A large currency area, furthermore, means deeper and more liquid financial markets, which allow participants to diversify their risks and, in the absence of currency risk, to focus more on credit risk. Another contribution which EU membership should make to financial stability in accession countries stems from the increased competition which will result from the entry of foreign service providers, particularly if this induces indigenous institutions to find innovative ways to hedge risks and diversify asset portfolios, and to adopt international best practices generally. While cross-country studies on this 4 aspect remain sparse, a recent World Bank study reveals instances where foreign bank entry did lead to improved operations and to greater access to foreign capital. Drawing on data for 80 countries, this study also shows that foreign bank entry does tend to reduce domestic bank profitability, non-interest income and, to some extent, overall expenses. Coupled with the finding that the presence of foreign banks contributes to a higher level of loan-loss provisioning, this leads the authors to conclude that, through its effects on competition, foreign bank entry improves the efficiency and functioning of indigenous banks. While there is nothing automatic about the realisation of such benefits, one might reasonably expect that in the long run the completion of the Single Market in financial services should contribute to the emergence of a healthier financial system in the accession countries.
From a broader policymaking perspective, moreover, there is also the question about the role that financial stability concerns should play in the formulation of macroeconomic policy more generally. I am sure that the second seminar session will provide further insights in this regard, when the interrelationship between fiscal policy, monetary policy and financial stability will be considered. Policy transparency, good governance and market discipline The relationship between macroeconomic policy and financial stability also serves to highlight the importance of policy transparency and good governance, both at the national and corporate level. In fact, it is generally agreed that the likelihood of disturbances to the financial system can be greatly diminished if the authorities manifest their policy intentions clearly, and explain the rationale behind policy measures once decisions have been taken. This helps to reduce the chances of investors and creditors making uninformed decisions, only to reverse them later. This aspect has become especially relevant in the context of capital account liberalisation, particularly in those countries that operate variants of fixed exchange rate regimes. It is even more so in countries which are simultaneously engaged in efforts to place public finances on a stable footing and to gain credibility for the central bank’s monetary policy. Here, a sudden shift in investor confidence could have serious repercussions, not only for financial stability but also for the conduct of monetary and fiscal policy.