The Euro Capital Market

215 Pages·1999·3.106 MB·English

by  Daniel Gros, Karel Lannoo(auth.)

The Euro Capital Market
TheEuroCapitalMarket.DanielGrosandKarelLannoo
Copyright2000JohnWiley&Sons,Ltd.ISBN:0-471-99762-5
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The Euro Capital
Market
DANIEL GROS and KAREL LANNOO
JOHN WILEY & SONS, LTD
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Library of Congress Cataloging-in-Publication Data
Gros, Daniel, 1955-
The Euro capital market / Daniel Gros and Karel Lannoo.
p. cm.
Includes bibliographical references and index.
ISBN 0-471-99762-5
1. Capital market—European Union countries.
2. Monetary policy—European Union countries.
3. European Monetary System (Organization) I. Lannoo, Karel. II. Title.
HG5422G68 1999
332'.0414—dc21 99-32598
CIP
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-471-99762-5
Typeset in 11/13 pt Palatino by Wyvern 21 Ltd, Bristol
Printed and bound in Great Britain by Biddies Ltd, Guildford and King's Lynn.
This book is printed on acid-free paper responsibly manufactured from sustainable forestry, in
which at least two trees are planted for each one used for paper production.
Contents
List of Tables vii
List of Graphs ix
Preface x
Foreword xi
Executive Summary xiii
Introduction 1
1 The Institutional and Regulatory Framework 7
The European Central Bank and its Monetary Policy 7
The institutional framework 9
Strategy 20
Monetary instruments 22
The Regulatory Framework for Capital Market Operators
and Products 27
The regulatory framework 28
New priorities 35
2 European Capital Markets at the Start of EMU 39
European Capital Markets: an Overview 39
Stock markets 39
Bond markets 44
The former euro-bond market 46
Money and foreign exchange markets 48
Derivative markets 51
Intermediaries in European Capital Markets 54
Banks 58
Institutional investors 61
Clearing and settlement agents 67
vi Contents
3 Market Restructuring and EMU 72
A More Market-based System to Emerge? 73
Asset Allocation in EMU 78
Bond Markets in the Euro Zone 83
Prospects for the sovereign debt market 83
A corporate bond market to emerge? 89
Mortgage loan markets 90
Equity and Derivatives Markets 93
Securities Clearing and Settlement Bodies 95
Financial Centres 96
4 Governance and Policy 102
Inconsistencies within a Single Capital Market 102
Differences in taxation and related regulations 103
Accounting standards 113
The wider corporate governance framework 117
The Implications of EMU for Capital Market Supervision 122
The EU framework 123
Securities market regulation in EMU and beyond 130
Implications of EMU for Prudential Control 132
The rationale for prudential supervision 135
The institutional set-up 139
The international dimension 147
The implications of EMU and the role of the ECB 150
Outlook 157
Conclusions 162
Appendix 1: Statistical Appendix 165
Appendix 2: The EU Regulatory Framework for
the Free Provision of Financial Services 175
References 185
Index 192
List of Tables
I.1 How international are European banks with
global ambitions? 5
1.1 Headquarters staff at national central banks 14
1.2 The monetary policy operations of the
European System of Central Banks 24
1.3 Solvency ratios (1996) in banking 32
2.1 World bond markets by currency (1996) 45
2.2 Top world derivative exchanges (1998) 52
2.3 Concentration in banking 57
2.4 Most important quantitative restrictions
on pension fund investments in Europe 64
2.5 Asset structure of life insurance companies
(1994) 65
2.6 Asset structure of pension funds (1994) 65
3.1 Amounts of bonds outstanding, total stock
market capitalisation and bank assets 76
3.2 Shares of EMU states in outstanding debt
and shares in a Euro-bond index 80
3.3 Long-term foreign currency sovereign credit
ratings in the EU and yield differentials on
Euro-DEM bonds (September 1997) 85
3.4 Sovereign credit ratings in the euro zone
(early 1999) 87
3.5 Total volume of mortgage loans outstanding
and mortgage bonds outstanding (1997) 92
viii List of Tables
4.1 Resident withholding taxes on interest and
dividends in the EU (1997) 107
4.2 Dominant form of shares and voting rights
in the EU 120
4.3 An institutional framework for financial
market control 147
4.4 Objectives of supervision and deficiencies in
the perspective of EMU 156
Al.l Comparative data on European stock
markets (1998) 165
A1.2 Evolution of stock market capitalisation 166
A1.3 Domestic listed companies in major EU
countries, Switzerland, Japan and the US 166
A1.4 Structural features of general gross
government debt (1997) 167
A1.5 Key data on European banking (1996) 168
A1.6 Profitability in banking 169
A1.7 Assets of insurance companies, pension
funds, investment funds and banks (1996) 170
A1.8 Pension funds asset growth 171
A1.9 Investment funds asset growth 171
A1.10 Investment funds asset spread in the
EU (1997) 172
Al.ll Monetary and bank supervisory functions
in the EU, Switzerland and the US 173
A1.12 Regulators of banking, securities and
insurance in Europe, Japan and the US 174
A2.1 The regulatory framework for free provision
of financial services in the EU 184
List of Graphs
2.1 Stock market capitalisation as % of GDP 41
2.2 Profitability in banking 62
2.3 Asset distribution of investment funds in the EU 68
3.1 Importance of financial intermediaries in the
EU, US and Japan 77
3.2 Euro Stoxx 50 index according to sector 81
3.3 Yield differentials with German Bunds 84
Preface
This book builds upon the report of a Centre for European Policy
Studies (CEPS) working party chaired by Tommaso Padoa-Schioppa
on the implications of monetary union for Europe's capital markets.
This project was launched in July 1997 and the recommendations,
published in June 1998, contributed to the drafting of the European
Commission submission on 'Financial Services: A Framework for
Action' to the Vienna European Council (December 1998).
The book continues the work undertaken by CEPS since the mid-
80s on European monetary and financial market integration, which
has resulted in many articles, papers and books, the most well known
being the standard work European Monetary Integration, by Daniel Gros
and Niels Thygesen. Our aim is to rectify the lack of reference works
on European capital markets. While working on the book, we were
surprised to see that no unified and comprehensive treatment of this
subject was available.
We are indebted to many persons who have stimulated our work
and helped us with comments and advice, in particular Tommaso
Padoa-Schioppa and our colleagues at CEPS. The members of the
1997-98 CEPS working party on 'Capital Markets and EMU'
contributed to our first report on this subject. Special thanks go to
Nuria Diez Guardia for research assistance and Isabelle Tenaerts for
secretarial support.