Financial Integration in the European Monetary Union

S?awomir Ireneusz Bukowski

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429575617
• Edition: 1
• Topic: Economics
• Subtopic: Monetary Policy
• Index: Economics

This book introduces readers to the world of international financial markets and their integration on a global and regional scale. The author presents the theoretical and practical issues concerning the processes of financial market integration, with a particular focus on the monetary union.

The empirical research results are based on econometric modeling, thus simplifying them for a non-specialist audience, who can instead concentrate on the author's conclusions, which comprise the results of these complicated research methods. The author outlines the role and functions of financial markets in the economy, in particular the relationship between financial intermediaries and financial markets and tackles the question of integration of new EU member countries' financial markets within the eurozone. The integration of financial markets in an international context is inevitable, and the author argues that we must learn how to benefit from it from in terms of economic growth.

This book will be a valuable resource for students of economics and finance, particularly those studying financial management and international business and finance, as well as professionals in these fields. Further, this book will be of interest to anyone looking to discover more about the problems of globalization and the integration of financial markets into the modern economy.

1
The role and functions of financial markets in economy

The structure of the financial market

A financial system is a set of legal standards and financial institutions whose main task is to collect, allocate and spend money resources. The financial system embraces the public (state, fiscal) finance system and the market financial system. The subject of our analysis will be the market financial system. It embraces financial instruments, financial institutions (intermediaries) and the rules that govern how they function in economy (see Pietrzak & Polański, 2000, pp. 11, 17–18; Osiński et al., 2004, p. 12; Bukowski, 2011, p. 14). The market financial system is also a mechanism of creating the purchasing power and its flow between nonfinancial economic units.

According to R. Merton (1995, p. 2), the financial system assures the payment system, mechanism of fund collection, the way of resource transfer in space and time, uncertainty management and risk control, and price information enables decentralized investment allocation in an economy and solving the problems of asymmetric market information. Performing all these functions is determined by the financial structure appropriate for any economy. The said structure is created by institutions, financial technology and rules of games that determine how a financial activity is organized at any time.

R. Stulz (2004, pp. 146–147) compares the financial structure to the foundations of a building. Yet, the same foundations cannot be used for different types of buildings. In this way, we can distinguish different economies on the basis of different financial systems. There are two systems: the bank-oriented economies and market-based economies. Both types of economies have different financial structures, different foundations. Thus, the financial systems functioning in different countries can be divided into market-oriented financial systems (often referred to as Anglo-Saxon ones) and bank-oriented financial systems (known also as continental ones). In the former system, the financial market and its segments are strongly competitive in relation to the banking sector as an alternative to capital raising and allocation. Financial markets play the main role in capital allocation. Analytical companies related to financial markets provide the entire market with information. Financial markets facilitate comprehensive risk management because signals coming from the market allow investors to assess risk and investment and enterprise profitability. They also facilitate company takeovers and mergers, which lead, on the one hand, to capital concentration and, on the other, to exert pressure on the work productivity of managers and achieving high profitability by enterprises and investment projects (see Allen & Gale, 2001, pp. 123–125; Levine, 1991, pp. 1445–1467).

In the bank-oriented system, banks play the main role. They collect information about enterprises and managers, and on the basis of their analysis, they allocate capital and enable the management of different types of risk, and in this way, they affect the effectiveness of investment projects in economy. E. R. Sirri and P. Tufano (1995, pp. 81–128) also draw attention to the role of banks in the capital mobilization for financing ventures, leading to economies of scale.

Several essential factors influence the shape of the financial system model. The first one is the level of economic development. The countries characterized by increasing GDP per capita tend to evolve toward financial markets playing a bigger role. An important role is also played by economic entities’ (enterprises and households) tendency to risk-taking, which is culturally conditioned. The choice of specific forms of financing by enterprises significantly determines the development of the financial market and/or banking system. The effectiveness of the legal system governing the financial market functioning and protecting shareholders is also worth noting (see also Osiński et al., 2004, p. 15).

Nowadays, in many countries, financial systems combine, in varying proportions, elements of both models. The countries whose financial systems are definitely market oriented, where the market capitalization to GDP ratio is higher than the bank credit to GDP ratio include, among others, the United States, the United Kingdom, Canada and Switzerland. On the other hand, the model where the aforementioned ratios are reversed dominates in, among others, Japan, South Korea, Germany and Austria (see Osiński et al., 2004, p. 16).

In Poland, the bank-oriented system features the following: lower GDP per capita than in the higher-developed countries, relatively lower effectiveness of the legal system than in developed countries, relatively higher corruption and a medium European tendency to risk-taking – greatly differing from American and British standards (see Bukowski, 2011, p. 14).

The financial market is one of the key markets in economy, connected with the market of products and services and labor markets through the supply-and-demand coupling and prices. On the one hand, financial markets are platforms where short-, medium- and long-term financial transactions take place and, on the other, mechanisms of short- and long-term capital mobilization and its allocation in order to finance investment ventures operate.

Financial instruments embodying capital are traded in financial markets. A financial instrument is a contract (agreement) between two parties that governs financial interdependence between them.

A financial market has its infrastructure created by a network of relationships among banks, investment fund companies, insurance societies and stock exchanges. The financial market participants include financial institutions, enterprises, households and the state. These entities provide financial capital and benefit from it at a specific price: interest.

Financial markets fulfill an important role in economy. First, they provide a mechanism of capital mobilization for investment purposes, its allocation and its transfer of financial capital into production capital. Second, they determine the price of capital and enable estimations of investment risk, which is the basis of investment decision-making. Third, they strengthen the motivating role of profit in enterprises and enable the enterprise value assessment. Fourth, they assure liquidity in economy, which means that all of the needs of economic entities in terms of money are satisfied. Moreover, financial markets play an important role in the absorption of economic shock results.

The financial market institutions include the legal system regulating capital turnovers, institutions of state financial supervision, financial intermediaries and financial instrument exchange markets. The system of law governing capital turnover consists of the rules of public and non-public capital turnover (financial instruments) and “rules of the game” between the turnover participants. It aims at ensuring safety to capital turnover, including the safety of financial investment projects. The distinction between a public and a non-public turnover of financial instruments is conventional. Usually, the criterion here is the number of people to whom the offer for sale of financial instruments is addressed. Public trading of financial instruments is usually subject to special supervision from the state institutions established for this purpose and to special requirements that must be met by the issuers of these instruments concerning the way of presenting economic information, financial safeguards, the way of issuance and so on.

Specially established institutions supervise the financial market functioning and their complying with the laws governing capital turnover. They include banking supervision, insurance supervision, pension fund supervision and a securities and exchange commission. Some countries implement solutions consisting of creating an institution of integrated financial supervision combining the functions of all the aforementioned supervisory institutions.

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Table of contents

• Cover
• Half Title
• Series Page
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Preface
• 1 The role and functions of financial markets in economy
• 2 Integration of financial markets on an international scale
• 3 The role of financial market integration in the monetary union
• 4 The measures of financial market integration on an international scale
• 5 What are the degrees of financial market integration within the EMU?
• 6 Is the integration of financial markets one of the necessary criteria of advantageous monetary integration? (The case of equity markets in Slovenia and Slovakia)
• 7 Financial market integration of the potential candidate countries to the EMU with euro area financial markets (case study: equity markets)
• Index