This process should lead to a more efficient allocation of finance within the global economy, but it will also call for the ability to adjust to structural changes in order for stable financial systems to be maintained. Today, I should like to outline the likely future development of the financial sector and of the financial markets in the euro area as envisaged by the European Central Bank (ECB). To this end, I shall first briefly discuss the impact of the introduction of the euro on domestic money markets. I shall then turn my attention to likely developments in the financial markets and in the banking system, before concluding with some remarks on how these likely developments might affect the stability and efficiency of the financial system in the euro area. Impact of the introduction of the euro on money markets Until the end of 1998 the various money markets of the euro area still displayed a certain number of distinctive features. However, following the changeover to the euro they were integrated swiftly and smoothly at the beginning of January 1999. A highly competitive single money market has already emerged in the euro area, as banks were well prepared for the changeover to the euro and the TARGET system has provided an efficient means of making cross-border payments. In particular, transaction volumes in money markets rapidly reached high levels while typical bid/ask spreads decreased almost immediately to very low levels. This indicates the depth and high degree of liquidity that the euro money market has already achieved.
A feature of the current stage of the development of the euro money market, which is particularly worthy of note, is that differences in overnight interest rate spreads mainly reflect differences in the credit standing of banks rather than that of the country in which the transaction takes place. 1  BIS Review 63/1999  These structural developments are, of course, positive. For the Eurosystem (i.e. the ECB and the national central banks of the 11 countries participating in the euro area) the existence of a deep and liquid money market enhances the efficiency of monetary policy operations. In this respect, I should like to draw your attention to the “market friendliness” of the framework applied by the Eurosystem to the conduct of monetary policy operations. By this I mean that the framework is based on tenders in which markets decide who receives the liquidity. The standing facilities are open and recourse to the marginal lending facility is not subject to scrutiny. In addition, the list of eligible collateral is extensive. Prospects for the development of financial markets in the euro area Looking now at the financial markets from a broader perspective, it is important to remember that the financial markets of the euro area began the process of integration before the start of Stage Three of Economic and Monetary Union. An indication of the pace of integration before January 1999 is provided in particular by the evolution of spreads between yields on the bonds issued by the various central governments of the euro area.