The Eurosystem is, of course, well equipped for its two collective decision-making bodies (the Board and the Council) to take decisions quickly whenever needed, whether for financial stability or for other reasons. This readiness is needed for a variety of typical central bank decisions, such as the execution of concerted interventions or the handling of payment system problems. Indeed, it has already been put to work during the changeover weekend and in the first few weeks of this year.

A clear reassurance about the capacity to act when really needed should be sufficient for the markets. Indeed, it may even be advisable not to spell out beforehand the procedural and practical details of emergency actions. As Gerry Corrigan once put it, maintaining "constructive ambiguity" in these matters may help to reduce the moral hazard associated with a safety net. I know of no central bank law within which the lender-of- last-resort function is explicitly defined.

The question of who acts within the Eurosystem should also be irrelevant for the markets, given that any supervised institution has an unambiguously identified supervisor and national central bank. As to the access to supervisory information, the lack of direct access by the
Eurosystem should not be regarded as a specific flaw of the euro area's institutional framework, as has been frequently argued, since this situation also exists at the national level wherever a central bank does not carry out day-to-day supervision.

30. Finally, the criticism reflects an overly mechanistic view of how a crisis is, and should be, managed in practice. Arguing in favour of fully disclosed, rule-based policies in order to manage crises successfully and, hence, maintain market confidence, is almost self-contradictory. Emergency situations always contain unforeseen events and novel features, and emergency, by its very nature, is something that allows and even requires a departure from the rules and procedures adopted for normal times or even in the previous crisis. Who cares so much about the red light when there is two metres of snow on the road? As for transparency and accountability, these two sacrosanct requirements should not be pushed to the point of being detrimental to the very objective for which a policy instrument is created. Full explanations of the actions taken and procedures followed may be appropriate ex post, but unnecessary and undesirable ex ante.

31. So far, I have focused on the provision of emergency liquidity to a bank. This is not the only case, however, in which central bank money may have to be created to avoid a systemic crisis. A general liquidity "dry-up" may reflect, for example, a gridlock in the payment system or a sudden drop in stock market prices. The actions of the Federal Reserve in response to the stock market crash of 1987 is an often cited example of a successful central bank operation used to prevent a dangerous market-wide liquidity shortfall. This kind of action is close to the monetary policy function and has been called the "market operations approach" to lending of last resort.
In such cases, liquidity shortfalls could be covered through collateralised intraday or overnight credit, or auctioning extra liquidity to the market.
The Eurosystem is prepared to handle this kind of market disturbance.

VI. CONCLUSION

32. In my remarks this evening, I have looked at the euro area as one that has a central bank which does not carry out banking supervision. This would be normal, because in many countries banking supervision is not a task of the central bank. What is unique is that the areas of jurisdiction of monetary policy and of banking supervision do not coincide. This situation requires, first of all, the establishment of smooth co-operation between the Eurosystem and the national banking supervisors, as is the case at the national level where the two functions are separated. The most prominent reason for this is, of course, the scenario where the provision of liquidity from the central bank has to be made in a situation that is generated by problems of interest to the supervisor. But beyond that, I do not know any country in which the central bank is not very closely interested in the state of health of the banking system, irrespective of its supervisory responsibilities.

33. In my view, we should move as rapidly as possible to a model in which the present division of the geographical and functional jurisdiction between monetary policy and banking supervision plays no significant role.
I do not mean necessarily a single authority or a single set of prudential rules. Rather I mean that the system of national supervisors needs to operate as effectively as a single authority when needed. While the causes of banking problems are often local or national, the propagation of problems may be area-wide. The banking industry is much more of a system than other financial institutions.

34. I am clearly aware that we are far from having a common supervisory system. But since the euro has just been launched and will last, we have to look in prospective terms at what needs to be set in place. There is no expectation, at least to my mind, that the division of responsibility in the euro area between the central bank and the banking supervisory functions should be abandoned. Although the Treaty has a provision that permits the assignment of supervisory tasks to the ECB, I personally do not rely on the assumption that this clause will be activated. What I perceive as absolutely necessary, however, is that co- operation among banking supervisors, which is largely voluntary but which finds no obstacles in the existing Directives or in the Treaty, will allow a sort of euro area collective supervisor to emerge that can act as effectively as if there were a single supervisor. This is desirable in the first instance to render the supervisory action more effective against the background of current and future challenges and, second, to assist the
Eurosystem in the performance of its basic tasks.

TABLES

Table 1. Market share of branches and subsidiaries of foreign credit institutions as % of total domestic assets, 1997

From EEA countries From third countries

TOTAL

Branches Subsidiaries Branches
Subsidiaries

AT 0.7 1.6 0.1 1.0

3.4

BE 9.0 19.2 6.9 1.2

36.3

DE 0.9 1.4 0.7 1.2

4.2

ES 4.8 3.4 1.6 1.9

11.7

FI 7.1 0 0 0

7.1

FR 2.5 NA 2.7 NA

9.8

IR 17.7 27.8 1.2 6.9

53.6

IT 3.6 1.7 1.4 0.1

6.8

NL 2.3 3.0 0.5 1.9

7.7

SE 1.3 0.1 0.1 0.2

1.7

UK 22.5 1.0 23.0 5.6

52.1

Source: ECB report "Possible effects of EMU on the EU banking systems in the medium to long term" (February 1999).

Table 2. Assets of branches and subsidiaries of domestic credit institutions in foreign countries as % of total domestic assets, 1997

In EEA countries In third countries

TOTAL

Branches Subsidiaries Branches
Subsidiaries

AT 2.6 NA 3.7 NA

NA

DE 12.0 7.3 7.8 0.9

27.9

ES 5.5 1.4 2.1 5.9

14.9

FI 5.9 0.3 6.6 0.3

13.1

FR 9.1 6.9 9.4 3.8

29.2

IR 8.3 14.9 1.3 10.1

34.6

IT 7.2 2.7 3.8 1.5

15.2

SE 7.2 NA 5.4 NA

NA

Source: ECB report "Possible effects of EMU on the EU banking systems in the medium to long term" (February 1999).

Table 3. Concentration: Assets of the five biggest credit institutions as % of total assets

1985 1990 1997

AT 35.8 34.6 48.3

BE 48.0 48.0 57.0

DE NA 13.9 16.7

ES 38.1 34.9 43.6

FI 51.7 53.5 77.8

FR 46.0 42.5 40.3

IE 47.5 44.2 40.7

IT 20.9 19.1 24.6

NL 69.3 73.4 79.4

SE 60.2 70.02 89.7

UK NA NA 28.0

Source: ECB report "Possible effects of EMU on the EU banking systems in the medium to long term" (February 1999).

Table 4. Number of branches and subsidiaries of foreign credit institutions, 1997

From EEA countries From third countries TOTAL

Branches Subsidiaries Branches
Subsidiaries

AT 6 20 2 11

39

BE 25 16 15 15

71

DE 46 31 31 45

153

ES 33 21 20 6

80

FI 9 0 0 0

9

FR 46 118 43 98

305

IR 18 21 3 7

49

IT 36 4 17 4

61

NL 11 8 11 19

49

SE 14 0 3 1

18

UK 106 18 149 114

387

Source: ECB report "Possible effects of EMU on the EU banking systems in the medium to long term" (February 1999).

Table 5. Private non-financial enterprises' bonds, credit institutions' bonds and government bonds outstanding as % of GDP,

1997

Private Credit Government non-financial institutions' bonds bonds bonds

AT 2.7 31.1 30.6

BE 10.0 38.3 111.0

DE 0.1 54.6 37.6

ES 2.6 4.5 52.9

FI 3.7 7.1 35.5

IE 0.01 1.6 32.2

IT 1.6 19.4 100.4

NL NA 43.1 53.4

SE 3.6 38.6 46.5

Source: ECB report "Possible effects of EMU on the EU banking systems in the medium to long term" (February 1999).

Euro and European integration

Speech delivered by Eugenio Domingo Solans,

Member of the Governing Council and the Executive Board of the

European Central Bank, at the "Euro and Denmark" exhibition in Aalborg, Denmark, on 10 September 1999

INTRODUCTION

It is a real pleasure for me to participate in the "Euro and Denmark" exhibition in Aalborg. It is the first time since my appointment as a member of the Executive Board of the European Central Bank (ECB) in May
1998 that I have had the opportunity to speak in Denmark. Thank you for your invitation and for asking me to share my views on the euro and on
European integration with investors and experts of this "pre-in" country.

I should like to refer to two main topics. First, and more extensively, allow me to explain the ECB's view and my own view on the role of the euro as an international currency. After this I intend to make some brief comments on the key role that the euro and the Eurosystem are playing in the process of European economic integration.

Before I begin, I should like to add that it goes without saying that the institutional position of the ECB - and therefore my own official position - concerning Denmark's entry to the euro area is one of strict neutrality. This is an issue which has to be decided by the Danish people, whenever and in whatever way they deem appropriate.

THE EURO AS AN INTERNATIONAL CURRENCY

The three basic functions of the euro

Every currency fulfils three functions: store of value, medium of exchange and unit of account. Concerning the first function (store of value), the euro is used and will increasingly be used as an investment and financing currency by market players, and as a reserve currency by public authorities. Regarding the second function of money (medium of exchange), the euro is used and will increasingly be used as a payment or vehicle currency for the exchange of goods and services and for currency exchange itself. It will also have an official use as an intervention currency.
Finally, as regards the third function of any currency (unit of account), the euro is used and will increasingly be used by economic agents as a pricing or quotation currency and as a pegging currency by the authorities responsible for exchange rate issues.

Let me give you some information about the present use of the euro in each of these areas. I shall first refer to the private use of the euro, after which I shall consider its official public usage.

The euro as a store of value

The available information seems to confirm that the euro already plays a significant role as an investment and financing currency in international financial markets. Without going into precise details (1), regarding the international debt securities market (money market instruments, bills and bonds), it can be said that in the first two quarters of 1999 net international issues denominated in euro amounted to
EUR 83.9 billion, compared with EUR 74 billion for the US dollar and EUR
50.9 billion for former euro area national currencies and ECUs during the same period of 1998. In other words, in the first two quarters of 1999 net international issues of debt securities denominated in euro were 13.4% higher than those denominated in US dollars, and 64.8% higher than those denominated in former euro area national currencies and ECUs issued during the same period of last year.

With regard to equity markets, the weight of euro area stock exchanges in terms of capitalisation ranks a clear second, far behind the
United States.

As to the banking sector, the latest data show that, at the end DX
:>48@>2:0 ?;5=:8T- -#"+ !-+ 1999DXCODE.HTof March 1999, above 40% of deposits and loans vis-а-vis non-residents were denominated in euro, with the share of the US dollar almost as high.

The euro as a medium of exchange

As for the second function of money (medium of exchange), the euro needs more time to develop as a payment currency for goods and services in international trade and as a vehicle currency in the foreign exchange markets. Although no precise data are available at this stage, the value of world exports denominated in euro is not likely to differ significantly from that of euro area exports. By contrast, the value of world exports settled in US dollars is nearly four times as high as that of US exports.
This difference can easily be explained by the combined and reinforcing effects of network externalities and economies of scale in the use of a predominant international currency, as is the case with the US dollar.

The euro as a unit of account

The use of the euro as a unit of account (its third general function) is closely linked to its use for the other two main functions. The use of a currency as a unit of account is, in a way, the basis for its use as a store of value or as a medium of exchange. The value stored in euro, or the payments made in euro, will tend to be recorded in euro. Therefore, we can conclude that the euro is playing an ever larger role as a unit of account for all the financial assets linked to the use of the euro as an investment and financing currency, and has a much less relevant role as a standard for pricing goods and services, owing to the widespread use of the US dollar as a payment and vehicle currency in international trade. The convenience of using a single standard for pricing commodities in the international markets, allowing traders to make direct comparisons between prices, makes it difficult for the euro to acquire a significant role in this respect. We can conclude that the development of the euro as a unit of account will follow the pace at which the issuers or suppliers of assets, goods or services priced or quoted in euro obtain a predominant position in the international markets.

The official use of the euro

The euro also has official uses as reserve, intervention and pegging currency, all three functions being strongly interrelated in most cases.

With regard to its official use, the euro is currently the second most international currency after the US dollar, this being a legacy of the former euro area national currencies.

Compared with the former euro area national currencies, there has been a technical decline in the share of the euro as a reserve (and, therefore, as an intervention) currency, mainly owing to the fact that such former national currencies became domestic assets within the euro area.
However, there are good reasons to expect an increase in international public use of the euro as a reserve and intervention currency, inasmuch as the public authorities understand that it is worthwhile to allocate their foreign reserves among the main international currencies and to give the euro a relevant share in accordance with its internal and external stability and the economic and financial importance of the euro area.

In connection with the use of the euro as a pegging currency, approximately 30 countries outside the euro area currently have exchange rate regimes involving the euro to a greater or lesser extent. These exchange rate regimes are: currency boards (Bosnia-Herzegovina, Bulgaria,
Estonia); currencies pegged to the euro (Cyprus, FYROM [the Former Yugoslav
Republic of Macedonia] and 14 African countries in which the CFA franc is the legal tender); currencies pegged to a basket of currencies including the euro, in some cases with a fluctuation band (Hungary, Iceland, Poland,
Turkey, etc.); systems of managed floating in which the euro is used informally as the reference currency (Czech Republic, Slovak Republic and
Slovenia); and, last but not least, European Union currencies pegged to the euro through a co-operative arrangement, namely ERM II. As you well know,
Denmark and Greece joined ERM II on 1 January 1999 with a ±2.25% fluctuation band for the Danish krone and a ±15% fluctuation band for the
Greek drachma. Although the euro remains in second position after the US dollar in terms of its official use, the role of the euro will increase in the future, without a doubt.

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