Prince Henri Auditoire 02 BW

The effects of EMU on the Luxembourg banking center - Yves Mersch

on the occasion of the Official State Visit in Japan

Financial & Industrial Seminar at Keidanren

 Tokyo, le 7 April 1999

Reproduction is permitted provided that the source is acknowledged.

Table of contents

1.   Overall picture

A recent report commissioned by the European System of Central Banks has confirmed the view that EMU is likely to act like a magnifying glass upon the European banking structure, i.e. enhancing already prevailing trends, strengths and weaknesses.

In particular EMU is expected

  1. to reinforce the pressure for the reduction for existing excess capacity,
  2. to put profitability under pressure, and,
  3. like increased internationalisation and geographical diversification, lead to more mergers and acquisitions. The international crises are also expected to have negative effects on the structural adjustment process in course.

If we analyse however this general wisdom against the practical outcome, we have to acknowledge that in the short-term the continued decrease in interest rates has been beneficial to banks due to capital gains and increased income from maturity transformation, even if in the long-term a low level of interest rates will reduce the margin earned by banks on their interest-free or low interest rate resources.

We also have observed in the aftermath of the Stability and Growth Pact a shift on the asset side from the public to the private debtors with the consequence of a more risky asset profile of credit institutions. As a result average return on equity in Europe has increased from a low of 8% in 1994 to 11% in 1996. This compares with US levels of ROE which, according to different sources, range between 15 and 20%.

The corresponding figures for Luxembourg show that banks outperformed most European financial centres in terms of profitability. Average return on equity being for those years 13.06 and 13.68 % respectively.