European Financial Markets and Institutions

438 Pages·3.526 MB·English

by  DeHaan J., Oosterloo S., Schoenmaker D.

This page intentionally left blank
European Financial Markets and Institutions
Written for undergraduate and graduate students of finance, economics, and busi-
ness, this textbook provides a fresh analysis of the European financial system.
Combining theory, empirical data, and policy, it examines and explains financial
markets,financialinfrastructures,financialinstitutions,andchallengesinthedomain
offinancialsupervisionandcompetitionpolicy.
Keyfeatures:
(cid:1)
DesignedspecificallyforcoursesonEuropeanbankingandfinance
(cid:1)
Clearsignpostingandpresentationoftextwithlearningobjectives,boxesforkey
conceptsandtheories,chapteroverviews,andsuggestionsforfurtherreading
(cid:1) Broad coverage of the European financial system – markets, infrastructure, and
institutions
(cid:1)
Explains the ongoing process of financial integration,in particular the impact of
theeuro
(cid:1)
ExaminesfinancialsystemsofnewMemberStates
(cid:1)
Usesup-to-dateEuropeandatathroughout
A companion website can be found at www.cambridge.org/de_Haan with exercises
andfreelydownloadablesolutions.
Jakob De Haan is Professor of Political Economy at the University of Groningen.
HeisalsoafellowofCESiFo(Munich,Germany)andEditoroftheEuropeanJournal
ofPoliticalEconomy.
SanderOosterlooisSeniorPolicyAdvisorattheNetherlandsMinistryofFinance.
He received his PhD from the University of Groningen and is affiliated with its
FacultyofEconomicsandBusiness.
Dirk Schoenmaker isProfessorofFinance,Banking,andInsuranceattheVU
UniversityAmsterdam,andDirectorofEuropeanAffairs,Competition,andConsumer
PolicyattheNetherlandsMinistryofEconomicAffairs.Beforethat,hewasDeputy
DirectorFinancialMarketsPolicyattheNetherlandsMinistryofFinance.

European Financial
Markets and
Institutions
Jakob de Haan
Sander Oosterloo
Dirk Schoenmaker
CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo
Cambridge University Press
The Edinburgh Building, Cambridge CB2 8RU, UK
Published in the United States of America by Cambridge University Press, New York
www.cambridge.org
Information on this title: www.cambridge.org/9780521882996
© Jakob de Haan, Sander Oosterloo, and Dirk Schoenmaker 2009
This publication is in copyright. Subject to statutory exception and to the
provision of relevant collective licensing agreements, no reproduction of any part
may take place without the written permission of Cambridge University Press.
First published in print format 2009
ISBN-13 978-0-511-50686-4 eBook (EBL)
ISBN-13 978-0-521-88299-6 hardback
ISBN-13 978-0-521-70952-1 paperback
Cambridge University Press has no responsibility for the persistence or accuracy
of urls for external or third-party internet websites referred to in this publication,
and does not guarantee that any content on such websites is, or will remain,
accurate or appropriate.
Contents
List of Boxes page viii
ListofFigures x
ListofTables xiv
ListofCountries xvi
ListofAbbreviations xviii
Preface xxiii
Part I Setting the Stage 1
1 FunctionsoftheFinancialSystem 3
1.1 Functionsofafinancialsystem 4
1.2 Bank-basedversusmarket-basedfinancialsystems 14
1.3 Conclusions 28
2 EuropeanFinancialIntegration:OriginsandHistory 33
2.1 Europeanintegration:introduction 34
2.2 Europeaninstitutionsandinstruments 36
2.3 Monetaryintegration 42
2.4 Financialintegration 48
2.5 Conclusions 55
Appendix:ExamplesofFSAPinaction 56
Part II Financial Markets 61
3 EuropeanFinancialMarkets 63
3.1 Financialmarkets:functionsandstructure 65
3.2 Moneymarket 71
v
vi Contents
3.3 Bondmarkets 77
3.4 Equitymarkets 91
3.5 Derivatives 97
3.6 Conclusions 103
4 TheEconomicsofFinancialIntegration 107
4.1 Financialintegration:definitionanddrivers 108
4.2 Measuringfinancialintegration 112
4.3 IntegrationofEuropeanfinancialmarkets 117
4.4 Theconsequencesoffinancialintegration 125
4.5 Conclusions 131
5 FinancialInfrastructures 135
5.1 Paymentsystemsandpost-tradingservices 136
5.2 Economicfeaturesofpaymentandsecuritiesmarketinfrastructures 147
5.3 Integrationoffinancialmarketinfrastructures 151
5.4 Conclusions 160
Part III Financial Institutions 165
6 TheRoleofInstitutionalInvestors 167
6.1 Differenttypesofinstitutionalinvestors 168
6.2 Thegrowthofinstitutionalinvestors 180
6.3 Portfoliotheoryandinternationaldiversification 187
6.4 ThehomebiasinEuropeaninvestment 191
6.5 Conclusions 200
7 EuropeanBanks 204
7.1 Theoryofbanking 205
7.2 Theuseofrisk-managementmodels 212
7.3 TheEuropeanbankingsystem 220
7.4 Conclusions 232
8 TheFinancialSystemoftheNewMemberStates 236
8.1 Thefinancialsystem 237
8.2 Thebankingsector 240
8.3 Whatattractsforeignbanks? 244
8.4 Financialintegrationandconvergence 250
8.5 Conclusions 255
vii Contents
9 EuropeanInsurersandFinancialConglomerates 259
9.1 Theoryofinsurance 260
9.2 Theuseofrisk-managementmodels 273
9.3 TheEuropeaninsurancesystem 279
9.4 Financialconglomerates 288
9.5 Conclusions 293
Part IV Policies for the Financial Sector 297
10 FinancialRegulationandSupervision 299
10.1 Rationaleforgovernmentintervention 300
10.2 Prudentialsupervision 304
10.3 Conduct-of-businesssupervision 312
10.4 Supervisorystructures 317
10.5 Challengesforfinancialsupervision 321
10.6 Conclusions 329
11 FinancialStability 334
11.1 Financialstabilityandsystemicrisk 335
11.2 Howcanfinancialstabilitybemaintained? 346
11.3 Thecurrentorganisationalstructure 353
11.4 Challengesformaintainingfinancialstability 356
11.5 Conclusions 365
12 EuropeanCompetitionPolicy 371
12.1 Whatiscompetitionpolicy? 372
12.2 Theeconomicrationaleforcompetitionpolicy 373
12.3 PillarsofEUcompetitionpolicy 378
12.4 Assessmentofdominantpositions 383
12.5 Institutionalstructure 391
12.6 Conclusions 395
Index 399
Boxes
Box 1.1 Financial development and economic growth page 7
Box1.2 Thepoliticaleconomyoffinancialreform 13
Box1.3 CorporategovernanceinEUMemberStates 17
Box1.4 Doesthefinancialsystemmatterafterall? 20
Box1.5 Legaloriginorpoliticalinstitutions? 27
Box2.1 Theroleoftreaties 35
Box2.2 TheLisbonTreaty 38
Box2.3 Dynamicsofintegration 41
Box2.4 DecisionmakingwithintheECBGoverningCouncil 46
Box2.5 BaselCommitteeonBankingSupervision 49
Box3.1 Credit-ratingagencies 67
Box3.2 Recentdevelopmentsingovernment-debtmanagement 80
Box3.3 Howmuchtransparencyisoptimal? 90
Box4.1 Euroareavs.non-euroareamembercountries 117
Box4.2 FinancialintegrationofthenewEUMemberStates 126
Box4.3 Financialintegrationandeconomicgrowth 129
Box5.1 Corepaymentinstruments 137
Box5.2 TheHerstattcrisis 153
Box5.3 Concentrationincreditanddebitcardmarkets 155
Box6.1 ABP 171
Box6.2 TheLTCMcrisis 175
Box6.3 Regulatinghedgefundsandprivateequity 178
Box6.4 InstitutionalinvestmentinthenewEUMemberStates 182
Box6.5 TheinternationalCAPMmodel 188
Box7.1 Securitisationtechniques 207
Box7.2 Liquiditymanagementduringcrises 210
Box7.3 Whenisitoptimaltodelegatemonitoringtobanks? 211
Box7.4 Value-at-Risk 216
Box7.5 Retailbankingmarketintegration 222
Box7.6 TheeconomicsandperformanceofM&As 228
viii