European Integration, Financial Systems and Corporate Performance (EIFC), Final Report
Project ID: HPSE-CT-1999-00039Funded under: FP5-HUMAN POTENTIAL
EU integration is characterized by four specific, yet interconnected, processes: monetary union, enlargement, the single market program and the impact of IT technology. Each of these processes has implications for both the supply and the demand of financial integration and for the finance growth nexus in Europe. Structural trends in the European banking market are accelerating under the pressure of capital market integration. However, European banks are now changing their behaviour in a number of ways. First, their assets are increasingly made up of liquid assets traded on capital markets, and lending to households for consumption purposes (e.g. credit cards). Their assets, liabilities, in contrast, have become less liquid as they provide longer term financial services such as insurance and pensions. In other words, banks have moved away from the tradition function of providing capital for production. So far, little attention has been given to the effect of this process of financial integration on corporate investment in general (and that of small and medium firms in particular) and thus on production, productivity and eventually employment. As far as large firms are concerned, the simultaneous expansion of capital markets has meant that they can issue longer-term bonds to finance capital expansion, and shorter-term commercial bills in order to provide working capital. However, these instruments cannot be issued by smaller firms for three reasons: first, the unit cost is too large in relation to the sums required; second, capital markets require a good deal of information not available for small firms; and third, to be attractive assets must not only have a good yield but also be highly liquid - in other words, issued on a scale which allows for an active market.
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Record Number: 7306 / Last updated on: 2006-04-11