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M. Messori: The inevitable evolution of European financial markets

In the decades preceding the 2007-2009 international financial crisis and the related ‘doom loop’ between the European sovereign debt crisis and the European banking sector crisis (2010-2013), the external financing of the ‘real’ activities in the continental part of the European Union (EU) and – in particular – in the euro area (EMU) was focused on bank credit. Moreover, in that same area many banking groups had a dominant role (along with some insurance companies) in the management of household financial wealth.

This set-up of the EMU’s financial markets is not only different from that of other economically advanced areas (primarily the United States); it has also been of crucial importance in supporting the euro area’s economic growth. While denouncing inefficiencies, this specific European set-up has, in fact, allowed for the use of substantial portions of private wealth for productive purposes: the banks’ creation of means of payment by-passed or – at least – mitigated the financial constraints potentially created by the qualitative gaps between the allocation of financial portfolios, selected by the majority of European wealth holders, and the composition of credit demand, carried out by the majority of non-financial firms in the various member states. This intermediation role, which justifies the existence of banks even in the theoretical models of general or partial equilibrium, has proved particularly valuable for European small and medium-sized non-financial firms which have had predominant influence in the productive apparatus of many EU’s member states. In fact, these types of firms encountered particularly severe difficulties in obtaining direct financing from financial wealth holders.  

Today, in the EMU financial markets, banks continue to enjoy the double quasi-monopolistic position just described. In this paper I maintain, however, that, in the subsequent stages of the abovementioned crises (starting in 2014), the role of the banking sector in the European financial markets began to undergo profound and irreversible changes and, therefore, is intended to lose its dominant influence in the external financing of productive activities and in the management of private financial wealth. If my interpretation of the imminent evolution in European financial markets was correct, it would mean that the structure of these markets will have to undergo profound changes. On the other hand, it should be stressed that, in many euro-area countries, small and medium-sized non-financial firms continue to play prominent roles. Therefore, alternative sources of financing of the European ‘real’ economy will have to be established; at the same time, however, the new non-bank financial institutions and the new bank business models will have to ensure that the role of financial intermediation, dominated until now by traditional banking groups, will continue to be active even if in different forms and with different results.

This paper pursues a twofold objective: (i) to show that the evolution of European financial markets hypothesized above is reflected in a series of empirical descriptive data, which, though not providing clear-cut evidence in favor of our interpretation, make the latter plausible; (ii) to examine, with some detail, the main impacts that the transformation of the role of banks will have on the set-up of financial markets and on financial regulation in the euro area and in other parts of the EU (the so-called “Banking Union” (BU) and the so-called Capital Markets Union (CMU) process).

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