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  • European Financial Markets and Institutions

    Written for undergraduate and graduate students of finance, economics, and busi-ness, this textbook provides a fresh analysis of the European financial system.Combining theory, empirical data, and policy, it examines and explains financialmarkets, financial infrastructures, financial institutions, and challenges in the domainof financial supervision and competition policy.

    Key features:

    Designed specifically for courses on European banking and finance Clear signposting and presentation of text with learning objectives, boxes for key

    concepts and theories, chapter overviews, and suggestions for further reading Broad coverage of the European financial system markets, infrastructure, and

    institutions Explains the ongoing process of financial integration, in particular the impact of

    the euro Examines financial systems of new Member States Uses up-to-date European data throughout

    A companion website can be found at www.cambridge.org/de_Haan with exercisesand freely downloadable solutions.

    Jakob De Haan is Professor of Political Economy at the University of Groningen.He is also a fellow of CESiFo (Munich, Germany) and Editor of the European Journalof Political Economy.

    SanderOosterloo is Senior Policy Advisor at the Netherlands Ministry of Finance.He received his PhD from the University of Groningen and is affiliated with itsFaculty of Economics and Business.

    Dirk Schoenmaker is Professor of Finance, Banking, and Insurance at the VUUniversity Amsterdam, and Director of European Affairs, Competition, and ConsumerPolicy at the Netherlands Ministry of Economic Affairs. Before that, he was DeputyDirector Financial Markets Policy at the Netherlands Ministry of Finance.

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • European FinancialMarkets andInstitutions

    Jakob de Haan

    Sander Oosterloo

    Dirk Schoenmaker

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • cambridge univers ity press

    Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, So Paulo, Delhi

    Cambridge University PressThe Edinburgh Building, Cambridge CB2 8RU, UK

    Published in the United States of America by Cambridge University Press, New York

    www.cambridge.orgInformation on this title: www.cambridge.org/9780521709521

    Jakob de Haan, Sander Oosterloo, and Dirk Schoenmaker 2009

    This publication is in copyright. Subject to statutory exceptionand to the provisions of relevant collective licensing agreements,no reproduction of any part may take place withoutthe written permission of Cambridge University Press.

    First published 2009

    Printed in the United Kingdom at the University Press, Cambridge

    A catalogue record for this publication is available from the British Library

    ISBN 978-0-521-88299-6 hardbackISBN 978-0-521-70952-1 paperback

    Cambridge University Press has no responsibility for the persistence oraccuracy of URLs for external or third-party internet websites referred toin this publication, and does not guarantee that any content on suchwebsites is, or will remain, accurate or appropriate.

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • Contents

    List of Boxes page viiiList of Figures xList of Tables xivList of Countries xviList of Abbreviations xviiiPreface xxiii

    Part I Setting the Stage 1

    1 Functions of the Financial System 31.1 Functions of a financial system 41.2 Bank-based versus market-based financial systems 141.3 Conclusions 28

    2 European Financial Integration: Origins and History 332.1 European integration: introduction 342.2 European institutions and instruments 362.3 Monetary integration 422.4 Financial integration 482.5 Conclusions 55Appendix: Examples of FSAP in action 56

    Part II Financial Markets 61

    3 European Financial Markets 633.1 Financial markets: functions and structure 653.2 Money market 71

    v

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • 3.3 Bond markets 773.4 Equity markets 913.5 Derivatives 973.6 Conclusions 103

    4 The Economics of Financial Integration 1074.1 Financial integration: definition and drivers 1084.2 Measuring financial integration 1124.3 Integration of European financial markets 1174.4 The consequences of financial integration 1254.5 Conclusions 131

    5 Financial Infrastructures 1355.1 Payment systems and post-trading services 1365.2 Economic features of payment and securities market infrastructures 1475.3 Integration of financial market infrastructures 1515.4 Conclusions 160

    Part III Financial Institutions 165

    6 The Role of Institutional Investors 1676.1 Different types of institutional investors 1686.2 The growth of institutional investors 1806.3 Portfolio theory and international diversification 1876.4 The home bias in European investment 1916.5 Conclusions 200

    7 European Banks 2047.1 Theory of banking 2057.2 The use of risk-management models 2127.3 The European banking system 2207.4 Conclusions 232

    8 The Financial System of the New Member States 2368.1 The financial system 2378.2 The banking sector 2408.3 What attracts foreign banks? 2448.4 Financial integration and convergence 2508.5 Conclusions 255

    vi Contents

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • 9 European Insurers and Financial Conglomerates 2599.1 Theory of insurance 2609.2 The use of risk-management models 2739.3 The European insurance system 2799.4 Financial conglomerates 2889.5 Conclusions 293

    Part IV Policies for the Financial Sector 297

    10 Financial Regulation and Supervision 29910.1 Rationale for government intervention 30010.2 Prudential supervision 30410.3 Conduct-of-business supervision 31210.4 Supervisory structures 31710.5 Challenges for financial supervision 32110.6 Conclusions 329

    11 Financial Stability 33411.1 Financial stability and systemic risk 33511.2 How can financial stability be maintained? 34611.3 The current organisational structure 35311.4 Challenges for maintaining financial stability 35611.5 Conclusions 365

    12 European Competition Policy 37112.1 What is competition policy? 37212.2 The economic rationale for competition policy 37312.3 Pillars of EU competition policy 37812.4 Assessment of dominant positions 38312.5 Institutional structure 39112.6 Conclusions 395

    Index 399

    vii Contents

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • Boxes

    Box 1.1 Financial development and economic growth page 7Box 1.2 The political economy of financial reform 13Box 1.3 Corporate governance in EU Member States 17Box 1.4 Does the financial system matter after all? 20Box 1.5 Legal origin or political institutions? 27Box 2.1 The role of treaties 35Box 2.2 The Lisbon Treaty 38Box 2.3 Dynamics of integration 41Box 2.4 Decision making within the ECB Governing Council 46Box 2.5 Basel Committee on Banking Supervision 49Box 3.1 Credit-rating agencies 67Box 3.2 Recent developments in government-debt management 80Box 3.3 How much transparency is optimal? 90Box 4.1 Euro area vs. non-euro area member countries 117Box 4.2 Financial integration of the new EU Member States 126Box 4.3 Financial integration and economic growth 129Box 5.1 Core payment instruments 137Box 5.2 The Herstatt crisis 153Box 5.3 Concentration in credit and debit card markets 155Box 6.1 ABP 171Box 6.2 The LTCM crisis 175Box 6.3 Regulating hedge funds and private equity 178Box 6.4 Institutional investment in the new EU Member States 182Box 6.5 The international CAPM model 188Box 7.1 Securitisation techniques 207Box 7.2 Liquidity management during crises 210Box 7.3 When is it optimal to delegate monitoring to banks? 211Box 7.4 Value-at-Risk 216Box 7.5 Retail banking market integration 222Box 7.6 The economics and performance of M&As 228

    viii

    www.cambridge.org Cambridge University Press

    Cambridge University Press978-0-521-88299-6 - European Financial Markets and InstitutionsJakob de Haan, Sander Oosterloo and Dirk SchoenmakerFrontmatterMore information

    http://www.cambridge.org/9780521882996http://www.cambridge.orghttp://www.cambridge.org

  • Box 8.1 The impact of foreign ownership on bank performance 241Box 8.2 Foreign banks and credit stability 252Box