Intro
There has been a very exciting development in the financial sector of the BSR in recent years. Banks are instrumental to growth, to create liquidity and to make trade prosper. In fact, the financial sector is not only an industry, but it is also critical to the entire growth and competitiveness of the Region and therefore crucial to improve and integrate.
Main Messages
• Having a deeply integrated, liquid single financial market, where risk capital is available across borders, would enhance economic growth and competitiveness in the BSR over other regions. - Carl-Johan Granvik
• An integrated Baltic Sea financial market should not be isolated; rather it should be looked at as an add-on to the European integration that is in process. - Carl-Johan Granvik
• A larger home market will create more trading in the listed companies of the Region, and it will get easier to attract foreign and domestic investors who want to see a large liquidity pool. - Hans-Ole Jochumsen
• The BSR needs to create an economic and financial system that promotes the entry and exit of firms, as innovation increasingly takes place through these activities. - Erik Berglöf
• The BSR needs to create a financial system that can support R&D activities, as innovation becomes more and more important in the global competition. – Erik Berglöf
• The BSR needs better coordination of the regulatory process, implementation of rules and supervision in order to diminish differences in the member countries and tear down barriers to trade. – Peter Egardt
Themes
Financial System of the BSR
Moderator, Partner at Bech-Bruun, Ian Tokley, started out the session by highlighting that the need for liquid funds, the ability to promote activities and to develop and encourage a private market requires a steady and strong financial market with available expertise and resources to drive the economics.
Innovation matters more and more in today’s global economy. As innovation increasingly takes place through the entry and exit of firms rather than through activities of existing firms, the BSR needs to create an economic and financial system that promotes the entry and exit of firms, Chief Economist of EBRD, Erik Berglöf, said. It is also important to enhance R&D activities and to create a financial system that can support that type of activities. In recent years, the BSR has experienced a dramatic transformation of its banking system and equity markets, especially in the new member countries of the EU. Executive Vice President of Nordea, Carl-Johan Granvik, showed Nordea’s example of moving into all BSR markets. Global competition has resulted in bigger, more international companies in the Region and in order to serve their demand, financial institutions needed to become stronger by joining forces, he said.
Granvik and Berglöf both emphasised that a lot has been done for an integrated financial market in the BSR already without a top-down steering of the process. Granvik argued that having a deeply integrated, liquid single financial market, where risk capital is available across borders, could enhance economic growth and competitiveness in the BSR over other regions. He also stressed that the BSR should not aim at creating an isolated financial market, it should rather look at it as an add-on to the European integration that we are in the process of building. However, all panelists agreed that even though a rapidly integrated financial market is emerging in the BSR, there are a number of impediments that hinder further integration.
Impediments to further integration
Creating an integrated financial market in the BSR demands a lot of coordination of regulation, supervision and harmonization. Difference in rules and regulations is an area where there is plenty of room for improvement, Berglöf emphasised. Harmonizing rules is therefore most crucial. Granvik agreed and urged all who can influence regulations not to build further barriers but rather to tear them down. Berglöf and his expert group have come up with a couple of solutions on how to diminish impediments to integration in the Region. Home country rule, meaning more focus on home country in terms of regulation and supervision, is one of the directions Berglöf suggested the BSR move in. A main challenge is how to achieve governance of such a system so that it is on one hand highly efficient and at the same time legitimate for all participating countries and market institutions, Berglöf puzzled. Governance is a particularly important issue to rise, especially in the case of the new member states of the EU, where most of the financial institutions are controlled from the outside, by foreign banks. Granvik underlined that the future of Baltic financial systems is in the hands of large Nordic banks and this is a huge responsibility.
Granvik also pointed out that liquidity is the weakest point in the BSR, partly due to too many currencies. Hans-Ole Jochumsen from OMX agreed and emphasised that more trading is needed.
Chairman of CBSS Business Advisory Council, Peter Egardt, spoke of the barriers to trade that stand in the way of integration, especially in the area of regulations and supervision. The main problem is that within the EU or the BSR the implementation of rules are different in almost all member countries, he explained. This hinders efficiency for financial institutions that operate in more than one country.
The Business Advisory Council sees two possible solutions to the problem: 1) much more detailed EU regulations or 2) better coordination of the regulatory process, the implementation and the supervision. Egardt voted for the latter. In fact, the Business Advisory Council is currently working on listing and prioritizing the most crucial barriers to trade starting with the financial market, he said. The ambition is to include as many member countries as possible in the BSR. Egardt believes that if this project succeeds, the Region can set an example to the entire EU on how to cooperate and work together in order to coordinate implementation of rules and supervision. Thus, we will be able to create a truly integrated financial Baltic Sea market that would enable us to become the hot spot for growth in the world, Egardt said.
An integrated financial market
President of Information Services & New Markets at OMX, Hans-Ole Jochumsen talked about the importance of an integrated exchange in the BSR. In fact, OMX is an operator that bases its strategies on Nordic-Baltic thinking and works towards deeper financial integration in the Region.
Hans-Ole Jochumsen stated that equity markets are becoming more international, and roughly half of the equity trading in Nordic countries is based on foreign investors. He explained that liquidity means trading and enhancing trading is all about getting more investors. If the BSR wants to attract more investments, it has to further integrate its financial markets in order to make it easier for the investors to enter. OMX believes that a larger home market will create more trading in the listed companies of the Region, it will become easier to attract more international investors who want to see a large liquidity pool, and in a longer perspective it brings the Region’s equity markets into a better position when it comes to consolidation in exchange.
Jochumsen highlighted that by implementing one integrated Nordic-Baltic exchange in 1998, new value was created to all stakeholders: “OMX believes it is an advantage to harmonize and present the Nordic and Baltic markets as one market.”
Nordic equity markets are much more mature than the Baltic markets. Thus, OMX tries to develop the more mature exchanges and at the same time it attempts to increase Baltic equity markets. The plan is to bring them together later on into one regional exchange.
