Institutional investors are expected to continue to grow, mainly owing to demographic and social changes, but they may also benefit from the depth and liquidity of the single financial market with a single currency and broader investment opportunities. Third , Monetary Union is likely to affect the features and magnitude of banking risks. The positive macroeconomic effects of Monetary Union are, on balance, expected to mitigate credit risk in the euro area. Market risk is set to decrease, especially with regard to foreign exchange and interest rate risk. It is likely that banks will seek to replace part of their lost foreign exchange business with new or increased involvement in non-euro area markets, which could entail the possibility of increased country risk.
Liquidity risk is likely to decrease owing to deeper and more liquid markets within the euro area.
Legal and operational risks may be relevant in the short term owing, respectively, to the overall new legal environment in the euro area and the necessary system adaptations for the transition to the euro, as well as the imminent year 2000 problem, but should become less relevant in the long term. Fourth , Monetary Union requires banks to reconsider their strategies in order to be able to cope with the challenges posed by the single currency. Indeed, EU banks are currently responding with improvements in services and procedures, changes in the range of products supplied to customers, as well as mergers, strategic alliances and co-operation agreements. Whereas most mergers and acquisitions in the European Union have so far taken place at the domestic level, the possibility cannot be ruled out that some of them were intended to provide a basis for further cross-border expansion. The comparatively low degree of concentration within the EU banking sector as a whole could provide room for further consolidation.