European Banking with a Single Currency

Abstract

At the Madrid summit in December 1995, the EU heads of state or government endorsed a three-phase plan for the introduction of the single currency. The purpose of the paper is to identify how, besides an obvious fall in revenue from intra-European currencies trading, a single currency will alter fundamentally and permanently European banking markets. A common currency will likely change the sources of competitive advantage in various markets such as those of government bonds and their fast growing appendices the interest rate derivative markets, of corporate bonds and equities, of foreign exchange, and of fund management. The benefits derived from the creation of a leading international currency are discussed, and the impact of a single currency on credit risk is evaluated. This paper was presented at the Financial Institutions Center's October 1996 conference on "