European Financial System

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European Financial System
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European Financial System

• European Monetary Union (EMU)
• European Financial Institutions (EFI)

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European Financial System

• European Monetary Union (EMU)
• European Financial Institutions (EFI)

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History of the EMU (1)

• European Monetary System (EMS), founded by EU
  member states in 1979
• European Currency Unit (ECU) compositum of the
  EMS-currencies
• Instability of the EMS, Great Britain left EMS in
  1990
• Italy has been stabilized with great effort

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History of the EMU (2)

• European Central Bank in 1989
• Foundation of the EMU 1.1.1999,
• 11 Countries AU, BE, FI, FR, GE, IR, IT, NL, LU,
  PO, SP
• Irrevocible fixed exchange rates of their
  currencies to the EURO
• 1.1.2001 Entrance of Greece

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Costs and risks of the EMU (1)

• Loss of the reputation of the home currency
  (especially in Germany)
• Equal nominal interest rates, ie. equal risk
  premia
• Loss of the exchange mechanism, especially in
  case of asymmetric shocks
• Strong reactions of output and employment in case
  of rigid prices and wages

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Costs and risks of the EMU (2)

• Strong fluctuations
• Loss of an independent monetary policy
• Structural inadequate monetary policy
• Different inflation rates
• Differencies in real interest rates
• Structural growth differencies

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Returns from the EMU (1)

• Significant reduction of transactions costs
  within the EMU
• Elimination of exchange risks for Intra-EMU sales
• Enlargement of the home market Elimination of
  the investment risk

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Returns from the EMU (2)

• EURO as an international portfolio currency
• EURO as a vehicle currency in Eastern Europe and
  Northern Africa
• EURO as a strong business currency
• EURO as reserve and intervention currency
• Reduction of the exchange volatility against
  US-Dollar and Yen??

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European Financial System

• European Monetary Union (EMU)
• European Financial Institutions (EFI)

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European Financial Institutions

• European System of Central Banks
• European Money Markets
• European Bond Markets
• European Sock Markets
• European Derivative Markets

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European Financial Institutions

• European System of Central Banks
• European Money Markets
• European Bond Markets
• European Stock Markets
• European Derivative Markets

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European System of Central Banks (ESCB,
Eurosystem)

• European Central Bank (ECB)
• National Central Banks (NCBs)

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Task of the ESCB

• Definition and implementation of the monetary
  policy of the euro area (Euroland)
• Conduction of foreign exchange operations
• Management of the official foreign reserves of
  the Member States
• Promotion of the smooth operation of payment
  systems

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Capital Subscription to the ECB

• Banca dItalia 14,8950
• Banco de Espana 8,8935
• Banco de Portugal 1,9232
• Bank of Greece 2,0564
• Banque de France 16,8337
• Banque centrale du Luxembourg 0,1492
• Banque Nationale de Belgique 2,8658
• Central Bank of Ireland 0,8496

• De Nederlandsche Bank 4,2780
• Deutsche Bundesbank 24,4935
• Österreichische. Nationalbank 2,3594
• Suomen Pankki 1,3970
• Bank of England 14,6811
• Danmarks Nationalbank 1,6709
• Sveriges Nationalbank 2,6537

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Organization of the ESCB

• Executive Board
• Governing Council
• General Council

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Composition of the Organisation

• Executive Board (EB)
• Members President (P), Vice-President (VP),
  4 other members of the Board (DB)
• Governing Council (GOC)
• Members P, VP, 4 DB, 12 governors of the
  NCBs of Euroland
• General Council (GEC)
• Members P, VP, 12 governors of the NCBs
  of Euroland, 3 governors of the NCBs of
  Non-euro areas

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Responsibility of the EB

• Implementation of the monetary policy
• Execution of the decisions of the GOC
• Instruction of the NCBs

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Responsibility of the GOC

• Guidelines and decisions to ensure the
  performance of Eurosystem
• Definition and specification of the monetary
  policy of Euroland
• Guidelines for the implementation of the monetary
  policy in Euroland

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Responsibility of the GEC

• Advisory of the ECB
• Collection of statistical information
• Preparation of the ECBs annual reports
• Standardization of the accounting and reporting
  of the NCBs
• Establishment of further key for the ECBs
  capital subscription
• Preparation of the fixing of the exchange rates
  of further member states

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Independency of the ECSB

• Minimum renewable term of office for governors of
  five years
• Minimum non-renewable term of office for members
  of the Executive Board of eight years
• Removal from office is only possible in the event
  of incapacity or serious misconduct (Competence
  is due to the Court of Justice of the EC)

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ECBS Monetary Policy Framework (MPF)

• Objectives of Monetary Policy
• Instruments of Monetary Policy
• Eligible Counterparts
• Types of Transactions
• Modes of Procedures
• Underlying Assets
• Modifications of MPF

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1. Objectives of Monetary Policy

• Price stability is the primary goal
• Support of the economic policy in EC
• Efficient resource allocation in EC

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2. ECBS Monetary Policy

• Open Market Operation
• Standing Facilities
• Minimum Reserves

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Open market operations

• Main refinancing operations
• Longer-term refinancing operation
• Fine-tuning operations
• Structural operations

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Standing Facilities

• Marginal lending facility
• Deposit facility

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Minimum Reserve

• Credit Institutions subject to reserves
• Reserve base and reserve ratios
• Maintenance of reserve holdings
• Reporting and verification

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3. Eligible Counterparties

• General Criteria
• Selection for quick tenders and bilateral
  operations
• Sanctions in the event of non-compliance
• Suspension or exclusion

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General Eligibility Criteria

• Only institutions subject to Eurosystems minimum
  reserve systems
• Financially sound institutions
• Additional Operational criteria

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European Financial Institutes
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Regional Distribution
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4. Types of Transactions

• Reverse Transactions
• Outright Transactions
• Issuance of ECB debt certificates
• Foreign exchange swaps
• Collection of fixed term deposits

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5. Modes of Procedure

• Tender procedures
• Procedures of bilateral operations
• Settlement procedures

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6. Eligible Assets

• Tier One Assets
• ECB debt certificates
• Other marketable debt instruments
• Tier Two Assets
• Marketable debt instruments
• Non- marketable debt instruments
• Equities traded on a regulated market

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European Financial Institutions

• European System of Central Banks
• European Money Markets (EMM)
• European Bond Markets
• European Stock Markets
• European Derivative Markets

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European Money Market

• Absolute and relative reduction of the engagement
  of the government sector in absolute and relative
  terms
• Strong increase of the MFIs in absolute and
  relative terms
• Significant absolute and relative increase of
  other corporations

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History of EMM
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Market shares of deposits, repo and currency swap
in Euroland
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Deposits, repo and foreign currency swaps in
Euroland
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European Financial Institutions

• European System of Central Banks
• European Money Markets
• European Bond Markets (EBM)
• European Stock Markets
• European Derivative Markets

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History of EBM
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European Bond Market

• OTC Market
• EuroMTS pan-European electronic trading System
  for Euro government bonds
• Euronext electronic platform (Merger of
  exchanges of Amsterdam, Bruxelles, Paris)
• Eurex-Bonds electronic trading platform of the
  Eurex (Merger of DTBSoffex)

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EuroMTS

• Owners major American and European financial
  institutions
• Trading platform for government bonds from 10
  European Countries and 3 agency issuer
• Austria, Belgium, Finland, France, Germany,
  Greece, Italy, The Netherlands, Portugal, Spain,
  the European Investment Bank, Freddie Mac and
  Kreditanstalt für Wiederaufbau

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European Financial Institutions

• European System of Central Banks
• European Money Markets
• European Bond Markets
• European Stock Markets
• European Derivative Markets

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European Stock Markets

• London Stock exchange
• Euronext (Merger of the exchanges of Amsterdam,
  Bruxelles, Paris)
• Deutsche Börse (Cooperation with Finexchange,
  Schweizer Börse, Wiener Börse)
• Regional exchanges (Madrid, Milan)

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European Stock Exchanges
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European Financial Institutions

• European System of Central Banks
• European Money Markets
• European Bond Markets
• European Share Markets
• European Derivative Markets

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European Derivative Market

• Eurex (Soffex Deutsche Börse)
• Euronext (Merger of Bruxelles, Paris, Amsterdam)
• LIFFE (London)

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European Derivative Markets
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Eurex - A leader among Futures and Options
Exchanges
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Products traded at the Eurex

• Money Market Products
• Capital Market Products
• Equity Market Products
• Index Products

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Money Market Products

• One-Month Euribor Futures
• Three-Month Euribor Futures
• Options on Three-Month Euribor Futures

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Capital Market Products

• Euro SCHATZ Futures
• Options on Euro SCHATZ Futures
• Euro BOBL Futures
• Options on Euro BOBL Futures
• Euro BUND Futures
• Options on Euro BUND Futures
• Euro BUXL Futures
• CONF Futures

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Equity Market Products

• Stock Options on German/Swiss/Nordic/
  Dutch/Italian/French/US and Neuer Markt Shares
• Low Exercise Price Options on German/
  Swiss/Nordic/Dutch/Italian/French/US and Neuer
  Markt Shares

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Index Products

• Index Futures DJ Global Titans 50SM/DJ STOXXSM
  600/DJ STOXXSM Sector/DJ STOXXSM 50/DJ Euro
  SOXXSM 50/Dax/ NEMAX/SMI/HEX 25
• Index Options DJ Global Titans 50SM/DJ STOXXSM
  600/DJ STOXXSM Sector/DJ STOXXSM 50/DJ Euro
  STOXXSM 50//Dax/NEMAX/SMI/HEX 25