Europe 1992: Issues and Prospects for the Financial Markets

Abstract

Financial markets Vittorio Grilli One potential effect of the integration of European financial markets concerns the geographical location of financial ‘hot spots’. It is likely that liberalization will tend to promote countries with already large and well developed international financial markets. Attracting the residents of smaller countries, these markets will become larger and more liquid, and thus even more appealing. It is very unlikely that other European countries could design policies apt to threaten London's supremacy as the main European financial centre. While the article focuses on the market for bank deposits, similar considerations apply to other financial markets. It appears that a large part of cross-country bank deposits are explained by country-specific factors, such as particular institutional arrangements in the areas of capital controls, tax regulations and secrecy laws. However, the relative importance of these factors varies between inter-bank deposits and non-bank deposits: taxation and banking secrecy matter for non-bank deposits while the very size of the economy influences inter-bank deposits. Finally, imperfect competition and switching costs imply that more intense competition wilt be felt primarily in the market for large deposits. Small deposit contracts will probably be unaffected by liberalization, at least in the short run.