News Release
London as a Financial Centre After EMU - Speech by Ian Plenderleith at a Conference on the International Monetary System After EMU
06 November 1997
In the UK wholesale financial markets, practical preparations are in fact already well advanced.
We at the Bank of England have now for nearly two years been helping prepare the UK financial markets for the euro. We do this because, even though the UK will not be in at the start, it is plain that banks and financial institutions in the UK, in their wholesale business for their corporate and institutional customers, in the UK and overseas, will want to be able to offer the full range of financial facilities in the euro from the outset .... practical preparations are now well advanced to achieve that by January 1999.
The Bank of England's part in this extensive process of market-wide preparation, besides equipping ourselves internally for operations in the euro, is a co-ordinating one.
Why do we devote this effort for preparing for the euro? The reason is very straightforward. London's pre-eminent position as an international financial centre rests on the fact that it provides broad and liquid markets for the full range of internationally-traded currencies and for the vast array of different instruments and facilities denominated in them. The euro will undoubtedly become a major internationally-traded currency, and it is therefore certain that it will be traded extensively in the London markets. The euro thus represents an opportunity, rather than a threat, for the London markets, and it is important that the London markets prepare in good time the systems and infrastructure needed to take advantage of this opportunity.
Let me touch on three areas where the advent of the euro is likely to usher in significant changes - but, I believe, positive changes, offering new business opportunities - for financial market participants.
First, in the bond markets, monetary union will serve to unify the various national government bond markets of the EMU participants, and the already substantial ECU bond market, into a single market in a single currency with multiple national government issuers. Currency risk will be removed, at a stroke. This does not, of course, mean that all government bonds of the different national issuers will trade at the same price: differences will still remain in trading structures and liquidity, in perceptions of sovereign risk and the scale of supply by different governments, and in investors' basic preferences. But the different national government bonds will tend to trade on essentially the same yield curve, with the focus of the market being concentrated, even more so than at present, on spread relationships.
A second effect in this area flowing from the concentration on spreads may be greater interest in developing a diversified, deeper corporate bond market in euro, as has long been present in the US, but much less so in other countries. If this happens, it could be a considerable boon to corporate borrowers as a whole because it would extend the range of financing opportunities open to them.
A second area where financial market activity in the euro is likely to generate new opportunities is in the short-dated money markets. Foreign exchange traders do clearly face some contraction in their activity, as an inevitable consequence of currency unification. But I do not expect to see too many destitute foreign exchangers miserably wandering the streets in search of charity or menial employment because of course, as trading amongst the EMU currencies disappears, new international trading is developing in a range of currencies of leading emerging market economies.
I have tried in these remarks to set out some of the ways in which I believe EMU will open up new opportunities for the financial markets. I believe this will be particularly so for the international markets in London. We intend to be ready to take full advantage of these opportunities, right from the outset in January 1999, even though the UK will not participate in EMU at that stage. The reason for this is very simply: London is the major European financial market, and we think that extending its activity to include financial services in euro is a significant contribution we in the UK can make from the outset to the success of the monetary union and of the single European market as a whole.
Key Resources
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Full text of Speech by Ian Plenderleith at
a Conference on the International Monetary System After
EMU |
