private sector alternatives, such as the net payment system run by the ECU Banking Association, which has a much lower demand for collateral.
What will be the size of the flows for which TARGET might be used? Cross-border payment flows are usually much smaller than domestic ones. Trade with the EU amounts to about 10 per cent of UK GDP. Assuming a similar proportion applies to turnover in payments between the UK and the EU, cross-border transactions in the EU should be around euro 13 billion daily. (This implies an annual turnover of about euro 2,860 billion: UK-EU trade amounts to about euro 100 billion; the ratio of 30 of turnover to trade is within the range observed in other currency markets.)
These calculations suggest that the additional collateral required would be about ECU 1.3 billion. This collateral would be remunerated at market rates. Folkerts-Landau et al. ( 1996) estimated that the upper limit of the opportunity cost of pledging collateral is 0.25 per cent, a consequence of the fact that eligible securities are high quality and very liquid but no longer available to the bank for other purposes. This would imply that the cost of pledging additional collateral would be only ECU 3.25 million per annum ( ECU 13 billion x 0.1 x 0.0025) for the entire UK banking system! This would be the maximum under a scenario of double collateral and still the sum is negligible if compared to gross income, profits, costs or any other indicator of the size of the UK banking system. Similar considerations apply to the other potential 'out' countries.
EMU will be a further quantum step in the integration of European capital markets, although they will remain different for some time to come. Within the US monetary union it does not make sense to speak of different regional capital markets. Nothing differentiates the New York from the Californian market, except that some market participants are located (and deal) in New York and some others deal primarily in California. This will not be the case in Europe. Even after the introduction of the euro capital markets will retain a strong 'national' flavour. This does not apply to all market segments, but to most of the important ones. There are many reasons for this. They can best be observed by distinguishing between the retail and the wholesale levels.