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Finanzmärkte im Umbruch


Hans-Hermann Francke, Freiburg/Eberhart Ketzel, Bonn/Hans-Helmut Kotz, Hannover

A. Neue Rahmenbedingungen für die Finanzmärkte

  Hans-Helmut Kotz, Hannover/Hans-Hermann Francke, Freiburg
Innovationen in der Finanzintermediation: Mikro- und Makroaspekte
  Andreas Hackethal/Reinhard H. Schmidt, Frankfurt
Finanzsystem und Komplementarität

Eirik Svindland, Berlin
Elektronische Märkte für Finanzdienstleistungen

B. Die Mikro-Folgen für Intermediäre und Unternehmen

  Hartmut Schmidt/André Küster Simic, Hamburg
Zur Theorie der Geld-Brief-Spanne auf Anlegerauktionsmärkten: Der Ein
fluß der Orderbuchtransparenz auf die Abschlußunsicherheit
  Wolfgang Gerke/Stefan Arneth/Robert Bosch, Erlangen-Nürnberg The Market Maker
Privilege in an Experimental Computerised Stock Market
  Henner Schierenbeck/Stefan Paul, Basel
Die Re-Allokation von Risikokapital als strategische Herausforderung
  E. Philip Davis, London
Pension Funds, Financial Intermediation and the New Financial Landscape
  Thomas Hartmann-Wendels, Köln
Konsequenzen für die Unternehmensfinanzierung

C. Die Makro-Folgen: Finanzarchitektur und Währungssystem

  George M. von Furstenberg, New York
Globalization of Capital, Currency Consolidation, and Exchange Rate Systems
  Wolfgang Filc, Trier
Stabilität von Finanzmärkten und internationales Währungssystem
  Lukas Menkhoff, Aachen
Is the Size of the Financial Sector Excessive? A Long-Term Perspective
  Agnes Be'nassy-Quere', Paris
The Advent of the Euro: Does it Spell a Difference for the International Monetary System?


D. Politikimplikationen

  Otmar Issing. Frankfurt
The ÄIonet~- Policy 0£ he Furopean Cent:a Bank: Strategy and Implementation
  Harald Nitsch. Freiburg
The Rise in Virtual Payments: A Challenge tor Monetary Control
  Lorenzo Bini Smaghi/Daniel Gros, Rome and Brussels Financial Stability


By Hans-Hermann Francke, Eberhart Ketzel and Hans-Helmut Kotz

Deregulation and, more importantly, the advancement of (communication) technology, as well as the application of theoretical inventions must be referred to as the most important changes in the credit industry's environmental conditions in the past two decades. The common denominator of these developments is the fact that substitution gaps between markets have been rapidly decreasing and the variety of alternatives for final market users and/or intermediaries has been widening. The competition between multiple (functionally equivalent) forms of providing financial products is also intensifying
The credit industry may, as a matter of principle, be referred to as a group of information processing institutions (although this represents, to a certain extent, an impermissible simplification). However, innovations in the processing, communication and interpretation of data/information create a need for adjustment on the part of financial institutions. Such innovations affect the intermediaries' production function by substantially reducing transaction costs. This leads to shrinkage in the substitution gap between the intermediaries and their functional substitutes, the markets (in which securities are traded, whilst intermediaries issue, as is commonly known, secondary claims, i. e. claims derived from the underlying original securities).
Markets and intermediaries use basically identical functions. They negotiate between savers and investors in real capital. If the capital markets were perfect and complete, individual forms of financing and financial institutions would be irrelevant (Modigliani and Miller, 1958). There would be no preference for any one of the various forms of corporate financing (pecking order metaphor of Myers and Majluf, 1984). Real markets, according to the Gurley-Shaw or Brainard-Tobin view, are characterized by transaction costs, indivisibilities, frictions, i. e. non-convex transaction technologies. External banking appraisals are made on the basis of the cost effectiveness of the services provided: bundling and diversification of risks providing transaction mechanisms and the conversion of savings into real investments (Tobin 1984). This is precisely where the technological progress as well as the theoretical innovation gains their importance. They expose traditional institutions to the competition of new providers.
According to a second (modern) approach - Stiglitz and Weiss 1981; Diamond 1984; Fame 1985; etc. - financial relationships are characterized by unevenly distributed information and post-contractual opportunism (moral hazard). Intermediaries are then able to acquire derived risks at a favorable rate. They profit from economies of scale in creating financial relationships (screening), as well as in monitoring and enforcing financial claims (Hellwig 1991). Basically, banks are building substantial networks of customer relationships. Subsequently, these networks lead to savings in all cost areas as arise in contexts in which the debtors have a better understanding of expected value (and the dispersion) of the cash flow from a project to be financed.
For this reason, it is almost impossible for new companies to raise funds directly on the market. It is to be assumed on the one hand that the quality of credit rating is positively influenced as experience grows over time. On the other hand, the more cases that are handled the more efficient and cost effective are the appraisals. This is an important reason explaining why the relationships between banks and their customers are characterized by mutual commitment (Okun's "visible handshake"), which is found in retail rather than in auction markets (Okun 1981; Stiglitz, Weiss 1986).
Comparatively, transaction-led asset markets tend to produce more volatile relationships. In anonymous markets, free riders create substantial problems for corporate control. This contributes to a stronger orientation towards the short term. However, bank-led systems may help reduce uncertainties in this area. The result may contribute to higher output and an increase in productivity.
The altered surrounding conditions, according to the efficiency principle, may lead to new attractive financial arrangements. The basically identical functions are offered by diverse institutions. The value-added chain becomes modular in character broken down by economies of scale. Therefore, the producers of financial products have to deal with the consequences. The monetary policy, that is the resonance for the financial market, is confronted with a different transmission mechanism. The regulation policy, that controls systematic risk, is faced with new tasks, and all this may also have real economic consequences.
It follows from the above considerations that the first chapter begins with the important determinants and the foreseeable competitive consequences of the division of labor between markets and intermediaries. The discussion is of the functional substitutes for banks and, finally, of the new transaction technologies and, thus, the new role of the stock exchange. In the second chapter the focus is to derive the micro-economic implications for market participants. This includes the task of banking management to find new organizational forms for securities, the strategy for pension funds, and the consequences of corporate financing and corporate governance as well as a case study on the importance of Europeanizing the credit industry. The third chapter presents the macro-economic consequences of globalization in capital markets on the financial landscape with focus on derivative instruments. In order to show the possible separation of the financial from the real world and, finally, presenting yet another case study of the consequences of the Euro for the financing systems worldwide. In conclusion, the fourth chapter deals with the policy implications of the changing monetary data framework of currency and the operational implementation of the European Central Bank System. These implications are with regard to monetary policy and an efficient regulation of financial markets.
The following works will shortly be summarized presenting their contribution to the mentioned general theme:
1. The necessity for the financial markets to adapt to the dramatically changing conditions is especially true for the stock market. The work "Zur Theorie der Geld-Brief-Spanne auf Anlegerauktionsmärkten: Der Einfluss der Orderbuchtransparenz auf die Absschlusssicherheit" from Hartmut Schmidt/Andreas Küster Simic attempts to anticipate the future market landscape of the stock market industry under two assumptions. First, international competition will continue to intensify due to the effects of technological and geopolitical advancements on market entry growth. Secondly, the investor auction markets will become more attractive due to technical improvements in communication and the consequently improved microstructure. The auction market's already powerful position will then continue to improve in the form of open auction markets.

The price spread is for this reason a key measurement that displays the competitive and organizational changes in the market structure. However, the standard theory of the price spread can no longer fulfill its role as a key function. It describes the existence and size of the price spread in accordance with the costs of market making. There is then no explanation for the investor market on the money and note exchange, where unlimited transactions occur, though no longer coming from the market maker but rather the investor.
Schmidt /Küster have a completely different approach that tests the empirical relevance of the Cohen /Maier /Schwartz /Whitcomb (CMSW) description of the investor market. The price spread, according to this approach, results from the different exchange rates and final risks with limited orders (favorable exchange with finality insecurity), instead of unlimited orders (security in immediate finality with exchange risk). The equilibrium spread lies where it is indifferent for the investor to limit his orders or not. This decision is under the assumption that the investor knows all his relevant orders. In other words, the order book is open and transparent. Empirical testing of this approach has been possible since trading systems such as IBIS and Xetra were developed. This then confirmed the CMSW-Model bidding behavior.
Empirical proof of desired functional, as well as, undesired dysfunctional consequences on the bidding behavior with an open order book and the resulting development potential of the investor market has until now been unavailable. The IBIS-Data analysis confirmed the hypothesis, that bidding behavior is really determined through order book transparency and that it has dysfunctional effects. Satisfactory avoidance of these dysfunctional effects has until now failed, and therefore desired functional effects could be impaired.
2. The important question of the future characteristic of the organization in the computerized stock market is if "The Market Maker Privilege in an Experimental Computerized Stock Market" has a positive function. Wolfgang Gerke, Stefan Arneth, and Robert Bosch devote an empirical study to this question. The study is motivated by the assumption that earlier privileges have no effect on the market efficiency due to the changing technology in the asset market, and should be removed. The authors expand on the work of Schmidt /Küster, who strive to consolidate the price-spread theory, because they view the traditional reasoning for the services of a computerized investor market as unfounded.
Two privileges are normally granted to the market makers: the price setting privilege, which grants limited ordering, and the transaction privilege, which grants transaction priority over other market participants. In return, the market makers maintain liquidity at all times through the positioning of buying and selling quotes. Expanding from earlier empirical studies, Gerke, Arneth, and Bosch perform experimental market studies, in order to prove the consequences of market maker privileges on the market efficiency and the utility for the traders.
The results show that non-privileged market participants gain no advantage from trading conditions without privileges. In similar conditions (same number of participants and commercial stocks in the test market), the authors conclude that there are no results, that indicate the favoring of some participants with marker maker privileges. On the other hand, the market makers have substantial advantages over other participants. Also when there are two or more competing participants, that have acknowledged privileges, neither an improvement in the trading conditions (through price fluctuations or liquidity) nor an increase in information efficiency can be observed when compared to a market without corresponding privileges
3. "Finanzsystem und Komplementarität" by Andreas Hackethal/ Reinhard H. Schmidt presents a methodology for the description and analysis of finance systems, that can contribute to the prognosis and the development of finance systems. In a time of serious changes in the surrounding conditions of the financial industry, there is a special need to explain the effects of modifying data and to correspondingly react in an economic-conforming and welfare-increasing manner.
The concept of complement is the center of the methodical approach from Hackethal/ Schmidt that in earlier times received much attention especially in the micro-economic works on organizational theory. Complements are considered a distinction of the relationship between the elements of a finance system. The elements of a system are to each other complementary, when a simultaneous alteration in the characteristic group of all the elements is always the sum of the appropriate partial alterations in the sense of system properties. Finance system's complementary elements often disclose many local equilibrium and optima. The display of the system elements are consistent with one another, i. e. they are a good match.
A financial system is generally understood as an interactive system of supply and demand in capital transfer and other finance-related services. The structural and behavioral conditions of the non-financial sectors, the transactions between the surplus, intermediaries and deficit units, and ventures in the business, law and cultural fields depict the financial system integrated in the national economy. This broad definition of financial systems enables the disclosure, comparison, and the valuation of the major features of financial systems through the empirical exposition of the USA, Japan, and Germany.
From the view of the business, there are features of business financing (mode of data processing and distribution), of corporate governance (outsider versus insider control from shareholders, bank creditors, and co-workers of the business), and of business strategy (alternative strategies) that influence the structures of national finance systems. Further disclosed is that these relevant features are differentially structured for the partial and complete systems in the USA and for the complete systems in Japan and Germany. The business financing corresponds with the internalization of information, the banking dominance with insider-control in corporate governance, and the gradual alteration of the business strategy in Germany and Japan. However, in the USA - and partially in Great Britain - the externalization of information and capital market dominance, as well as outsider-control and fundamental alterations of the business strategies are in a complementary relationship.
The acquired insights can be applied in three different applications: the description and analysis of financial systems, the explanation of properties and the prognosis of the system development, and the development of system complementary elements. The explanation application from Hackethal/Schmidt seems plausible with today's views. However, it fails to be a design of methodical restrictions for complex real financial systems. The concepts of complements, consistence and system adhesion are relevant for questions in expansion and research.
4. As a varied and weighted intermediary in the process of changing financial markets is the roll of pension funds that Philip Davis describes in "Pension funds, Financial Intermediation and the New Financial Landscape". Both the rapid growth of pension funds in multiple countries and their accomplishments toward the growth of financial markets have drawn attention to pensions fund's activities as intermediaries. The author assesses pension funds and their additions to the changing financial landscape from a pubic finance perspective. Due to the close attention of the "Theory of Financial Intermediation" on banks, Davis highlights the theory's concentration on the deposit and credit industries and the choice of functions of intermediaries and markets. However, the author is unable to completely establish the contribution of pension funds as financial market intermediaries.
Davis refers to Merton and Bodie with the "Function of Finance Systems" in order to analyze the roll of pension funds. This functional approach, which includes the traditional approach, is a set of instruments that help prove, in compliance with certain financial functions, that pension funds are more applicable than other intermediaries or even direct lending relationships. As highly efficient financial institutions, pension funds tend to eliminate other financial settlements. They expand certain capital market functions and act as competitors to banks.
Davis systematically examines the functional contributions of pension funds to the financial system. He refers especially to their developing roll in the areas of corporate governance, the application of new financial instruments, and the special association to the sponsoring corporation, the latter relating to corporate finance, insurance and personal management aspects. Further is shown that the growth of pension funds profits from fiscal and employment incentives, as well as the growing, due to the aging tendency of the civil population, demand. In other words, they are independent from supply-side advantages. A financial system supported by pension funds has strengths in relation to cross-sectional risk sharing, yet it is weaker in intertemporal risk sharing.
Finally, pension funds create a special challenge for banks, in that they intermit financial relationships that were once serviced from banks. However, they are not perfect alternatives to banks, because they cannot create liquidity and are not set up to provide direct credit, which is needed for private information. The banks answer this challenge with credit management parallel to other zero interest carrying businesses, in order to profit from the growth of pension funds.
5. The banking sector is affected from the radical changes on the financial market to a large degree. The recognizable reactions are for example, intensified solicitation of business contributions to operating income, which have no effect on the balance sheet, and organizational and business reconstruction measures that led to industrial mergers, i.e. megafusion. Concepts and instruments of business management over the last decade have become prerequisites for future-oriented, strategic modifications.
With this in mind, Henner Schierenheck and Stefan Paul identify in their work "The Challenge of Reallocation of Rick Capital" the main objective as the usage of risk capital in various business fields in order to maximize the corporate value obtained from risks.
In contrast to the strategically oriented goals of the 1970's, it is no longer possible to have the implicit equalization of business and market share growth with rising results under intensive competition. This is easy to see with a synopsis of the development and application of controlling instruments in the last three decades. Rate of return as a priority preceded both profit-oriented growth and risk management during the early 1980's. Market investment methods made it possible to carry out a marginal, decisional legitimization of income on the level of single businesses. In the 1990's, corporate value became more important in goal orientation of business leaders. Cost of equity builds the Benähmark, which is determined by the value increase potential of a business strategy (relating to shareholder value).

The authors in "Zur Konkretisierung eines risikoadjustiertren Gesamtbanksteuerung" present the basic features of a concept based on the system's hierarchical, risk adjusted ratios. This can help a bank calculate the risk performance of different operations and/or businesses, and put the results of the bank in an aggregate order. They further present how the shareholder value is effected by the bank's risk capital allocation.
Schierenbeck/Paul establish comprehensively that the different stages of risk capital allocation help the lasting improvements of a bank's risk performance, so that the actual risk/profit ratio in the bank's portfolio efficiently uses the available risk capital. The allocation of risk capital is therefore a central strategic challenge of value management for credit institutes.
6. "Konsequenzen für die Unternehmensfinanzierung" from Hartmann-Wendels analyzes the causes, structural tendencies and fundamental principles of the new orientation of business finance. The author, with the assumption that rapidly changing, financial institutions worldwide have led to market trends in Germany, refers to multiple legal prerequisites that support these trends. For example, the increase in business financing through the capital market instead of traditional means through financial intermediaries.
In the last decade a few trends can be perceived. On the one hand, the rapid outgrowth in the volume of stock emissions, the evolvement of the dynamic market segment the "New Market", and the increasing importance of traded corporate bonds/loans should be taken notice. On the other hand, the decline of the bank's corporate and credit business is a rather dubious trend. Structural effects are also mentioned. For example, the separation of creditors with good credit standing as asset backed transactions in certain companies is motivated by to little inspection regulations for a bank's capital. The movement of credit risks to venture capital businesses is similar.
These structural modifications in business financing serve to develop instruments, which help create representative costs for the changing requirements for the distribution of risks and information between capital investors and capital debtors. The author refers to the better possibilities on the markets to allocate risks due to the marketability of finance titles and the scientific progress in reducing the Principal-Agent-Problem through contractual, incentive-based profits, which have until now been of little practical importance.
Much more important are the possibilities to keep costs down in specific control activities and information improvements for new financial forms. The market mechanisms, i.e. self-interest, that capital debtors have to control the growth of unevenly distributed information or to regulate "hostile takeovers", which the management uses to achieve conformed shareholder behavior, is covered by specialized, independent, third parties (Rating Agents). The advance of asset backed transactions and credit derivatives will raise market prices for the takeover of credit risks, which create competitive cost advantages, for example in the traditional credit industry of banks.

Previous issues:

14 Europäische Währungsunion.
Von der Konzeption zur Gestaltung.
1998,   ISBN 3-428-09395-X,  EUR 68,-- / sFr 117,--
Francke, Hans-Hermann
Eberhart Ketzel
Hans-Helmut Kotz (Hrsg.)  
13 Konzepte und Erfahrungen der Geldpolitik.
1995,   ISBN 3-428-08096-3,  EUR 68,-- / sFr 117,--
Francke, Hans-Hermann
Eberhart Ketzel (Hrsg.)  
12 Kredit und Kapital.
Gesamtregister zum 1. bis 25. Jahrgang (1968 - 1992).
1993,   ISBN 3-428-07886-1,  EUR 36,-- / sFr 64,--
Francke, Hans-Hermann
Hans-Jacob Krümmel (Hrsg.)  
11 Allfinanz - Strukturwandel an den Märkten für Finanzdienstleistungen.
1991,   ISBN 3-428-07286-3,  EUR 68,-- / sFr 117,--
Krümmel, Hans-Jacob
Hannes Rehm
Diethard B. Simmert (Hrsg.)  
10 Wandlungen des geldpolitischen Instrumentariums der Deutschen Bundesbank.
1988,   ISBN 3-428-06414-3,  EUR 52,-- / sFr 90,--
Ehrlicher, Werner
Diethard B. Simmert (Hrsg.)  
9 Der volkswirtschaftliche Sparprozeß.
1985,   ISBN 3-428-05960-3,  EUR 76,-- / sFr 131,--
Ehrlicher, Werner
Diethard B. Simmert (Hrsg.)  
8 Internationales Bankgeschäft.
1985,   ISBN 3-428-05790-2,  EUR 40,-- / sFr 71,--
Krümmel, Hans-Jacob (Hrsg.)  
7 Geld- und Währungspolitik in der Bundesrepublik Deutschland.
1982,   ISBN 3-428-05335-4,  EUR 52,-- / sFr 90,--
Ehrlicher, Werner
Diethart Simmert (Hrsg.)  
6 The Economics of Flexible Exchange Rates.
Proceedings of a Conference at the Institute for Advanced Studies, Vienna, March 29 - 31, 1978.
1980,   ISBN 3-428-04644-7,  EUR 46,-- / sFr 81,--
Frisch, Helmut
Gerhard Schwödiauer (Eds.)  
5 Inflation, Unemployment and Monetary Control.
Collected papers from the 1973 - 1976 Konstanz Seminars.
1979,   ISBN 3-428-04314-6,  EUR 38,-- / sFr 67,--
Brunner, Karl
Manfred J. M. Neumann (Eds.)  
4 Die Monetarismus-Kontroverse.
Eine Zwischenbilanz.
1978,   ISBN 3-428-04126-7,  EUR 44,-- / sFr 78,--
Ehrlicher, Werner
Wolf-Dieter Becker (Hrsg.)  
3 Bank Credit, Money and Inflation in Open Economies.
Proceedings of the Conference on Bank Credit, Money and Inflation in Open Economies held in Leuven on September 15 - 16, 1974.
1976,   ISBN 3-428-03765-0,  EUR 46,-- / sFr 81,--
Fratianni, Michele
Karel Tavernier (Eds.)  
2 Probleme der Indexbindung.
1974,   ISBN 3-428-03214-4,  Vergriffen
Ehrlicher, Werner (Hrsg.)  
1 Proceedings of the First Konstanzer Seminar on Monetary Theory and Monetary Policy.
1972,   ISBN 3-428-02825-2,  Vergriffen
Brunner, Karl (Ed.)