than 40% of all interbank market activity is now conducted with domestic counterparties. In 1998, the share was still over 60%.
Second, the wholesale payment infrastructure for the euro area – including TARGET, Euro I and Euro Access Frankfurt – is already very unified. Payment flows in these systems again indicate a significant increase in cross-border interbank trading after the introduction of the euro. In terms of value, cross-border transactions currently account for 40% of all kinds of TARGET payments, for instance. The degree of integration is certainly lower for securities settlement, even though a process of consolidation has been taking place.
Third, the degree of integration of securities market activities is usually misjudged, since attention is focused on the costs and difficulties of individual investors when investing abroad. The picture is completely different for wholesale activities. The corporate finance markets for major customers are actually already quite highly integrated. To give an example, the share of domestic book-runners for bonds issued by euro area companies dropped from over 80% in 1995 to 36% in 2000. As in many other securities and derivative market activities, the market structure relies on large European or global financial groups. The same trend towards a high level of integration also holds true of wholesale asset management, with investments being increasingly diversified across borders.
In terms of volume, growth has been very impressive in the euro-denominated securities markets, until the very recent slowdown and increased market uncertainty after the tragic events in the United States. The deepening of the markets has been particularly strong for bonds – euro-denominated bonds issued by private entities doubled during 1999, and market activity remained quite strong until the summer of this year.
Challenges stemming from integration
Two major challenges for authorities in charge of financial stability emerge from the common wholesale banking system: vulnerability to common shocks and potential contagion of major problems across many countries, should such problems arise.
Let me take the issue of common shocks first. Clearly, integration opens up a wide range of opportunities for growth and contributes to increasing the resilience of the system. It brings along a wider range of funding sources and – on the asset side – the degree of diversification of exposures increases. But integration also renders financial institutions more exposed to common shocks. For the largest banks, area-wide risks affecting specific lines of business increasingly matter more than the home country-related risks.
One way of illustrating this point is to take a look at banks' share price development. Since the beginning of the year, the share prices of almost all major European banks have declined. The 30 largest banks have lost, on average, around 25% of their value. The overall deterioration in global macroeconomic conditions and financial market volumes has affected all institutions, as banks' profit outlook has deteriorated following the likely increase in provisioning needs and reductions in income from market-related activities.
However, the stock market changes for these 30 banks range widely from a small plus to very significant minuses of over 50%. In line with the notion that the home-country risks have lost in importance, banks' nationality is no longer a very relevant determinant of the size of the stock market reaction. To give you just one example, large retail-oriented banks have suffered only a mild deterioration, while the share prices of wholesale and market-oriented banks from even the same countries have declined quite substantially. In general, the greatest stock market reductions have occurred for banks with substantial dependence on declining investment banking activity, or with significant credit exposure concentrations on certain industries – such as the technology sectors or airlines – or troubled emerging markets. These represent common risk elements for euro area banks.
Let me turn to the second issue of the spreading of problems. The common wholesale market is clearly a driving force behind efficiency and further integration. Market participants have generally expressed that they are satisfied with the way the market works. Banks are able to borrow liquidity from one another across borders, instead of having to resort to central bank funding. The common money market can also absorb larger disturbances than before. However, banks operating in the common wholesale system form a network, which could facilitate a rapid propagation of shocks across the euro area. A major problem at a key financial institution is likely immediately to be transmitted to other countries, through large and well-capitalised counterparties, or via the effects on liquidity and prices in securities markets.
BIS Review 91/2001