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However, it is the nature of new markets, given the uncertainties attached to future developments for the companies listed on these markets, to exhibit more volatility than established markets. Bank-based finance has a special role to play for many companies in need of funds, and thus helps to ensure a well-balanced growth process. The economic literature on "relationship banking" has demonstrated that banks can contribute to alleviating the impact of sudden economic shocks on their clients.

Banks stand ready to provide many customers with funds even in adverse circumstances, e. The banking sector also has an essential role to play with respect to the allocation of funds to the most profitable investment opportunities. Banks are, as mentioned before, financial intermediaries that by nature add cost to the allocation of capital. Thus in order for banks to survive in a market economy they need to provide added benefits.

It is difficult to compete with the debt securities market, if a bank loan is of a size where the fixed costs of accessing debt markets become negligible. However, securities markets are not always sufficiently liquid and some, especially small and medium, enterprises cannot cover their liquidity needs via securities markets owing to significant fixed costs of access.

An additional benefit of bank-based finance relates to the intrinsic nature of the banking business: some projects cannot be financed directly by the market on account of significant information asymmetries between the borrowers and potential lenders. Banks can bridge this gap thanks to their comparative advantages in the assessment and monitoring of investment projects, which contributes to overcoming information asymmetries. Let me now turn to the major changes of the financial system in the euro area after two years with the euro. The launch of the euro on 1 January was a historic event.

Eleven national currencies were converted into one single currency overnight. The newly created currency area of the twelve participating European Union Member States has a considerable weight in the world economy. The successful launch of the euro, which is a key element in the creation of a stable and prosperous Europe, has boosted the integration of financial markets in the euro area.

This process of integration in European financial markets coincided with the trends towards globalisation and securitisation. Other factors, among a wide range, which shape the financial system are historically determined characteristics, technological innovations, monetary and fiscal policies and specific legal and accounting systems that differ from country to country.

MSc Money, Banking and Finance

Evidence of integration can be found, to varying degrees, in all parts of the financial system. The euro area money market is among the most integrated parts of the financial system. The conduct of one common monetary policy in the euro area brought about immediate integration of the unsecured segments of the money market, mainly the interbank market and the short-term derivatives market. The secured segments of the money market, that is the repo market and the markets for short-term securities, are also increasingly integrated, but they still suffer from underlying problems with the management of collateral.

Nonetheless, the outlook is promising. The euro area bond market has also developed rapidly. Notably, the private segments of the euro area bond market have flourished since the introduction of the euro. Probably the most significant development has been the rapid growth in the euro-denominated corporate bond market, which has increased several-fold in size since the launch of the euro and is now characterised by issues of above EUR 1 billion.

EMU has also stimulated integration in the stock markets in the euro area, where structural developments have been dominated by a series of high-profile mergers and attempted mergers. The rapid growth achieved by European securities markets has taken place notwithstanding remaining regulatory obstacles to their integration. The European authorities are fully aware of the need to address this problem. Several obstacles have been identified in the recent Report of the Committee of Wise Men, chaired by Alexandre Lamfalussy.

The Committee proposes to speed up the removal of impediments through the institutionalisation of two new regulatory committees for securities markets, which should allow for an increased harmonisation of securities regulation and less burdensome procedures for adapting Community rules to rapidly changing financial markets.

Another essential European initiative was the adoption by the Commission, in May , of a programme for the completion of the Single Market for financial services. This programme, the Financial Services Action Plan, lists a series of measures with indicative priorities and timetables. The project considered as a whole and its inherent philosophy are capable of enhancing economic growth.

In this perspective, a handful of specific initiatives deserve a particular mention. A first initiative is the adoption of the European Company Statutes, which is essential to enhance the level-playing field between European firms and to provide a suitable legal framework for transnational conglomerates. A second important aspect is the Risk Capital Action Plan, which would help redirect financial flows towards fast-growing small and medium-sized enterprises. Let me also mention the last four initiatives, namely the e-commerce policy for financial services; the harmonisation of rules on the accounting requirements for European companies; the takeover bids Directive; and finally the removal of accounting, legal and fiscal discrepancies hindering the cross-border use of collateral.

A European Directive on this subject should be adopted in Many of these initiatives may appear to be unimportant and somewhat "esoteric" regulatory changes.

Driving Forces of Financial Globalization

However, they can provide a real boost to the smooth operation of markets and, therefore, to economic growth. For example, obstacles to the cross-border use of collateral prevent the further cross-border integration and consolidation of clearing and settlement infrastructures, thus hindering the integration of European money, bond and equity markets. A smooth electronic integration of trading, clearing and settlement operations would help reduce transaction costs substantially. The gradual dismantling of regulatory obstacles to remaining market integration in Europe will contribute to enhancing their depth and efficiency, in turn contributing to an improved allocation of funds to the most profitable investment opportunities, and thus supporting economic growth.

The interaction between financial markets, economic growth and monetary policy is by no means a new issue for central bankers. However, financial market developments have brought the question to the forefront of the policy debate.

The continued integration and deepening of financial markets is a significant issue for policy-makers, and particularly for central bankers, since smoothly functioning and efficient financial markets are crucial in ensuring a smooth transmission of monetary impulses. The best contribution that monetary policy can make to the smooth functioning and integration of European financial markets and to economic growth is to maintain a steady medium-term price stability orientation. Such a policy will be beneficial, as it will minimise the adverse effects of inflation and high inflation uncertainty.

As we all know, price stability is beneficial in numerous ways. It not only creates a climate for higher economic activity over the medium term, but also reduces the economic and social inequalities caused by the asymmetric distribution of the costs of inflation among the various economic agents. In addition, in an environment of low inflationary expectations, inflation risk premia become relatively less important as a determinant of financial prices. As a result, other factors such as credit risk can play a larger role in the price formation mechanism.

Ultimately, this results in a more efficient allocation of financial resources. The approach of focusing on price stability is by now the conventional wisdom in industrialised countries. In the case of Europe, this consensus on the contribution of price stability in the medium term to promoting long-term growth is explicitly enshrined in the Statute of the ESCB, which states unambiguously that "the primary objective of the ESCB shall be to maintain price stability in the medium term.

Also the design of prudential regulation plays an important role from a growth perspective. Supervision is the guardian of financial stability, which in turn crucially determines the capability of the financial system to allocate resources efficiently and absorb liquidity shocks. Financial crises can have a deep and protracted impact on economic growth, as illustrated by several episodes of financial instability that occurred in many countries. The contribution of prudential supervision to economic growth proceeds along two dimensions. From a preventive perspective, supervision has to ensure a continuous and comprehensive monitoring of all the potential threats to financial stability.

The role of supervision is also crucial after the emergence of a crisis, in order to provide for a swift and ordered resolution. Supervisors can only be effective in these two respects if they are able to pay sufficient attention to systemic issues, namely the risk of contagion effects. In order to address this issue in an effective way, they should be able to bridge the gap between information of a micro-prudential nature, namely information on the safety and soundness of individual institutions, and macro-prudential analysis, which encompasses all activities aimed at monitoring the exposure to systemic risk and at identifying potential threats to financial stability arising from macroeconomic or financial developments.

This line of argument would support a large role for central banks in supervision, since they have traditionally played a large role in macro-prudential analysis and the preservation of financial stability and they have acquired a strong expertise in this field. Furthermore, smooth access of central banks to micro-prudential information would also be profitable from the perspective of another traditional central banking task, namely the oversight of payment systems.

In spite of these arguments supporting a large role of central banks in supervision, the debate has remained broadly inconclusive in the economic literature so far, owing to the existence of opposite considerations. The first important argument against a large role for central banks is the so-called "conglomeration argument", which crucially relies on the idea of a blurring of distinction between banking, insurance and securities firms.

In order to preserve the level-playing field, all segments of the financial industry would have to be supervised under the aegis of a common supervisor. According to this line of reasoning, this "umbrella" could not be the central bank, since the latter is traditionally in charge of supervising monetary organisations. I will not embark upon a thorough analysis of this issue now.

Let me just say that I am convinced that this argument has lost relevance in the current context characterised by a more market-based conduct of supervision - which alleviates the level-playing field concern - and by an increased relevance of systemic risk issues. The second major argument against a large involvement of central banks in supervision is the alleged conflict of interest between monetary policy and prudential supervision.

Many authors have argued that the institution in charge of monetary policy cannot be entrusted with supervision, because the monetary policy stance would be "contaminated" by supervisory issues, for instance the need to safeguard the liquidity of individual banks. The advent of the euro, however, has shifted the balance of arguments decisively in favour of a large involvement of national central banks NCBs in supervision, for two main reasons.

First , the argument of a conflict of interest between monetary policy and prudential supervision becomes irrelevant within the euro area, where supervisory responsibilities are at the national level. Since the geographical jurisdictions of monetary policy and prudential supervision no longer coincide, NCBs in charge of prudential supervision are shielded from the traditional conflict of interest. The second key factor is the increased relevance of systemic risk since the advent of the euro. The nature and scope of systemic risk have changed in a decisive way.

A first decisive evolution is the growing integration of European financial markets in the euro area. As I have already mentioned, the interbank market, especially the unsecured segment, is already fully unified across the area owing to the disappearance of the currency risk and the connection of national real-time gross settlement systems via TARGET, the large-value cross-border payment system of the Eurosystem.

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