.
And it is this last point that I would now like to emphasise.
The role of public policies post-FSAP
The adoption of the measures contained in the FSAP obviously does not
constitute the end of the public authorities' involvement in the integration
process. It is now crucial for the competent authorities to effectively
implement at national level the measures adopted at European level in
a coherent manner. As was stressed by the Lamfalussy Committee, the
capacity of Community legislation to adapt flexibly to constantly evolving
markets and the coherence of its application help to alleviate the burden
on the financial institutions which are active across the single market.
Therefore, as you know, the so-called "Lamfalussy" approach
provides for the drafting of technical Community legislation, or "secondary"
legislation, which can, if necessary, be amended through a simplified
procedure. It also provides for closer co-operation between supervisory
authorities in the area of financial regulation and supervision. This
method seems to me likely to bring about a truly joint regulation and
legislation from the point of view of those who ultimately count, i.e.
market players, while fully respecting the principle of subsidiarity.
The implementation of the "Lamfalussy approach" offers what
may be a unique opportunity to simplify the current regulatory framework
while standardising its application. If this approach is adopted in
full, it is reasonable to expect that the elaboration of European regulations
combined with this strengthened co-operation between competent national
authorities would lead to the development of a joint European handbook,
an "EU Rulebook", comprising the technical measures applicable
in terms of financial regulation. This European rulebook would provide
the financial institutions with the reference that they perhaps lack
today when they undertake cross-border activities.
A second issue on which public authorities are working is related to
the supervision of financial institutions. Two strategic objectives
should be highlighted here.
First, the strengthening of co-operation between competent authorities,
in particular between supervisors and central banks, in order to supervise
more effectively institutions which operate in several jurisdictions.
This would also draw on the efforts at the very heart of the central
banks' mission to ensure that financial stability is maintained. This
strengthened co-operation would imply an intensified exchange of information,
which is, moreover, already under way within the European System of
Central Banks, and will also be developed in the context of the new
structures created in accordance with the Lamfalussy approach.
I should now like to make an aside on the specific nature of the banking
system, which is actually a source of particular, systemic risks directly
associated with the maturity transformation carried out by banks and
with their role in payment systems in particular. Therefore, given our
responsibilities, it is essential that the ECB and the national central
banks of the Eurosystem are actively involved in the regulatory process.
It is just as important for central banks to work closely with the competent
authorities in the area of supervision. The memorandum of understanding
signed by central banks and banking supervisors on the principles of
co-operation in crisis management situations is a perfect illustration
of the efforts made in this domain.
I should also like to reiterate that financial integration brings about
a change in the systemic risk transmission channels, notably as a result
of a possible increase in the risks of cross-border contagion and, consequently,
a change in the potential sources of financial instability. Given our
responsibility in this field, we are paying particularly close attention
to these implications of the integration process.
The second strategic objective is that it would be preferable if the
procedures and obligations associated with banking supervision were
to converge further, in order to lighten the burden on the institutions
subjected to them. This could be done by means of a joint agreement
between competent authorities on some transparent standards to be applied
when the measures contained in the "rulebook" that I mentioned
a moment ago are being implemented.
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None of what I have just said detracts from the merits of arrangements
under which national authorities are responsible for prudential supervision.
Furthermore, the conditions for an in-depth co-operation are being developed
precisely to ensure that such a decentralised organisation is still
able to achieve the results expected in the context of an integrated
The role of the private sector post-FSAP
The points that I have raised so far form a long list of tasks incumbent
upon the public sector to convert into a reality the potential for financial
integration resulting from the FSAP. However, this is a responsibility
which also behoves the private sector. I would like to say a few words
on this point.
The first of the private sector's responsibilities is, naturally, to
take advantage of the opportunities created by the single market, as
you have successfully been doing up to now. If it is up to the authorities
to create the environment of trust needed to undertake cross-border
activities, it is finally up to you to "convert the try".
But there is also another area in which private initiative can, and
in my view must, contribute to the process of market integration. This
is the area of collective action, which is something I should like to
explain in more detail.
The rules governing the proper functioning of the financial markets
are not only enacted by public authorities. There are a considerable
number of rules, perhaps the majority in fact, which are the result
of the community of market participants itself. These rules include,
for example, quotation conventions, conventions for calculating accrued
interest, conventions for delivery versus payment and many other standards
used by the market as a whole.
What sets these rules apart is the fact that the voluntary adhesion
that they create is the result of network externalities. The more people
that follow these rules, the more beneficial it is to apply them, not
least because of the resulting increase in the number of potential counterparties.
However, the use by two groups of market operators of different standards
or conventions will constitute a real segmenting factor.
Therefore, to my mind, the adoption of common rules, conventions or
standards by all market players is one way in which the private sector
can, in its own interests, work effectively and together towards achieving
greater financial integration. Public authorities can only facilitate
collective action in this domain, not replace it. Moreover, the ECB
and the national central banks of the Eurosystem have, on many occasions,
acted as a facilitator, and we are, of course, willing to continue to
help the market along this path if need be.
To illustrate this point, I will use the example of the creation of
the EONIA when the euro was introduced. This index, which reflects the
level of the overnight rate on the interbank market, is not the result
of a legislative or regulatory decision, but of coordinated action between
money market operators. The European Central Bank is involved in the
calculation of this index, but only as a facilitator.
The reason I mention the EONIA is because it seems to me that its existence,
as well as its adoption as a benchmark on the interest rate swap market,
has been an important factor for the integration of this particular
market segment. Furthermore, the results are well known by everyone:
the market for interest rate swaps indexed on the EONIA is the most
liquid and deepest of its kind in the world, and its contribution to
managing the interest rate risk of all market players is considerable.
Given this amazing success, the question which needs to be asked is
therefore whether all potential opportunities for collective action
to deepen financial integration have been exploited. Our experience
leads us to believe that this is not the case. For example, we could
mention the commercial paper market, where the diversity of the conventions
used is perhaps greater than is strictly necessary, although a group
of market participants has taken the initiative to specifically reduce
In this context, the completion of the FSAP is perhaps also an opportunity
not to be missed. If the legal or regulatory obstacles to cross-border
activity are eliminated, the adoption of joint standards and conventions
through collective action only becomes more desirable and more beneficial.
In order for this collective action to become a reality, market associations
which are effectively pan-European in their constitution and objective
are needed. However, I have the impression that the number of initiatives
in this direction are increasing, and I find that a reason to be optimistic
about European financial integration.
Therefore, the conclusion of the FSAP does not signal the end of the
process of financial integration in Europe. It marks the end of a stage,
and a decisive stage at that, but one which must be followed by other
In order to achieve this, a strategy which is just as ambitious and
coherent as the one which has been applied up to now must be applied
post-FSAP. It will be up to the different players involved in this process,
whether public authorities or market players, to jointly develop this
strategy over the coming year. In any case, I believe that this strategy
should include some of the elements that I have outlined today, namely:
First, close attention to coherence between the actions carried out
by the various public authorities, as well as between the role of the
public sector and the essential role of the private sector. Only will
effective interaction between all those involved be likely to lead to
even deeper integration.
Then, the need for rationalisation and simplification. This can be applied
to the area of regulation and supervision, but also to the standards
and conventions drawn up by the private sector.
Finally, the need for organisation and participation. In order for the
policies which have been defined to be put into practice, market players
must, in principle, be actively involved and organised effectively with
a view to a permanent dialogue with the supervisory authorities in the
best possible conditions.
Given the statements and initiatives which are appearing it seems to
me that a consensus is being formed on these three points. This is the
case, for example, for the market infrastructure, where a certain coherence
and complementarity can be observed between the various activities in
progress. The development of TARGET2 by the Eurosystem in particular,
the strategy proposed by the Giovannini group in the area of delivery
versus payment and the work carried out on the consolidation of technical
platforms used by international central securities depositories based
in Europe should all yield tangible results between 2005 and 2008. I
would like to see the encouraging signs of a forthcoming acceleration
of this process of European financial integration, which is already
well advanced. The benefits of everything that has been achieved so
far are so outstanding that there can be no doubt that it is in the
interests of all concerned to continue determinedly along this road.