Financial Sectors in EU Accession Countries

Editor: Christian Thimann
Published by: European Central Bank, July 2002

The advent of the euro has had, and continues to have, a major impact on the European financial sector, with the main direction of impact being one of further integration. Further integration of the financial sector throughout the euro area is of significant interest to the ECB, as it will strengthen the effectiveness of monetary policy transmission and contribute to greater efficiency and competitiveness of the euro area’s real economy. It is also of interest to accession countries, as it has to guide their own integration process with the euro area.

Important steps towards further integration in the euro area’s financial sector are already visible, and the process is gaining increasing momentum. In the banking sector, integration can be considered as achieved in the market for unsecured interbank loans and deposits, and it is also far advanced in the repo market, despite a few remaining differences in the crossborder settlement of collateralised transactions. In banking activities vis-à-vis the corporate sector, the areas of syndicated loans, corporate bond underwriting and equity issues have also witnessed greater integration, which is reflected, inter alia, in narrowing price differentials
for such services within the euro area. Greater integration has also characterised capital markets, including equity, government bond and corporate bond markets. The general trend towards greater financial integration has been bolstered by the increasing harmonisation of the regulatory framework and the increasing integration of the underlying financial infrastructure.

For accession countries, the changes ongoing in the euro area’s financial sectors indicate that these countries need to catch up with a moving target. Financial sectors in accession countries will not only grow – in breadth, depth and efficiency – but they will also become further integrated with the euro area. Much of this further integration will be market-driven, but it will be – and for some aspects needs to be – supported by actions of the authorities. The adoption of the EU’s legal framework, a greater integration of the financial infrastructure with that in the euro area and a strong cross-border collaboration of supervisors will be important policy elements in this process.

Financial sectors in accession countries display a number of distinct features. Most of these features – especially those related to size and efficiency – put them still behind financial sectors in the euro area. Mostly as a result of the legacy from the past, financial sectors in accession countries are still relatively small and not yet fully developed in terms of market segments or instruments. This is particularly true for capital markets, which only play a marginal role in many accession countries’ financial sectors, but it is also true for most indicators of banking activities.

However, there is one feature for which the financial environment in accession countries can be considered ahead of that in the euro area, namely the local availability of services provided by cross-border operators, mainly due to the wide extent of cross-border ownership.
6 Foreword In accession countries as a whole, foreign ownership already stands above 65% and will rise further once the final privatisation rounds that are ongoing in some countries have been completed. In a few countries the banking sector is even entirely in foreign hands. In the euro
area countries, in contrast, foreign ownership is highly limited. Only about 20% of the banks’ capital in euro area countries is in foreign ownership, and only in four countries is this ratio at least 30%. In the euro area a number of factors have contributed to limiting strategic crossborder ownership, including a low degree of market integration in the past, differences in banking culture across countries and a desire (often shared by authorities and banks alike) to keep “national champions” in domestic hands. These factors are about to weaken – at highly different speeds – so that over the longer term one can well imagine cross-border ownership
levels rising across the area. Many of the experiences the current EU accession countries are going through will then become relevant for the current euro area members.

Structural developments in the financial sector are mostly gradual, which means that large changes can only be observed over a long time period. Therefore, although they will undergo continuous changes over the coming years, it is likely that financial sectors both in the euro area and in accession countries may not look fundamentally different from today when the first of the current EU accession countries will adopt the euro. As a result, the financial sector in an enlarged euro area will look quite different from that of today, and three main features can already be identified: first, the overall size and stage of the development of the financial sector relative to the size of the underlying economy will be somewhat lower than today; second, the structure and functioning of the financial sector will be slightly more heterogeneous across the euro area; and, third, the degree of cross-border ownership will be larger than in the euro area today. The first two features fall into the domain of monetary policy transmission, even though their importance for the euro area-wide monetary policy will be highly limited given the low economic weight of the accession countries in an
enlarged euro area for the foreseeable future. The third feature, however, may have relevant implications for supervisors and authorities in the field of payment systems and financial market infrastructure upon euro area enlargement. In particular, it will make cross-border cooperation
of supervisors more important and may also lead to an even greater integration of financial infrastructures.

All these considerations demonstrate how vital – and interesting – an analysis of accession countries’ financial sectors is, and how relevant it already is at this stage not only for the authorities of accession countries but also for the ECB. The information and assessments provided in this book are therefore highly valuable, as they provide insights into the structure and functioning of financial sectors in accession countries, which will remain a fascinating area for policy-makers in many years to come.

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