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Christian Noyer: Banking in the euro area

Speech by Mr Christian Noyer, Vice-President of the European Central Bank, at the 30th Anniversary of the Association of Foreign Banks' Representatives, Frankfurt, 8 November 2001.


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I am very grateful for the invitation to speak to you on the occasion of the 30th anniversary of the Association of "Foreign Banks' Representatives in Germany". Your Association has 117 members from a large number of countries. Several of the member institutions are counted among the 30 major European banks, or among banks from elsewhere with important operations in Europe.

For many banks represented by your Association, the topic of my speech "banking in the euro area" is part of day-to-day business. It is also day-to-day business for the European Central Bank (ECB) and the Eurosystem as a whole, as we conduct our monetary policy operations and run the TARGET large-value payment system.

The further integration of the European banking system and financial markets is in the interests of both banks and the central bank. For banks, it means the liquidity benefits of deeper and wider markets and lower costs when operating in several countries. From the central bank perspective, it enhances the efficient and consistent implementation of the single monetary policy.

We already enjoy the benefits of a common euro area banking system in important respects. An integrated money market exists for liquidity transfers in euro; banks are inter-connected in a common payment system infrastructure; and wholesale securities market activities and corporate finance services do not recognise geographical borders. However, at the retail level, international banks must still treat each country as an individual market. This is because of localised demand and country-specific banking products, and differences in conduct-of-business and consumer protection rules. The remaining differences in regulatory and supervisory practices can also play a role. I believe that few institutions understand this as well as you do, as you still have to cope with the task of navigating business through various national environments.

I should like to explore this double feature of euro area banking today. On one hand, there is the challenge for central banks and supervisory authorities to respond to the emergence of a common wholesale banking system in order to maintain financial stability. On the other hand, greater integration, also in the retail field, remains an important policy objective. I should like to address the two aspects in turn, starting with wholesale banking and then moving on to the retail side.

A common wholesale banking system

I share the view that a common currency and a common central bank actually determine a unified banking system. In a nutshell, access to a common source of central bank liquidity and a common money market – as well as confidence in the common currency – create strong interconnections between all banks operating in the single currency area. This is the case irrespective of whether we have pan-European banks, or whether discrepancies remain in local retail markets. The case of the United States is illustrative. Even when strong inter-state banking limitations were in place – restricting retail banking activities to small local markets – the US banking system was, nevertheless, commonly viewed as a single system.

Illustrative facts

The progress made with integration in wholesale activities has been rapid and remarkable. First, a common euro money market has been in place since the early days of the euro. A large number of financial products can be traded easily with minimal price distortions, small enough to prevent arbitrage across countries. Likewise, data on cross-border trade flows provide a strong indication of market unification. In the case of the predominantly used unsecured interbank contracts, the share of counterparties from other euro area countries has more than doubled after the introduction of the euro. In addition, a large proportion of the activity in euro is conducted with counterparties outside the euro area, especially in London. The share of cross-border transactions is somewhat lower in the case of repo transactions, because of remaining legal and tax barriers and settlement difficulties. All in all, less

BIS Review 91/2001


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