The arrival of the Euro and the market for corporate bond underwriting

Transcription

1 The arrival of the Euro and the market for corporate bond underwriting João A.C. Santos Federal Reserve Bank of New York 33 Liberty St New York, NY 145 (212) CMVM - Lisbon May 4, 21 The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System. 1

2 Presentation overview Design of financial systems Financial systems of Euro countries Euro and the market for bond underwriting Euro-zone financial system Potential implications for Portuguese institutions The Euro & corporate bond underwriting 2 2

3 The role of the financial system Alexander Hamilton (1781) banks were the happiest engines that ever were invented for creating economic growth John Adams (1819) banks harm the morality, tranquility, and even the wealth of nations The Euro & corporate bond underwriting 3 3

4 The role of the financial system The Arrow-Debreu world with complete markets The presence of moral hazard and adverse selection problems Real world markets are incomplete intermediaries pose their own incentive problems Bank-based versus market-based systems financial players funding opportunities securities available The Euro & corporate bond underwriting 4 4

5 Bank vs market-based systems (1997) Country Domestic Bond market Stock market bank credit to capitalization capitalization private sector In % of GDP In % of GDP In % of GDP Number of listed domestic firms Market-based systems United Kingdom ,46 United States ,851 Bank-based systems Germany Japan ,387 Portugal The Euro & corporate bond underwriting 5 5

6 Other differences between the two systems Different corporate governance arrangements hostile takeovers versus bank monitoring Different solutions to firms in financial distress reorganization versus liquidation Different risk sharing opportunities cross sectional risk sharing versus intertemporal risk smoothing The Euro & corporate bond underwriting 6 6

7 The markets for bond underwriting before the Euro Currency matching requirements imposed on institutional investors Market segmentation based on national currencies The Euro & corporate bond underwriting 7 7

8 Nationality of the bookrunner vs currency of issue ( ) Borrower s Nationality Euro legacy currencies US Dollar All currencies Market share of bookrunners whose nationality matches the issue currency (in %) Euro area United States All Market share of bookrunners with the same nationality as the borrowers (in %) Euro area United States All The Euro & corporate bond underwriting 8 8

9 Impact of the Euro on the market for corporate bond underwriting Reduced exchange rate risk Eliminated currency matching requirements Eliminated the market segmentation defined by currencies reduced the advantages to underwriters that had the same nationality of the currency of the issue made it easier for banks to explore scope economies associated with investment banking The Euro & corporate bond underwriting 9 9

10 Private sector international bond issues: Average gross fees over nominal amount Euro-era Euro issues U.S. dollar issues The Euro & corporate bond underwriting 1 1

11 Private sector international bond issues: Average bond ratings AAA Euro issues Euro-era AA A US dollar issues The Euro & corporate bond underwriting 11 11

12 Private sector international bonds: number of issues Euro issues US dollar issues The Euro & corporate bond underwriting 12 12

13 Private sector international bonds (US$ bn) Euro issues US dollar issues The Euro & corporate bond underwriting 13 13

14 Private Euro area vs non-euro area issuers (US$ bn) Euro-area issuers Issuers outside the Euro-area : :3 Euro US dollar The Euro & corporate bond underwriting 14 14

15 International syndicated loans (US$ bn) Euro-era U.S. EU-11 The Euro & corporate bond underwriting 15 15

16 International bond issues by type of borrower (US$ bn) Issues in Euros Issues in US dollars Other-financial institutions Non-financial corporations Banks The Euro & corporate bond underwriting 16 16

17 International bond issues by rating of the borrower (US$ bn) 4 Issues in Euros 4 Issues in US dollars AAA AA A BBB BB & below The Euro & corporate bond underwriting 17 17

18 Econometric analysis: Preliminary results Impact of the Euro on underwriting fees ex-ante yield spreads Results underwriting fees for Euro-denominated bonds have decreased and have converged to the levels of the US dollar denominated bonds yield spreads have evidenced a similar pattern The Euro & corporate bond underwriting 18 18

19 Potential implications For the financial system of the Euro zone convergence towards a single bond underwriting market impulse towards a market-based system For Portuguese institutions banking sector nonfinancial firms capital markets The Euro & corporate bond underwriting 19 19

20 Potential implications: Portuguese banks On the relative importance of commercial & investment banking On funding opportunities International bonds (volume US$ ml) Euro US dollar The Euro & corporate bond underwriting 2 2

21 Portuguese firms funding sources by Asset Size, in percentiles 25 Trade credit Bank debt Insiders' debt 5 Ret. Earnings Public debt The Euro & corporate bond underwriting 21 21

22 Bank debt versus public debt Bank debt Public debt long term 8 short term.8 4 long term short term The Euro & corporate bond underwriting 22 22

23 International financing by Portuguese firms (US$ bn) 3 Bonds 6 Syndicated Loans Euro US dollar The Euro & corporate bond underwriting 23 23

24 Final remarks Euro introduced structural changes in the market of bond underwriting Beginning of a single market for bond underwriting Underwriting costs have decreased significantly Firms reacted by issuing bonds in record levels Arrival of new opportunities for financial markets, banks and nonfinancial firms Impulse for the development market-based system in the Euro-zone The Euro & corporate bond underwriting 24 24