Financial Convergence Research Articles

Financial Integration in the West African Economic and Monetary Union

This study assesses the degree of financial integration in the West African Economic and Monetary Union (WAEMU). The structure of the financial sector and its institutional arrangements indicate that financial integration is well advanced in some aspects. Common and foreign ownership of banks is very high and cross-border transactions are frequent in the government securities markets. Common institutions help achieve a high degree of similarity of rules. There is nonetheless scope for further financial integration as indicated by persistent deviations from the law of one price, limited cross-border bank transactions, and differences in treatment. Policy measures could therefore help achieve greater financial convergence.

Financial Integration in the West African Economic and Monetary Union

This study assesses the degree of financial integration in the West African Economic and Monetary Union (WAEMU). The structure of the financial sector and its institutional arrangements indicate that financial integration is well advanced in some aspects. Common and foreign ownership of banks is very high and cross-border transactions are frequent in the government securities markets. Common institutions help achieve a high degree of similarity of rules. There is nonetheless scope for further financial integration as indicated by persistent deviations from the law of one price, limited cross-border bank transactions, and differences in treatment. Policy measures could therefore help achieve greater financial convergence.

Real and nominal stochastic convergence: Are the new EU members ready to join the Euro zone?

A key requirement for the new members to join the European Economic and Monetary Union (EMU) is real and financial convergence to European Union (EU) levels. This paper expands the analysis in [Kočenda, E., Macroeconomic convergence in transition economies, Journal of Comparative Economics 29 (2001) 1–23] and [Kutan, A., Yigit, T., Nominal and real stochastic convergence of transition economies, Journal of Comparative Economics 32 (2004) 23–36] by investigating the convergence of the new EU members to these standards. Using panel unit root techniques, we find strong evidence of real stochastic convergence for all new members, which indicates that they adjust to Euro-area output shocks. However, the degree of nominal convergence is idiosyncratic. The Baltic states exhibit the strongest monetary policy and price-level convergence, suggesting that they are ready to adopt the Euro. However, Central and East European countries should address the reasons for their lack of convergence before adopting the Euro. Journal of Comparative Economics 33 (2) (2005) 387–400.

Financial Convergence and Integration of New EU Member States

Financial Convergence and Integration of New EU Member States

Risque pays : l’Europe de l’Est est-elle spécifique ?

Country risk : is Eastern Europe specific ? Apart from distinct past of other emergent countries and particularities, the specificity of Eastern Europe comes from the EU accession process. Today, we show that there is not any more default risk on public debt, or major fears on institutional environment. However a risk of economic crisis remains and must not be ignored. Paradoxically, this risk is linked to financial convergence implied by EU accession. This process is not easily compatible with the needed growth and purchase power catch up. JEL classifications : F21, F34, F36, P34, P35

Winners and Losers as Financial Service Providers Converge: Evidence from the Financial Modernization Act of 1999

The Financial Modernization Act of 1999 dramatically increased insurers’ and investment banks’ authority to provide an array of financial services and allowed commercial banks to offer investment banking and insurance services. In this paper we examine the market response to this legislation. We find a strong positive response among insurance companies and investment banks, and no significant response among commercial banks. Larger institutions in all three financial sectors earn higher abnormal returns. Additionally, better performing banks earn higher abnormal returns. Our results suggest that allowing financial convergence can add value through synergies and that large players are needed to exploit the scope economies.

The Spatial Distribution of Credit: The Case of Spanish Savings Banks

This article attempts to answer two questions, using Spain as a case study: do savings banks, and the regional banking system in general, have specific forms of activity which may be termed 'regionalising'?; and then, is the quantitative importance of the regional banking system sufficient to ensure that the effects of such behaviour upon the regional distribution of credit will be substantial? The evidence shows that in Spain these institutions have a strongly regionally-oriented character that has greatly contributed to financial convergence. The regional orientation has resulted in relatively low inter-regional differences in access to credit.

Bank Integration and Business Volatility in the U.S.

We investigate how bank migration across state lines over the last quarter century has affected the size and covariance of business fluctuations within states. Starting with a two-state version of the unit banking model in Holmstrom and Tirole(1997), we conclude that the theoretical affect of integration on business cycle size is ambiguous, as some shocks are dampened by integration, but others are amplified. Empirically, we find that integration diminishes employment growth fluctuations within states, and decreases the deviations in employment growth across states. Business cycles within states become smaller with integration, in other words, but more alike. Our results for the United States bear on the financial convergence underway in Europe, where banks remain highly fragmented across nations.

Financial Convergence in the European Monetary Union?

This paper reports tests of hypotheses that a variety of interest rates and other measures from financial markets in countries belonging to the European Monetary Union (EMU) were converging prior to the introduction of the euro in January 1999. We expected to find convergence because of i) removal of national barriers to flows of funds, ii) explicit and market-driven harmonization of regulation and supervisory standards, iii) coordinated macroeconomic policies, iv) privatization of state enterprises, and v) fiscal redistribution of resources. The first series of tests (sigma-tests) are that standard deviations and/or coefficients of variation of cross-sections of national measures are diminishing over time, relative to a group of non-EMU countries. Evidence of convergence was found for inflation rates, short- and long-term nominal interest rates, and ex post real short-term rates, but not for real per capita GDP. The second series concerned levels and trends in interbank claims and noninterest income at banks. These measures are believed to be larger and growing more rapidly when banks are attempting to escape binding national regulations. Interbank claims were larger at EMU banks than at banks in other countries, but had no interpretable trends. The ratios of noninterest income to total bank income and assets were found to have positive trends. The third series of tests used a statistical cost accounting model estimated for twelve countries to examine whether marginal costs of liabilities and revenues from assets were tending toward equality, as might be expected in an efficient unified economy. Within the EMU, significant differences across six major countries were observed for 1994, 1995, and 1996, but not in 1997 or 1998. Convergence seemed to be being achieved.

European Economic and Monetary Cooperation from an Historical Perspective

Analyse the issues related to the European Economic and Monetary Union and positive and negative impacts of the single European currency Euro launched on 1st January, 1999, on the economic and political environment in Europe. Launching of Euro strengthens Europe's bargaining position vis-a-vis the United States and other countries. Creation of new financial instruments and convergence of inflation and interest rates will have an impact on investment decisions and cross-border flows will increase the size of the markets.

La faisabilité socio-économique des ajustements budgétaires en Europe

Today the countries of the European Union are facing almost the same realities, obliged to reduce radically fiscal deficits with the object of promoting stronger future and non- inflationary growth. Of course, this duty is embodied in the financial convergence criterions contained in the Maastricht treaty. The fast and lasting favourable result of fiscal adjustment plans depends not only on a steady economic activity, but also on political and socio-institutional factors such as the parliamentary ability to cut down government outlays, the flexibilty of fiscal choices, the social opposition to the increasing tax burden, etc. In this paper we propose, first, to list all these political, social and institutional factors giving rise to favourable fiscal adjustment in the case of the European countries and to explain their importance and, second, to point out empirical correlations between such factors and European fiscal performances during the 80'.

FOUR GOALS FOR A STRONGER U.S. FINANCIAL SERVICES INDUSTRY (AND FIVE WAYS FOR CONGRESS TO HELP US GET THERE)

For at least the past 15 years, the preferred model for financial modernization among U.S. lawmakers and regulators has been based on the concept of the financial services holding company (FSHC) with functional regulation of its financial subsidiaries. Such an approach makes eminently good sense in a world where it is possible to make clear distinctions among different financial functions and between financial services and other information‐based businesses. Although this may have been the case 15 years ago, today the FSHC model will not deal with financial convergence and the broader convergence of information‐based businesses in a completely satisfactory way.To lay the groundwork for a financial structure that can carry us into the next century, Congress needs to look beyond the approaches it has been willing to consider to date. Instead of simply eliminating remaining entry barriers, it needs to permit true financial integration with a much simpler and more streamlined system of regulation than we have today. After holding up four goals for a financial services marketplace for the next century, this article offers five “sensible and politically realistic” suggestions for the 105th Congress that would help move the U.S. financial sector toward those goals.

Stabilization and adjustment in a small open economy: Ireland, 1979-1995

At the end of the 1970s, the Irish economy was faced with an unsustainable current account deficit, rising unemployment, high inflation, and a rapidly increasing public debt. By the mid-1990s Ireland's growth rate was the highest in the OECD, unemployment was declining rapidly, the current account was in surplus, and the country seemed likely to meet the Maastricht financial and fiscal convergence criteria. Domestic absorption has been sharply reduced despite a mild appreciation of the real exchange rate. External competitiveness, measured in terms of relative unit wage costs in a common currency, improved dramatically owing to the sharp increase in the share of foreign direct investment (FDI) in total capital formation. While the fiscal correction of the late 1980s helped restore private-sector confidence and was indispensable for progress on financial convergence, the boost to labour productivity given by the increased inflow of FDI is credited with the key role in the economy's transformation. Copyright 1996 by Oxford University Press.