In the euro area, the impact of these developments has been amplified further by Stage Three of Economic and Monetary Union, in particular as a result of the introduction of the euro, the single monetary policy and the integration of the euro area financial markets. I shall now briefly discuss how these underlying factors are expected to affect the banking sector. First of all, technology has already been shaping the structure of the financial system. It has reshaped the relative costs of different banking and financial services and facilitated the provision of new types 1  2  ECB Monthly Bulletin, “The euro area one year after the introduction of the euro: key characteristics and changes in the financial structure”, January 2000; ECB Occasional Paper Series No 1, “The impact of the euro on money and bond markets, July 2000”. European Central Bank, “Possible effects of EMU on the EU banking systems in the medium to long term”, February 1999; ECB Monthly Bulletin, “Banking in the euro area: structural features and trends”, April 1999. 1  BIS Review 83/2000  of services. The costs of collecting, processing and using information have decreased dramatically. This has, for example, led to greater efficiency in the provision of financial information and better techniques for assessing and pricing risks, in turn reducing the cost of external finance. On balance, it has tended to favour markets more than banks as it has allowed the former to rely more heavily on public rather than private information.
It has also affected banks’ income and cost structures, as they have been able to make profits as a result of advances in technology. That is, banks have been able to specialise in the provision of information and the monitoring of credit exposures, for example in the context of loan securitisation, thus raising the share of non-interest income. On the other hand, banks’ profits have come under pressure in some areas, such as lending to large firms. This resulted from the fact that technological progress has opened these areas to competition from inside the domestic banking sector, from international banks and also from other financial intermediaries such as institutional investors. In point of fact, the development of institutional investors has been facilitated by technological changes reducing the costs of collecting savings, gathering and disseminating public information, and assessing risks. Technological development has also facilitated the rapid development of new financial products. While a large proportion of innovations would not have been possible without the breakthroughs achieved in financial theory, it has been predominantly technological progress that has made the widespread use of these innovations possible. The second factor underlying the structural changes in the financial system and banking sector is the process of financial liberalisation which has been ongoing for some time already. It has allowed an increase in the overall level of competition in financial systems. In the EU, financial liberalisation gained momentum with the Single Market programme.