The role of financial markets for economic growth. Speech delivered by Dr. Duisenberg, President of the European Central Bank, at the Economics Conference . I would like to take the opportunity today to talk about the role of financial markets for economic growth. I shall first consider whether the design of the financial system matters for economic growth. Secondly, I shall say a few words about where the euro area financial system is heading, two years after the introduction of the euro. After this I shall discuss the role of monetary policy in the interplay between financial markets and economic growth. What is Capital Market? Meaning, Functions and Role. As an important financial set up capital market provides various. Nationalisation of Banks in India. Financial market regulation. FINANCIAL MARKETS: STRUCTURE AND ROLE IN THE FINANCIAL SYSTEM Mini contents The structure of a financial system. Towards the end, I shall address, as just mentioned by Governor Liebscher, the role of central banks in prudential supervision. Does the financial system matter for economic growth? In the financial system funds flow from those who have surplus funds to those who have a shortage of funds, either by direct, market- based financing or by indirect, bank- based finance. The former British Prime Minister William Gladstone expressed the importance of finance for the economy in 1. Today I would like to address the issue of whether the design of the financial system matters for economic growth. My view is that the answer to this question is yes. According to cross- country comparisons, individual country studies as well as industry and firm level analyses, a positive link exists between the sophistication of the financial system and economic growth. While some gaps remain, I would say that the financial system is vitally linked to economic performance. Nevertheless, economists still hold conflicting views regarding the underlying mechanisms that explain the positive relation between the degree of development of the financial system and economic development. Some economists just do not believe that the finance- growth relationship is important. For instance, Robert Lucas asserted in 1. Moreover, Joan Robertson declared in 1. According to this view, economic development creates demands for particular types of financial arrangements, and the financial system responds automatically to these demands.
Other economists strongly believe in the importance of the financial system for economic growth. They address the issue of what the optimal financial system should look like. Overall, the notion seems to develop that the optimal financial system, in combination with a well- developed legal system, should incorporate elements of both direct, market and indirect, bank- based finance. A well- developed financial system should improve the efficiency of financing decisions, favouring a better allocation of resources and thereby economic growth. Both market and bank- based financial systems have their own comparative advantages. For some industries at certain times of their development, market- based financing is advantageous. For example, financing through stock markets is optimal for industries where there are continuous technological advances and where there is little consensus on how firms should be managed. The stock market checks whether the manager's view of the firm's production is a sensible one. For other industries, bank- based financing is preferable. This holds in particular for industries which face strong information asymmetries. Financing through financial intermediaries is an effective solution to adverse selection and moral hazard problems that exist between lenders and borrowers. Banks in particular have developed expertise to distinguish between good and bad borrowers. Economies that have both well- developed banking sectors and capital markets thus have an advantage. Furthermore, in times of crisis in either system, the other system can perform the function of the famous spare wheel. The financial system is also particularly important in reallocating capital and thus providing the basis for the continuous restructuring of the economy that is needed to support growth. In countries with a highly developed financial system, we observe that a greater share of investment is allocated to relatively fast growing sectors. When we look back more than one century ago, during the Industrial Revolution, we see that England's financial system did a better job in identifying and funding profitable ventures than other countries in the mid- 1. Role Of Financial Market In India Pdf To JpgRole of financial market in india pdf Largest company dedicated to industrial automation and information, makes its. Milwaukee, Wisconsin, Rockwell Automation employs. A financial market is a broad. Connect With Investopedia. Financial Markets News. India will not let guards down on preparedness to deal with. This helped England enjoy comparatively greater economic success. The banker and former editor of . Equity is essential for the emergence and growth of innovative firms. Today's young innovative high- technology firms will be the main drivers of future structural change essential for maintaining a country's long- term growth potential. The contribution of financial markets in this area is a necessity for maintaining the competitiveness of an economy today given the strongly increased international competition, rapid technological progress and the increased role of innovation for growth performance. Equity financing is particularly advantageous for these companies and their investors given the uncertainties of the economic return. Banks, on the other hand, may be reluctant to provide loans owing to the risk profile of these firms, and the greater exposure to a negative result in a loan contract. Total market capitalisation of the new markets in five euro area countries grew from EUR 7 billion at the beginning of 1. EUR 1. 67 billion in December 2. While some of this increase can be attributed to the overall rise in share prices during this period, it is important to note that the number of listed companies continued to increase in almost every month. The total number of companies listed on these new markets in the euro area increased from 6. January 1. 99. 8 to 5. Developments over the last year have admittedly been dismal. However, it is the nature of new markets, given the uncertainties attached to future developments for the companies listed on these markets, to exhibit more volatility than established markets. Bank- based finance has a special role to play for many companies in need of funds, and thus helps to ensure a well- balanced growth process. The economic literature on . Banks stand ready to provide many customers with funds even in adverse circumstances, e. The banking sector also has an essential role to play with respect to the allocation of funds to the most profitable investment opportunities. Banks are, as mentioned before, financial intermediaries that by nature add cost to the allocation of capital. Thus in order for banks to survive in a market economy they need to provide added benefits. It is difficult to compete with the debt securities market, if a bank loan is of a size where the fixed costs of accessing debt markets become negligible. However, securities markets are not always sufficiently liquid and some, especially small and medium, enterprises cannot cover their liquidity needs via securities markets owing to significant fixed costs of access. An additional benefit of bank- based finance relates to the intrinsic nature of the banking business: some projects cannot be financed directly by the market on account of significant information asymmetries between the borrowers and potential lenders. Banks can bridge this gap thanks to their comparative advantages in the assessment and monitoring of investment projects, which contributes to overcoming information asymmetries. The financial system of the euro area after two years with the euro. Let me now turn to the major changes of the financial system in the euro area after two years with the euro. Financial market integration. The launch of the euro on 1 January 1. Eleven national currencies were converted into one single currency overnight. Greece became the twelfth EU Member State to adopt the single currency on 1 January 2. The newly created currency area of the twelve participating European Union Member States has a considerable weight in the world economy. It accounts for around 2. GDP and world exports. The successful launch of the euro, which is a key element in the creation of a stable and prosperous Europe, has boosted the integration of financial markets in the euro area. This process of integration in European financial markets coincided with the trends towards globalisation and securitisation. Other factors, among a wide range, which shape the financial system are historically determined characteristics, technological innovations, monetary and fiscal policies and specific legal and accounting systems that differ from country to country. Evidence of integration can be found, to varying degrees, in all parts of the financial system. The euro area money market is among the most integrated parts of the financial system. The conduct of one common monetary policy in the euro area brought about immediate integration of the unsecured segments of the money market, mainly the interbank market and the short- term derivatives market. The secured segments of the money market, that is the repo market and the markets for short- term securities, are also increasingly integrated, but they still suffer from underlying problems with the management of collateral. Nonetheless, the outlook is promising. The euro area bond market has also developed rapidly. Notably, the private segments of the euro area bond market have flourished since the introduction of the euro. The amount outstanding of long- term debt securities issued by the private sector was 2. Probably the most significant development has been the rapid growth in the euro- denominated corporate bond market, which has increased several- fold in size since the launch of the euro and is now characterised by issues of above EUR 1 billion. EMU has also stimulated integration in the stock markets in the euro area, where structural developments have been dominated by a series of high- profile mergers and attempted mergers. Regulatory framework. The rapid growth achieved by European securities markets has taken place notwithstanding remaining regulatory obstacles to their integration.
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