##ncies between 1990 and 1998. 4 the amounts outstanding by non - euro area residents increased even more sharply from 56 billion euros to 120 billion euros in 1999. 5 consequently, the euro topped the us dollar as an issue currency for international bonds in the private sector for the first time in the same year. 6 low interest rates and a weakening currency might have stimulated borrowing in euro. a closer look at debt financing shows that corporate bonds have gained in popularity in the euro area during the past few years. growth rates for the outstanding amount of domestic debt securities by corporate issuers of 23 % in 1998 and 14 % in 1999 were higher than the increase in bank loans to nonfinancial corporations, although the latter had started from significantly higher levels. 7 the increase in bond issues was accompanied by a change in the structure of issuers. whereas bonds had formerly been a financing instrument almost only for large, top - rated “ blue chip ” companies, an increasing share of bonds has been issued by lower - rated companies to capitalise on the growing readiness to accept credit risk among investors in the euro area. the average bond rating consequently declined from aa + to aa - and approached that in the united states in 1999. 8 to provide a more complete picture, bonds issued by financial institutions declined slightly in 1999 following an expansion in 1998. 9 however, financial intermediaries are still the largest borrowers in the private bond market. their debt in the form of bonds amounts up to nine times the domestically issued corporate debt. source : euro. nm. the new market segments in europe in belgium, france, germany, italy and the netherlands are tailored to the requirements of a group of issuers which carries a high risk, is short on collateral and is in need of large financial resources. all three characteristics seemed to match investors ’ demand in 1999 quite well hence the demanddriven record issue values. source : fibv. see bis ( 2000a ), p 133, for market capitalisation data and deutsche bundesbank ( 1998 ), p. 58, for european differences. see bis ( 2000a ), p 128. source : ecb. see bis ( 2000b ), p 17. sources : bis, ecb, own calculations. note that due to reclassifications the growth rates for the ecb bank loans statistic suffer from comparability for different time periods. see bis ( 2000a ), p 130. source : bis, own calculations. looking at differences in the

less recent studies by imf or oecd staff also find evidence of a significant undervaluation. 38 looking for possible causes for the recent weakness of the euro, it will soon become apparent that the euro ’ s exchange rate reacted asymmetrically to macroeconomic events on each side of the atlantic. thus, the successful passage of the tax reform bill in germany was barely acknowledged in exchange rate movements while the surprisingly large growth in us gdp in the second quarter was reflected rather quickly in a corresponding fall in the euro exchange rate. apparently, the uncertainties associated with the euro area received more attention than those affecting the us economy. exchange rates do not, however, consistently move in only one direction. cyclical developments may revive the diversification argument as a strategic consideration. moreover, empirical studies support the view that the composition of foreign exchange reserves to some extent reflects the structure of external trade and financial ties. if the euro were to become more popular among private market participants, it might also significantly improve its fortunes as a reserve currency. see dooley, m p, j s lizondo and d j mathieson ( 1989 ). these ten countries account for more than one - half of the world ’ s foreign exchange reserves. they are all either asian or latin american countries whose economies are oriented more towards the dollar area than towards the euro area. ecb ( 1999b ), table c, pp 52 - 53. see clostermann, j and b schnatz ( 2000 ). see macdonald, r ( 2000 ). see alberola, e et al. ( 1999 ), and coppel, j, m durand and i visco ( 2000 ). iii. banking competition before introducing the euro, investors in europe dealt mainly with banks in their country of origin. the market share of branches and subsidiaries of foreign banks as a percentage of total assets of the banking system was below 11 % in most emu countries. 39 this suggests that competition from outside was somewhat constrained. the currency union was consequently expected to foster competition in the banking sector. 40 in particular, a reduction in excess capacities and an increase in efficiency was expected. 41 a single monetary policy and a single currency could partly take away some of the informational and funding advantage of domestic banks and therefore diminish the need to maintain banking relationships in every country. 42 this might lead to a reduction of branches and increased cross - border competition within the euro area. whereas there is some evidence that