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Straight talking from bankers’ bank Back  
The annual report of the Bank for International Settlements released in early June contained fresh, plain, and even humorous statements about the international economy, rewarding traders, the euro and capital markets. The following are edited highlights.
Euro issuance grows as Pfandbrief becomes more popular

The euro has been particularly attractive to private sector borrowers both Private issuance within and outside the euro area. Between July 1998 and December 1999, euro 11 private sector borrowers issued 76% of their debt in euros, compared to an average of 50% in the predecessor currencies between January 1990 and June 1998.

Over the same period, private borrowers residing outside the euro area issued a fifth of their international debt in euros, nearly a twofold increase over the total share of the legacy currencies before July 1998.

While it could be argued that low interest rates and a weakening currency may have played some role in stimulating borrowers’ interest in the euro, strong euro area structural factors have clearly also contributed to the increase in issuance.

The composition of borrowers that have tapped the euro bond market partly reflects the traditional structure of European finance, but partly also its changing profile. The largest issuers, in terms of both the number of issues and the volume of funds raised, have been European banks.

German banks’ sales of securitised assets in the form of Pfandbriefe account for a large part of this segment. Indeed, the success of the Pfandbrief market has prompted a number of European countries to introduce legislation that replicates its institutional features in an effort to facilitate the development of bank asset securitisation. Such recent innovations in France, Spain and Luxembourg have yet to mature and achieve the liquidity and investor acceptance enjoyed by their German counterpart.

A smaller but growing share of bonds has been issued by non-financial corporations, which have capitalised on the increasing appetite for credit risk among European investors. Within this group, there is a high concentration of telecommunications companies.

Underwriting fees fall
Historically, the nationality of the underwriter of an international bond has been more closely associated with the currency in which the bond is issued than with the nationality of the borrower. This suggests that any established relationship between corporations and their investment bankers is not as important a factor in the selection of underwriters as the ability of the latter to correctly price and place the issue in a market they know well.

The advent of the euro has diminished any local advantage European bankers had derived by virtue of their familiarity with investors with a strong national currency bias.

While the effect of this change has failed to alter the strength of the stylised facts, fees for the euro-denominated segment of the market have rapidly converged towards the level of its US dollar counterpart over the last two years (see graph).

Together with the growing similarity in the average credit quality of the borrowers and the close relationship between issuance levels in the two segments, this convergence in fees is a clear indication of the progressive integration of the international bond market.

The blossoming of the euro-denominated corporate bond market will have a lasting impact on the European
financial structure, traditionally characterised by the predominance of bank-intermediated forms of finance.

A broader and more receptive investor base is likely to encourage more classes of private borrowers to substitute debt securities for bank loans. At the same time, banking institutions are themselves likely to use the market as a source of funding that will support their portfolios of less liquid assets.

By increasing the sensitivity of corporate and bank balance sheets to capital market conditions, this trend is also likely to pose new challenges for financial stability in the [euro] area.

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