Mr. Duisenberg speaks on changes in European financial systems and the contributions of the ECB Remarks delivered by the President of the European Central Ba Dr. W. F. Duisenberg, at a conference on 'Monnaie unique et fiscalité de l'épargne: Europe financière?' organised by the European Parliament in Brussels on 23/9/98.
## 1. Introduction
I would like to express my appreciation for the interesting exchange of which has taken place during this round table. As was made clear during the discuss structure of financial systems in Europe will evolve as the single currency is created has already contributed to this evolution in many ways and will continue to do so in th would like to make a few remarks on this topic.
## 2. Changes in European financial systems
European financial systems are evolving within a global environment, which become more liberalised, international and concentrated. Changes of particular importan euro area include technological innovation in payment systems, the supply and trading derivative products, and the improvement and diffusion of new risk management techni Moreover, the environment of European financial systems is characterised by the Single with new harmonised pieces of regulation and practices developed on the basis of, not Banking Co-ordination Directives, the Capital Adequacy Directives and, importantly context of this Conference, the Investment Services Directive.
The scope and organisation of financial activities in the euro area will al as a result of the creation of the euro. First, money markets are going to be unified. focus of foreign exchange activities will of course shift to currencies outside the eur the behaviour of participants in equity and bond markets is likely to be driven less specific considerations and more by precise, sector-specific or issuer-specific cons This latter development is what some commentators have called the development of a ' risk culture'. This development is likely to improve the effectiveness of price for European bond and equity markets. This, in due time, will contribute to the smooth fun of the financing of the euro area economy, as savings are likely to be channelled more and swiftly through the economy. As such, the development of a 'credit risk cultur therefore be a welcome product of European Monetary Union.
## 3. Contributions of the ECB
Let me now turn to the contributions that the European Central Bank has m and will continue to make, to support the efficient working of financial markets in the
## Price stability
The first and foremost contribution that the ECB aims to make is price st The European System of Central Banks will pursue its primary objective of maintaining stability with determination. This should facilitate the formation of price expectation participants and contribute to financial stability in general.
This environment will be beneficial to the efficiency of savings allo amongst the various sectors of the economy of the euro area. There are several reasons First, the achievement of price stability should help to reduce the uncertainty rel future path of inflation. This should enhance the information content of real and fin prices and improve the capacity of economic agents to select investment options eff Second, price stability will contribute to protecting the value of savings, thereby undesirable wealth re-distribution effects that inflation may cause. Third, in the increased financial stability may contribute to reducing the likelihood of occurrence of bubbles.
## Payment systems
A second contribution of the ECB relates to the field of payment systems EMI, and now the ECB, have developed the TARGET system, which will be made available t market participants as from 4 January 1999. The system will ensure the unification o markets in the euro area. It will reduce transaction costs for cross-border payments enhance security with regards to settlement risks and possible payment gridlocks.
The ECB has also prepared, and is about to publish, a set of minimum stan which securities settlement systems should fulfil in order to be used in ESCB credit o This publication and other initiatives taken by the ECB have fostered the increased co between securities settlement systems and depositories of the euro area.
## Market rules and practices
A third contribution of the ECB relates to market rules and practices. commentators have recognised that European Monetary Union will contribute to the further the harmonisation of market rules and practices. In accordance with the mandates g treaties and statutes, the European Monetary Institute has taken, and now the European Bank takes, an active role in the promotion of adequate new market conventions and rule euro area, bearing in mind the principles of free competition.
## Monetary policy framework of the ECB
Finally, financial markets will need to take into account the monetary framework of the ECB. The monetary policy framework of the ECB has been built so as t very efficient for transmitting monetary policy, while at the same time being as n possible with regard to financial structure. The neutrality and, indeed, market-friendl ECB's framework is apparent in a variety of ways.
First, neutrality is apparent in the way open market operations are con Almost all of the ECB's open market operations will be executed through tenders, to broad spectrum of counterparties may submit bids. This will be a transparent and fair Fine tuning open market operations may also be conducted through tenders, the so-called tenders. The ECB and the national central banks will aim at giving the opportunity to in fine tuning operations to all counterparties having an appropriate track record of a money market, if necessary on a rotating basis.
Second, the consideration of neutrality has been a driving factor in the p establishment of the list of eligible assets. Eligible assets are the assets which coun
to post as guarantees for any credit received from the European System of Central Banks. of eligible assets comprises a wide variety of assets, which have been selected by according to area-wide uniform criteria relating to their credit standing in the whole order to promote a certain degree of continuity at the start of the Third Stage o Monetary Union, a sub-set (the so-called tier two eligible assets) includes assets o importance for certain national banking systems of the euro area. These assets have credit standing as the other assets.
For monetary policy operations, counterparties will be able to use any e assets, irrespective of where they are located in the euro area. To this end, national will act as correspondents for each other so as to make cross-border use possible also for which this service is not yet provided by securities settlement systems.
For the record, one may also mention the ECB's system of risk control meas Risk control measures will ensure that the amount of assets provided is always suffici designing its system of risk control measures, the ECB has paid careful attention t market practices in this area.
Finally, and perhaps most importantly, the minimum reserve system of the has been developed so as to be as neutral as possible. The minimum reserve system has t objectives. The first objective is to stabilise money market interest rates. This will requesting that average reserve holdings be above the minimum reserve requirements monthly periods of time. This will allow the banking system to absorb liquidity shock The volatility of money market rates will, as a consequence, be reduced. Also, fin operations will not have to be used frequently, which will mean that markets are less a central bank interventions than they would otherwise be. The second objective of the m reserve system is to enlarge the demand for central bank money, so as to enlarge the deficit of the banking system vis-à-vis the European System of Central Banks. Th safeguard the role of the European System of Central Banks as a key provider of liquid banking system.
In the minimum reserve system of the ECB, the reserve ratio will be rather and reserve requirements will be fully remunerated. The reserve ratio will be set at be and 2.5% and will be applied to the deposits, debt securities and money market paper i credit institutions, except for residual maturities above two years. Reserve holdin remunerated up to the required reserve level, at the rate of the ESCB's main ref operation (as averaged over a month).
It may be argued that a less than full remuneration of minimum reserves w increase the interest rate elasticity of central bank money demand. This notwithstan European Central Bank has decided in favour of a full remuneration of minimum reserv order to avoid the potential distortions to fair and efficient markets that a le remuneration could have implied. As a result, the minimum reserve system is unlikely to any delocation of certain parts of the reserve base, hence of savings. Finally, it may a to note that the European Central Bank has also decided not to exempt any credit inst the euro area from the minimum reserve system.
## 4. Conclusion
I am confident that the policy of the ECB has always been, and will conti be, guided by the principle of equal treatment, the desire to foster the development markets in the euro area and the need to avoid undue shifts in economic activity. This contribute to providing an adequate environment for an efficient allocation of savings area.