gertrude tumpel - gugerell : the role of retail finance for financial markets efficiency and stability speech by ms gertrude tumpel - gugerell, member of the executive board of the european central bank, at the eleventh conference of the ecb - cfs research network, prague, 20 october 2008. * * * introduction it is for me a real pleasure to speak here in prague at the european central bank and centre of financial studies research network conference. i would like to thank the organizers of the conference for compiling a very interesting and stimulating program. my special thanks go to our host, the czech national bank, for the very good cooperation and for an outstanding local organization of this conference. being here in prague, i was reminded that joseph schumpeter was born not too far away from prague in a small town named trest. it was joseph schumpeter who once said that “ economic progress in capitalist society means turmoil ”. it would be, of course, unfair and undue reference to associate schumpeter ’ s notion of turmoil with the current period we are experiencing in financial markets. in my speech today, i would like to focus on the retail banking sectors ’ contribution to efficiency and stability in financial markets also in light of the ongoing financial market turbulences. i will also stress the importance of retail payment infrastructures, and particularly the issue of harmonisation and integration as it underlies the single european payment area ( sepa ) project as a fundamental basis for the efficiency and stability of the european retail finance market. 1. the role of retail banking for economic development and monetary policy ( i ) retail banking plays a crucial role in fostering economic activity retail banking is the backbone of banking activities. retail sector banks, in particular, have the expertise to provide credit to small and medium - sized enterprises ( or smes ) and to evaluate the associated risks. as smes are the main engines of job creation and economic growth, they are also important drivers of innovation in the economy. therefore, an efficient and stable retail banking business is needed for the financing of sme activities. as these firms do not have access to global capital markets, they are heavily dependent on banks for their funding. this is particularly true for european smes, as the european market for venture capital remains very small compared to the one in the us. the availability of bank credit is, thus, crucial for sustained investment of firms and, therefore, plays an important role for economic development and growth

euro area “ term premium ” monetary policy shock, a euro area macro shock and a “ foreign ” shock. the responses are normalised to a 10 basis point impact decline in the rate expectations component. the model is re - estimated on yearly intervals over the period 2005 - 19, with the years 2005 - 06 and 2018 - 19 grouped together as 2005 data is only available from july 2005 onwards and the latest observation available for 2019 is 1 august. while the evidence presented suggests that, for a given shock size, rate cuts have a larger exchange - rate effect than changes in term premia, the sheer scale of the app means that the sharp decline in term premia has been an important driver of the euro exchange rate. in fact, according to the model, the cumulated negative impact of the term premium shock on the euro since mid - 2014 is more than double the contribution of the rate expectation shock. this reflects the fact that term premia have declined much more than rate expectations since mid - 2014. a role for term premia in influencing the euro exchange rate is in line with dedola et al. ( 2019 ). these authors point to several transmission channels through which the app has significantly affected the euro / us dollar exchange rate. at a basic level, there has been a clear correlation between changes in the relative balance sheet sizes of the ecb and the federal reserve and in the euro / us dollar exchange rate ( chart 6 ). the authors use announcements of quantitative easing ( qe ) type measures to predict future changes in the relative sizes of central bank balance sheets. in turn, they estimate the effects of these exogenous balance sheet changes on exchange rates – and other relevant asset prices – over time. chart 6 relative balance sheet, the usd / eur exchange - rate and qe announcements ( percentages and usd / eur ) source : dedola, georgiadis, grab and mehl ( 2018 ). notes : the upper panel shows the evolution of the relative balance sheet of the ecb and the federal reserve ( ecb / federal reserve in percentages ). the bottom panel plots the usd / eur exchange rate. across both charts, the blue ( yellow ) vertical lines indicate the dates of qe announcements by the ecb ( federal reserve ). latest observation : april 2019. the authors find that qe measures have had large and persistent effects on the euro exchange rate. chart 7 ( left side ) shows the impulse response of the nominal us dollar