This article discusses the ways in which efficient securities markets benefit society, how Norwegian securities market legislation is being modernised to be in line with European standards, and in addition issues related to changes in Norwegian securities market infrastructure. In the first section the social usefulness of securities markets is explained. The most important aspect of this is that smoothly functioning securities markets, together with a well developed financial sector, promote growth throughout the economy. Through the direct transmission of funding from investor to projects, securities markets also contribute to financial stability. The second section deals with amendments to Norwegian securities markets legislation that are under way. Special attention is paid to the European Economic Area and its implications, including the requisite transposition of EU legislation into Norwegian law. The third section discusses the specific tasks performed by the stock exchange and comments on whether the infrastructure organisations of securities markets need to be domestic in order to reap the social benefits of securities markets.
The social functions of securities markets
1.1 Seven benefits
A money economy with access to interest-bearing loans enables the individual to distinguish between income and consumption flows. This encourages capital accumulation, which means that housing projects and investment in production equipment take place at an earlier point in time, thus increasing the stock of real capital in the economy. Investment must be based on predicting the future, and involves elements of risk. Credit is only widely available when the risk factors are managed by a developed credit intermediation system (mainly banks) in which there is sufficient confidence. Very large, high-risk investments are difficult to finance, even for a bank, because the level of risk may be unacceptably high. However, it may be easier to acquire equity capital for such projects if a number of private participants join together, each with limited ownership interests. Furthermore, loans for large projects can be raised if the loan is divided between several lenders (including banks).
Division into interests makes it possible to carry out large projects because the risk and investment are spread between several participants. Equity and lender interests can be standardised as tradable shares and bonds respectively. This reduces the financial costs, since those furnishing the funds require lower compensation because they are able to withdraw the funds when the need arises. An investor can do this by selling securities in secondary markets, but in order to function smoothly, such markets require adequate information and general trading rules governing execution, priorities, etc.
Through securities markets, the risk associated with a particular project is spread and borne directly by the investors. If financial institutions were to fund the project, a large part of the risk would be concentrated in these institutions, but when securities are issued and the risk is directly borne by the investors, this relieves the financial sector of financial risk. In this way securities promote financial stability.
The specific role of securities markets in the economy is to streamline the issue and sale of
* ownership interests in a company, such as shares
* loans to a company or project, such as bonds
by issuing standardised shares and bonds in the form of securities and by organising and centralising the trading of securities in a single marketplace with fixed rules. Through the securities market an unspecified number of participants can become shareholders or bondholders in an undertaking under standardised conditions. After the securities have been listed on the stock exchange, the organised market, shareholders and bondholders can sell their shares and bonds in a secondary market. Securities may be sold to anyone and without consultation with the company that issued them.
The standardisation of contracts and information requirements governing these transactions enable the investor to choose the degree of risk exposure for a particular project. The investor can also impose a required rate of return in relation to risk, and the investment decision can be reassessed by selling securities. This ensures that capital markets channel capital to projects with the highest return. A share in a company entails the right to share in the profits and to exercise a certain degree of control. In efficiently functioning securities markets the price of claims and shares in the company reflects the information available about the company. A company with a high expected return will be able to finance its expansion by raising capital in the market.
Thus far, five benefits to society to be derived from an organised financial system involving securities have been described:
* Credit in the private sector increases the stock of consumer and real capital.
* Project-sharing spreads risk and makes large, high-risk projects possible.
* This relieves the financial sector of financial risk and promotes financial stability.
* Competition to generate a return results in the best projects being financed.
* The standardisation of securities claims reduces the credit intermediation costs.
This also applies wholly or partly to other types of financial claims, and the social benefits of securities are similar in many ways to those of other financial claims. This similarity means that the boundaries for the form selected change; for example there is competition between bonds and syndicated bank loans. Banks can finance lending in the bond market by securitising assets. Securities are traded in regulated markets, but if other capital or credit intermediation at a particular point in time is considered to be more secure, cheaper and more efficient, this will be preferred. The costs of securities trading are partly determined by costs incurred in the payment and settlement system, the stock exchange and the stockbroker system.
An important consequence of the fact that securities markets offer a number of different standardised equity and lender shares for investment is that an investor can have a diversified portfolio of securities in different companies. Since companies face different risks, a diversified portfolio reduces the risk for the investor. The possibility for an investor to diversify also has social benefits, since it means that a larger number of participants will be willing to invest in high-risk projects with high social returns, enabling the project to acquire equity and loan capital. A further benefit is that investors can themselves choose the degree of exposure to risk they are willing to bear. In practice this is done by hedging different types of risk (exchange rate, interest rate, commodity prices, risks to life or objects: non-life or life insurance).
In addition to the five benefits mentioned above, an organised financial system for securities has the following two advantages:
* By providing opportunities for diversifying and reducing risk, securities markets provide safer saving for those with excess capital.
* Smoothly functioning financial markets, including securities markets, promote long-term economic growth.
1.2 Factors that contribute to economic growth
We have argued above that smoothly functioning financial markets have a positive effect on long-term economic growth: they encourage division of labour and specialisation because transaction costs are lower. This reduces information costs and promotes appropriate allocation of resources, since projects are evaluated in connection with the provision of equity and loan capital. This makes it possible for both savers and entrepreneurs to manage the risks, and promotes transparency in the way the company is managed and a certain degree of control over the management. In this way the financial system encourages saving by making it safer, and promotes specialisation, leading to technological advances in the production of goods and services. Since priority is given to projects with a high degree of product development, such a system increases innovation and growth in the economy.
These effects were empirically verified in a survey by Levine (1997). The survey includes studies comparing different countries and examines particular sectors and the liberalisation of the financial sector in particular countries. He found a significant relationship between long-term economic growth and a well developed financial sector. This is supported by other studies controlling for other factors that contribute to economic growth. Thus there is empirical support for using the existence of a well developed financial sector as an indicator that the country will have a high growth rate later. Comparative studies of economics history that do not use econometric methods also support this conclusion.
The survey shows that we do not know precisely which parts of the financial system are decisive for economic growth, or how the growth-promoting factors act in the different phases of the process from an agricultural economy via an industrial economy to a mainly service-producing economy. Levine mentions in particular that there is no theoretical or empirical answer to the question of whether growth-promoting factors vary systematically with the structure of the financial system (i.e. whether the system is bank-dominated, as in Japan or Germany, or market-dominated, as in the UK and the US). Nor is it possible to distinguish between the contribution made by securities markets and that made by the rest of the financial sector. However, on the basis of the various functions in the financial sector, it seems reasonable to assume that modern and efficient financial institutions and an efficient securities market both promote growth.
Levine (2005) maintains these conclusions even when taking account of the extensive...