The ISD and the development of European capital markets

The past decade has seen a sea change in European capital markets. From a predominantly bank-dominated system, the European financial system has become more market-based. According to some indicators, it has even recently surpassed the US in this respect. For example, leading European stock market indexes have become more cyclical than those in the US, and both the issuance of international bonds and the number and total value of IPOs (initial public offerings) in Europe surpassed those in the US in 2005, 2006 and 2007.

The change since 1996, when the Investment Services Directive (93/22/EC) (ISD) came into force, is remarkable. As can be seen from the hexagon in Figure 2.1, bond issuance more than doubled, equity market capitalization tripled and equity market turnover and the total amount of derivatives contracts written increased seven-fold. Figure 2.2 shows that the growth of bank assets was overtaken by the growth in bond assets during several years, which is another sign of the move towards a more market-based system. Although the growth of the IPO market has benefited from the enforcement of the Sarbanes-Oxley Act in the US and from some large-scale privatizations in the EU in 2005, it is a sign that the European regulatory regime is not too burdensome and/or that it manages to cope with diversity.

It is difficult to distinguish the extent to which this phenomenon is the result of regulatory initiatives, as compared to simple market developments.