The Future of Financial Markets
David G Mayes et al, Palgrave Macmillan, 2006, xv + 175 pages, £55.00.

This is the third book that David Mayes and his colleagues at the Bank of Finland have written. The common theme is the future development of the monetary and financial system viewed from the perspective of a small open economy that has recently entered a monetary union (the euro area) and to draw policy conclusions for the central bank.

In recent years financial markets have experienced fast growth, integration across countries and rapid technological change. In the euro area the additional challenge has been to bring together the different national administrations that have been designed for each country separately and which are inefficiently linked. This is a two-step process which involves dismantling existing barriers, particularly with regard to cross-border transactions, and harmonising systems across the euro area.

The payment system is analysed in terms of structure, efficiency, innovation and regulation. The starting point is the observation that national payment systems do not have a simple cross-border extension and that there are problems associated with implementing settlement systems internationally. The benefits appear to be large yet progress has been slow – cross-border transactions are much more expensive than their domestic counterparts. The authors identify a role for more competition between private banks and a greater degree of co-operation on standards and infrastructure. The role of the central bank is to lay down some basic rules and to act as a catalyst for change.

When it comes to securities markets the challenge is still more complicated since transactions need to be settled, usually through the banking system, and the securities need to change ownership. The study examines the relative efficiency of European stock exchanges and finds that, although their efficiency has been improved over time, on average they still operate at a 20-25 per cent higher cost level compared to the international benchmark. Empirical work suggests that economies of scale are significant and makes the case for mergers and alliances between European exchanges.

In a final chapter the book ends on a note of caution. The development of e-money has been far less than might have been expected given developments in the technology.

The Bank of Finland has an impressive track record in financial innovation – the cheque system was abandoned more than twenty years ago – a tradition which this series of books maintains. Progress in exploiting the gains which modern technology offers to countries in the euro area has been disappointingly slow so far. This book identifies a number of key areas where further progress can, and should, be made.

Geoffrey Dicks
RBS Global Banking & Markets