Finanzmärkte im Umbruch
Contents
Introduction 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 |
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Andreas Hackethal/Reinhard H. Schmidt, Frankfurt Finanzsystem und Komplementarität |
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Eirik Svindland, Berlin |
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 |
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Wolfgang Gerke/Stefan Arneth/Robert Bosch, Erlangen-Nürnberg The
Market Maker Privilege in an Experimental Computerised Stock Market |
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Henner Schierenbeck/Stefan Paul, Basel Die Re-Allokation von Risikokapital als strategische Herausforderung |
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E. Philip Davis, London Pension Funds, Financial Intermediation and the New Financial Landscape |
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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 |
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Wolfgang Filc, Trier Stabilität von Finanzmärkten und internationales Währungssystem |
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Lukas Menkhoff, Aachen Is the Size of the Financial Sector Excessive? A Long-Term Perspective |
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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 |
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Harald Nitsch. Freiburg The Rise in Virtual Payments: A Challenge tor Monetary Control |
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Lorenzo Bini Smaghi/Daniel Gros, Rome and Brussels Financial Stability | |
Introduction
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.
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