On the one hand, they have provided new types of savings products, often supported by tax concessions on pension or life insurance savings, as well as by technological changes which reduce the costs of collecting savings, gathering information and assessing risk. On the other hand, they have created more demand for different types of securities. While they have enhanced structural changes in the financial system, they have also started to compete with traditional banking services in respect of both assets and liabilities. However, in the euro area these institutional investors often form part of the banking groups. Banks in the euro area still have the most extensive distribution network of all types of financial institutions, even if the importance of this is declining. Their existing customer relations give them a competitive edge in the provision of many new financial services. Therefore, while interest income is being reduced by the process of disintermediation, the growth of new products may increase non-interest income in the same banking groups. The euro and the banking sector Despite these fundamental factors which are changing the nature of the financial services business, it is important to note that the financial systems, in general, and the banking sectors, in particular, in the euro area countries have, in the past, been relatively nationally based and fragmented with little cross-border retail activity. However, the euro should function as a catalyst with regard to the effects of the fundamental factors I have mentioned earlier, and thus increase the pressure for structural change.

As a result, banks are increasingly exposed to risks from abroad, and risks to financial stability are far less frequently confined to national borders. The most substantial increase in cross-border activity and market integration has taken place in wholesale activities. For example, the currency-based segmentation of the markets for unsecured interbank deposits disappeared very quickly after the euro was introduced. This could be seen from the rapid convergence of national spreads. Furthermore, market integration has not only been reflected in price quotations, but also in trading volumes. The share of cross-border transactions currently accounts for more than 50% of overall activity in both the unsecured and the repo markets. Some large institutions are starting to act as “money centre” banks with an area-wide scope of activity. The smaller institutions still mainly operate with their domestic counterparts. They nonetheless benefit from the more equal market conditions. Accordingly, the share of cross-border transactions in the area of large-value payment transfers through the TARGET system has been increasing steadily. In addition to the single monetary policy, two main reasons explain the rapid integration of wholesale activities in the euro area, in general, and the market for unsecured interbank deposits, in particular. First, the smooth functioning of the settlement of cross-border payments, mainly performed via the TARGET system, allows banks to trade safely throughout the euro area. Second, the swift acceptance of euro area indices such as EONIA and EURIBOR forms a common basis for pricing.