This growth was to some extent expected, as the common currency creates a huge investor base for security lending. One particular factor that contributed to the strong growth was the considerable number of business takeovers and mergers in 1999, perhaps influenced by the euro. Securities are a common form of financing such operations. A growing number of small, higher risk companies could also make use of this market. In general, the euro is having a considerable influence on the development of securities markets in Europe. A number of factors are improving market liquidity and efficiency, for example the elimination of exchange rate risk, greater price transparency, harmonisation of market practices and changes in market infrastructure. BIS Review 78/2000  6  In most European countries, credit has traditionally been channelled through financial intermediaries such as banks. The structure is different in the US, where the securities markets are larger and the banking sector is smaller. Among the Nordic countries, Finland has the largest stock market capitalisation relative to GDP. This is mainly due to one company, Nokia. Sweden also has a comparatively large stock market. This can perhaps be seen in connection with the structure of the enterprise sector in Sweden, which has been dominated by some very large, export-oriented companies. This economic structure might also have contributed to the development of Sweden’s relatively large and internationally active banks. Denmark and Sweden have relatively large debt securities markets. This is mainly related to house financing.

Larger and more efficient securities markets - both in equities and debt instruments - provide more financing alternatives for companies and investment alternatives for savers. Companies financed in the securities markets are continuously monitored through a transparent process. Well-functioning securities markets may thus increase the profitability of capital and hence economic growth, by making sure that capital is allocated to the best new investment projects and by facilitating the restructuring of existing companies. In other words: competition for capital contributes to creative destruction. In my opinion, larger and more efficient securities markets will also reduce the risk of financial instability. Let me give you a recent example. The Long Term Capital Management crisis in 1998 showed that banks and securities markets can complement one another in crisis situations. During the crisis, the market for securities with credit risk dried up for a short period. Banks then increased their lending, and thereby averted a more extensive shortage of credit. More frequently, financing through securities markets has been used as a substitute for bank loans in the event of banking problems. The goal of financial stability thus implies both well-functioning banks and securities markets. The optimal balance between the two is difficult to define, but in most countries - including the Nordic countries the financial system would be more robust with larger, more developed securities markets than is the case today. This could also enhance the growth prospects of the respective economies. 5.