A comparative analysis of the US and EU retail banking markets - Wsbi

September
2006
RESEARCH
A COMPARATIVE ANALYSIS
OF THE US AND EU
RETAIL BANKING MARKETS
A CONTRIBUTION IN THE CONTEXT OF
THE EU/US RETAIL BANKING FORUM

A COMPARATIVE ANALYSIS
OF THE US AND EU
RETAIL BANKING MARKETS
A CONTRIBUTION IN THE CONTEXT OF
THE EU/US RETAIL BANKING FORUM

IE
UK
FR
BE
NL
LU
DK
DE
SE
CZ
AT
SL
PL
SK
HU
FI
EE
LV
LI
WASHINGTON
MONTANA
OREGON
IDAHO
WYOMING
NEVADA
CALIFORNIA
UTAH
COLORADO
ARIZONA
NEW MEXICO
NORTH DAKOTA
MINNESOTA
WISCONSIN
SOUTH DAKOTA
NEBRASKA
IOWA
ILLINOIS
KANSAS
MISSOURI
MICHIGAN
NEW YORK
INDIANA OHIO
PENNSYLVANIA
WEST
VIRGINIA MD. DEL.
KENTUCKY VIRGINIA
OKLAHOMA
TENNESSEE
NORTH CAROLINA
ARKANSAS
MISSISSIPPI
SOUTH CAROLINA
ALABAMA GEORGIA
TEXAS
VERMONT
NEW
HAMPSHIRE
MASS.
CONN. R.I.
N.J.
MAINE
LOUISIANA
PT
ES
FLORIDA
IT
GR
MA
CY
■ EU-15
■ EU 10 New Member States (entry in May 2004)
■ United States of America
Key statistics - Year 2003
EU-15
United States of America
15 Member States 50 States +
(up to 30 April 2004)
District of Columbia
Area 3.2 million km 2 9.6 million km 2
Population 383.6 million 290.8 million
Currencies 4 currencies: Euro for 12 Member States, 1 single currency: US dollar
Danish Crown for Denmark, Swedish Crown for Sweden,
Sterling Pound for the UK
GDP €9,413 billion €9,728 billion
US $11,204 billion
US $11,578 billion
GDP/capita (in euros) 24,537 33,453
GDP/capita (in US $) 29,204 39,816
GVA financial intermediation/Total GVA 5.4% 8.7%
Total assets of the banking sector/GDP 277% 88%
Note: GVA = Gross Value Added
4

Mr. Chris De Noose,
Chairman of the Management Committee of WSBI and ESBG and Editor in Chief of this publication
would like to thank the following members of the WSBI/ESBG staff for writing and editing the study:
Ms. Michaela Koller
Member of the Management Committee
Mr. Nicolas Jeanmart
Adviser Banking Supervision
Ms. Marcela Gaybor
Adviser Legal Affairs
Mr. Norbert Bielefeld
Deputy Director Payment Systems
Mr. Hector Calvo
Adviser
Ms. Catherine Goislot
Adviser Statistical Affairs
Mr. Malcolm McDowell
Adviser Economic Affairs
Ms. Vlatka Cini
Adviser Capital Markets
Ms. Adina Apetroi
Assistant Lobby Department
The final lay-out and printing was organised by
the WSBI/ESBG Communications Department team
Mr. Dirk Smet
Communications Manager
Ms. Alessandra Pertot
Communications Coordinator
Ms. Malou Doumen
Assistant Communications Department
Mr. Dirk Gordts
Organisation Officer
5

The following WSBI/ESBG committees provided the guidance in writing the study:
The Coordination Committee
The Financial Regulation Committee
The Economic Affairs Committee
A special thanks for their valuable insights on the US banking market to:
Ms. Diane Casey-Landry
President & CEO
America's Community Bankers
Mr. Robert R. Davis
Executive Vice President
America's Community Bankers
6

A COMPARATIVE ANALYSIS
OF THE US AND EU
RETAIL BANKING MARKETS
Table of Contents
Foreword 11
1 Executive summary 13
2 General introduction 19
3 Institutional comparison 21
3.1 Section introduction 21
3.2 Types of banking institutions 21
3.2.1 United States 21
3.2.1.1 Legal forms in the US market 21
3.2.1.2 Actors present in the US market 32
3.2.2 European Union 32
3.2.2.1 Legal forms (and harmonisation) in the EU market 32
3.2.2.2 Actors present in the EU market 34
3.2.3 Comparison 39
3.2.3.1 Types of institutions and their activities 39
3.2.3.2 Ownership structure 40
3.2.3.3 Deposit guarantee systems 40
3.2.3.4 Corporate Social Responsibility 40
3.2.3.5 Taxation 41
3.3 Financial Conglomerates 41
3.3.1 United States 41
3.3.2 European Union 41
3.3.2.1 Introduction 41
3.3.2.2 Definition 42
3.3.3 Comparison 42
7

4 Regulation and supervision comparison 43
4.1 Section introduction 43
4.2 Regulation and supervision of the banking sector 43
4.2.1 Main features of the legislative process in the US and in the EU 43
4.2.1.1 Legislative process in the United States 43
4.2.1.2 Legislative process in the European Union 45
4.2.1.3 Comparison 48
4.2.2 Responsible authorities/relevant bodies in the financial services area 49
4.2.2.1 United States 49
4.2.2.2 European Union 52
4.2.3 Chartering/Licensing 54
4.2.3.1 United States 54
4.2.3.2 Europe 56
4.2.3.3 Comparison 56
4.2.4 Supervision 57
4.2.4.1 United States 57
4.2.4.2 Europe 58
4.2.4.3 Comparison 60
4.2.5 Regulatory trends in the banking sector 60
4.2.5.1 United States 60
4.2.5.2 Europe 63
4.2.5.3 Comparison 64
4.3 Regulation of the capital markets 65
4.3.1 Introduction 65
4.3.2 United States 66
4.3.2.1 Background 66
4.3.2.2 Applicable legislation 66
4.3.3 European Union 70
4.3.3.1 Background 70
4.3.3.2 Applicable legislation 70
4.3.4 Comparison 72
5 Economic comparison 75
5.1 Section introduction 75
5.2 Banking markets 75
5.2.1 Size of banking market 75
5.2.1.1 United States 75
5.2.1.2 European Union 77
5.2.1.3 Comparison 79
5.2.2 Size of credit institutions 80
5.2.2.1 United States 80
5.2.2.2 European Union 82
5.2.2.3 Comparison 83
5.2.3 Concentration and consolidation 84
5.2.3.1 United States 84
5.2.3.2 European Union 86
5.2.3.3 Comparison 87
8

5.3 Credit institutions 88
5.3.1 Balance sheet structures 88
5.3.1.1 United States 88
5.3.1.2 Europe 91
5.3.1.3 Comparison 93
5.3.2 Efficiency of credit institutions 94
5.3.2.1 United States 94
5.3.2.2 Europe 95
5.3.2.3 Comparison 97
5.4 Section conclusion 99
6 Product and distribution comparison 103
6.1 Section introduction 103
6.2 Retail lending 103
6.2.1 Consumer lending 103
6.2.1.1 United States 103
6.2.1.2 European Union 107
6.2.1.3 Comparison 112
6.2.2 Home lending 114
6.2.2.1 United States 114
6.2.2.2 European Union 116
6.2.2.3 Comparison 119
6.2.3 Small business/SME lending 121
6.2.3.1 United States 121
6.2.3.2 European Union 124
6.2.3.3 Comparison 129
6.3 Payments comparison 130
6.3.1 Payments in the US 130
6.3.1.1 Market participants 130
6.3.1.2 Retail and commercial payments in the US 131
6.3.1.3 Settlements of high transactions in the US 132
6.3.1.4 Clearing of retail and commercial transactions in the US 133
6.3.2 Payments in the European Union 133
6.3.2.1 Market participants 133
6.3.2.2 Retail and commercial payments in the European Union 134
6.3.2.3 Settlement of high value transactions in the European Union 136
6.3.2.4 Clearing of retail and commercial transactions
in the European Union 136
6.3.3 Initial considerations as regards the US and EU payments markets 137
6.4 Distribution channels in retail banking 139
6.4.1 United States 139
6.4.1.1 The bank branch 139
6.4.1.2 Complementary channels 140
6.4.2 Europe 141
6.4.2.1 The bank branch 141
6.4.2.2 Complementary channels 142
6.4.3 Comparison 143
9

6.5 Issues of competition in retail banking 143
6.5.1 United States 143
6.5.2 Europe 145
6.5.3 Comparison 147
Abbreviations 149
Annexes 151
Annex 1: Gauging customer satisfaction via the use of an index 151
Annex 2: Statistical appendix 152
Annex 3: Bibliography 159
10

FOREWORD
The temptation of looking over the neighbour’s fence when
tending to one’s garden is hard to resist for any keen gardener,
especially when that neighbour is a successful enthusiast in
that pursuit.
And so it is in Europe in the context of financial services
policy: as so many commentators define their vision of what
the European Union should aim to achieve, they cannot resist
the temptation of mentioning what their trans-Atlantic
neighbour – the US – has achieved in its own garden that is
the US financial services market.
And since the US financial services market has played, and
continues to play, no small part in the economic success of
the US, it is natural for EU policy-makers and the industry
alike to want to identify best practices in order to understand
what has allowed it to thrive so.
Cynics might respond that the grass is always greener on the
other side; that certain Atlanticist commentators are glossing
over what works less well in the US to give an overly positive
shine on the country’s achievements. And indeed sceptics
could point out that the EU is not the US, that 25 nations
deciding together on a common agenda cannot expect to
replicate what one country has achieved for itself.
Realists might hold the view that the US is an amalgam of
things that work well, and things that work less well, to which
pragmatists might respond that before we decide whether
the EU should be more like the US, we need to identify and
consider exactly what things it does well, and what it does
less well.
With the analysis that follows we hope not so much to
demystify as to clarify and to inform. To respond with facts
to those that state that the US banking system (or specific
parts of it, such as the performance of its actors or the way
that they are regulated) is either better or worse than the EU
system. Thus, we carry out our analysis of the US banking
markets alongside a comparable analysis of the EU and
attempt to draw some conclusions on what is similar about
the two markets and on how they differ.
We also choose to take on a humbler task than the mammoth
undertaking that would represent a complete analysis of
the US and European financial services market. Instead, we
attempt what we consider to be a relatively broad coverage
of the main characteristics and issues of the US and
European retail banking markets.
In fairness, the task has not been a simple one. Not least
because detailed, academic studies on even limited aspects
of either the US or the EU retail banking markets are very
few and far between, not to mention the lack of cross-
Atlantic comparative studies. To collate the appropriate data
and information has therefore been an arduous task. Not to
mention that comparable information and data (sometimes
even within the EU) was often very difficult to find. What has
compounded the difficulty of writing this study is the fact that
comparing the US to the European Union, of 25 countries, is
not comparing like-with-like. This has made things problematic
especially in the regulatory and supervisory section, where
for instance a comparison of regulatory regimes between
the US and the EU would normally require comparing one
regime against 25 separate regimes (or in the case of this
study: 15 – see explanation below).
However, given that the comparison has been between the
US on the one hand, and the agglomeration of the EU
Member States on the other, it has been necessary to refer
in particular either to what exists at EU-wide level, or to refer
to an average between the Member States. When neither
has been possible, or when it has been necessary to give a
more complete picture, we have referred to what exists at
Member State level.
We should also point out that this study considers the EU 15.
This was a necessity due to data availability. Having to take
into account the ten new Member States would have seriously
constrained us in terms not only of the data that we could
use for this study, but also in terms of the time-series of
the data.
11

To finish, if we had to pick from among the various stances
catalogued above that which we have attempted ourselves
to take in our comparison of the EU and US retail banking
markets, we would say that we wrote the study as pragmatists
and concluded it as realists. To put it clearly: what we were
concerned with here above all was to be as factually accurate
as possible. We therefore leave the idealism, cynicism and
scepticism for others and would be content if our study
would be seen as a solid contribution to an educated debate
about what exactly the European Union should attempt to
emulate as it devises future financial services policy and
what it has to offer itself in the transatlantic debate.
The EU/US Retail Banking Forum
This study is an update of the document presented on the
30th of May 2006 at a seminar of the EU/US Retail Banking
Forum. The focus of the event was to initiate a debate on
the challenges of banking regulation and supervision in the
US and the EU, and it represented the second gathering of
the Forum, which was launched on the occasion of the
WSBI/ESBG conference entitled “First EU/US Retail Banking
Forum Conference”, in Brussels on the 14th and 15th of
November 2005.
The EU/US Retail Banking Forum is a WSBI/ESBG initiative open
to professionals in the fields of retail banking and financial
regulation from all related backgrounds (policy-makers,
bankers, advisers, regulators, academics etc.), working in the
EU or the US.
The aim of the Forum, which represents a platform for the
exchange of views, knowledge and opinion, is to promote a
better understanding of the systems of retail banking and
financial regulation of each market. In so doing, it is hoped
that the Forum will contribute usefully to policy-setting in
the field of financial regulation.
The Second EU/US Retail Banking Forum Conference is
taking place in Washington on the 16th and 17th of
November 2006.
More information on the EU/US Retail Banking Forum can
be obtained on the websites of the World Savings Banks
Institute and the European Savings Banks Group.
12

1. EXECUTIVE SUMMARY
Before looking at the US and EU retail banking markets in an
attempt to understand and then compare what is happening
on both sides of the Atlantic, one first has to acknowledge that
there are important differences between the US and the EU.
The United States is one country with one language (spoken
by 82 percent of the population as a native language and
nearly everyone as a daily language) and one currency, which
has existed for more than 200 years.
In contrast, the European Union, is an intergovernmental
and supranational union of 25 democratic Member States
with 20 official languages and 14 currencies, only one of
which is common between 12 of those Member States, and
which has been in existence for just over 7 years 1 .
All these differences aside, it is evident that both markets
pursue the same or at least similar objectives, though as we
explain below they very often choose different ways and
means to meet them.
Diversity of players and business models –
assuring competition
Diversity or pluralism in the banking market has apparently
proven to be highly desirable in both the US and the EU.
Apart from commercial banks, which are market leaders in
both markets, savings banks/thrifts and cooperative banks/
credit unions continue to co-exist and compete, providing
American and European consumers with a broad range of
financial products and services. The competition that has arisen
between credit institutions with such diverse structures and
business models has contributed to the satisfaction of clients’
needs and is seemingly effectively meeting customer
demand in both markets.
Diversity of market participants is achieved in different ways:
in the US credit institutions each have their own specific
charter (or license to operate) according to bank type, such
that commercial banks, thrifts and credit unions represent
distinct and specific legal forms.
In contrast in the EU, commercial, savings and cooperative
banks represent different types of actors which are not tied
to any particular charter at the EU level. The specificities of
the different institutions are generally rather defined at the
national level.
One common goal: to preserve the stability
of the banking sector
In the regulatory and supervisory sphere, the US and the EU
pursue very similar objectives: ensure that the banking
sector is safe, both at the entity level and at the industry
level; protect investors, in particular retail investors;
guarantee the integrity of the financial markets; make sure
that insurance companies can fulfil their obligations.
Two different means to achieve it:
regulatory competition (US) versus
regulatory level playing field (EU)
Differences can be observed however in the strategies
applied to achieve these stability objectives. For instance,
while European regulators are convinced that a level playing
field must be ensured for all firms operating in the EU
territory, their US counterparts tend to believe that
regulatory competition, i.e. competition between the
authorities responsible for regulating and supervising the
financial sector, is the most appropriate approach. The roles
and powers attributed to regulatory agencies is another
good example of the divergent approaches followed in
these two parts of the world. This translates into huge
differences between the EU and US regulatory and
supervisory frameworks.
In the US, credit institutions are regulated and supervised by
distinct bodies, according to their charter type. In Europe, all
credit institutions, irrespective of their legal form, are bound
by the same laws and regulations, and are supervised by the
same bodies at the national level.
1 While the Euro was launched on the 1st of January 1999 as an electronic currency, it became legal tender on the 1st of January 2002.
13

In the US, credit institutions have charter choice and can
decide to obtain their charter either at the state or the
federal level, which in turn will determine whether they are
regulated and supervised at the state or the federal level.
For this reason, the regulatory system in the US is referred to
as a ‘dual’ system, symbolised by the simultaneous existence
of different regulatory options that are not alike in terms
of statutory provisions, regulatory implementation and
administrative policy. In the EU on the other hand, credit
institutions are supervised at the level of the Member State, but
mainly regulated at the EU level as the main areas of banking
law have been harmonised at the EU level via directives
which are applicable to all credit institutions equally.
Common global rules – different ways
to implement them
Despite the divergences explained above, some convergence
in approach has been deemed necessary across both markets,
as evidenced by the increasing number of rules that are
being set and applied at the global level. The FATF rules 2 , the
joint FASB-IASB convergence project between US GAAP and
IFRSs 3 , and not least the Basel I accord, now in the process
of being replaced by the Basel II framework, are good
illustrations of this approach.
Approaches diverge again however with regard to the
domestic implementations of those internationally agreed
rules. Taking the example of the implementation of Basel II
into European law, the EU – in line with its level playing field
approach – chose to apply it to all EU banks. In the US
however the decision was made that an estimated 20 banks
will apply the advanced approaches (A-IRB and AMA 4 ), while
the huge majority of smaller and mid-sized American banks
will apply Basel IA. This decision has led to debates in the
US, with smaller and mid-sized banks raising level-playing
field concerns by stating that Basel II banks could benefit
from competitive advantages which could ultimately lead to
asset stripping of smaller competitors and thus to increasing
concentration levels and risks.
Deregulation = less regulation
Notwithstanding the differences between the US and
EU banking markets, one broad common trend across both
markets has been deregulation in the banking sector,
which has dominated the agenda of the EU and US financial
law-making bodies in recent decades, resulting notably in
an extension of the activities in which banks may engage.
This widening of the scope of activities has however been
accompanied with the introduction of new, sometimes
burdensome, prudential rules, of which the Basel provisions
on capital requirements are a good example.
Proximity banking is key in both markets:
consolidation of the banking sector –
but an increase in branches
Banking consolidation has resulted in large falls in the
number of credit institutions in the last two decades in both
the US and the EU – but the US still has many more credit
institutions (18,533) than the EU (7,444). The US also has
many more credit institutions relative to its population than
the EU (64 per 1 million inhabitants in the US compared to
19 credit institutions per 1 million inhabitants in the EU).
And while asset concentration measures give a higher CR5
for the US (37.6%) than the EU (14.5%), looking at CR5
figures of individual European Member States reveals that
the situation varies greatly from country to country, with the
most concentrated Member States achieving much higher
levels of concentration even than the US (i.e.: The Netherlands
(84%), Belgium (83%), Finland (81%), Denmark (67%),
Greece (67%), Portugal (63%). Consider also that, of the
EU15, only 4 Member States have CR5s lower than the US
(2003 figures).
Parallel to these falls in the number of credit institutions,
both markets have also experienced an increase in the
number of branches over the same period. The resulting
increase in the number of branches per credit institution is a
sign that in the age of globalisation, local market
representation and proximity to customers is deemed
essential by both American and European banks.
2 Rules developed at the international level to combat money laundering and terrorist financing.
3 The US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) published a Memorandum of Understanding
(MoU), signed in February 2006, that outlines a work programme for convergence between US Generally Accepted Accounting Practices (US-GAAP) and
International Financial Reporting Standards (IFRS).
4 Those 20 banks are expected to apply the Advanced Internal Rating Based Approach (A-IRB) as a method for credit risk and the Advanced Management
Approach, or AMA, for operational risk.
14

Small scale banks and mega banks
The banking industries in both the US and the EU are
dominated by small to medium-sized institutions (although
the majority of the industry’s assets in both markets are
concentrated among a few large institutions). The average
US credit institution (€831 million) – even excluding credit
unions – is however considerably smaller than the average
EU credit institution (€3,494 million).
This is quite revealing, for it highlights that if we were to
regard the size of average institutions as a partial indicator
of the concentration of a banking market we would conclude
that the US banking market is in fact more ‘fragmented’.
This is reinforced if we take note of the fact that the US has
many more credit institutions (whether or not one includes
credit unions) than the EU. All this suggests in fact that
banking in the US is rather a small scale, local affair, and that
although the US is known for producing many of the world’s
‘mega-banks’, this model of banking is in fact not at all
representative of the majority of the industry.
Cross-border banking: via branches in the US,
subsidiaries in the EU
The nature of consolidation in the US and the EU has been
similar, with the great majority of it being intra-state.
As regards inter-state activities, in the US, though the passing
of the Riegle Neal Act initially boosted the number of interstate
mergers, inter-state expansion has primarily occurred
via inter-state branching, with the result that less than 3%
of US credit institutions have subsidiaries in other states.
In Europe, until recently the value of cross-border M&A as a
proportion of total M&A was low, but a few large deals in
the last couple of years have significantly increased that
proportion. However in contrast to the US, cross-border
expansion in Europe has occurred by means of subsidiaries,
rather than branches.
Inter-state/cross-border activities:
intrinsic barriers render them difficult
in EU and US alike
It is interesting that inter-state expansion has been relatively
low in the US even though regulatory, cultural and linguistic
differences, which are mentioned as key obstacles to such
deals in Europe, are not issues in the US (or at least not in
a comparable way). This may however be explicable in
terms of other comparable factors that render difficult the
achievement of cost and revenue synergies for banks wanting
to operate across US or EU (Member) states.
Cost savings can more easily be achieved by in-market
rather than out-of-state bidders, given the former’s ability to
cut overlapping facilities such as branches. Also, the reward
of higher profits via higher prices due to increase in market
power is not available in a cross-border/ state context.
US performance: no evidence that
consolidation has driven it
Compared to their European counterparts, US credit
institutions generally achieve higher levels of profitability
(with the exception of the UK and Luxembourg) and higher
cost efficiency (with the exception of the UK, Luxembourg,
Denmark, Spain, Ireland, and Portugal).
A number of possible explanations exist for the difference in
performance between credit institutions in the US and the
EU, among which a more favourable economic climate,
higher risk-taking by US credit institutions as well as more
flexible labour market laws.
The pace of consolidation of the US banking industry is
however not likely to explain superior returns by US banks:
firstly, it has not been significantly greater than the EU (the
number of credit institutions fell by 44% between 1985 and
2003 in the US, while the number of credit institutions in
the EU fell by 41% for that same period); secondly, there is
no conclusive evidence that banking consolidation in the US
has driven profitability.
Higher levels of US consumer lending -
more detailed consumer protection rules
The proportion of consumer lending to GDP is twice as high
in the US as the EU (17% as against 9%), and US citizens,
for a variety of reasons, have a much higher propensity for
credit purchases. This is evidenced by a much lower savings
rate, and by the fact that Americans each have on average
four credit cards, while the average in Europe is 0,6 credit
card/citizen.
Given that US citizens are clearly more consumption (and
debt) oriented than their EU counterparts, it does not come
as a surprise that the US legislator was apparently keen on
intensifying consumer protection regulation. It chose to do
so by introducing even more detailed rules at the federal
level in a wide range of areas such as credit billing information,
credit data reporting, debt collection practices and equal
opportunities to access credit.
15

Following the same logic, the EU consumer protection rules
seem to be the appropriate and adequate response to the
fact that EU consumers are generally more risk averse and
more inclined to save.
Information is key in both markets –
enables customers to make their own choice
Information disclosure is a cornerstone of consumer protection
in both the EU and US legal systems. An important number
of US laws applicable to consumer credit focus on
appropriate and transparent information for consumers.
EU policy also considers essential the need to provide
consumers with adequate information to enable them to
make an informed choice. At the EU level, however, the
information disclosure regime is less detailed than in the US,
a likely consequence of the aim in the EU to set a number
of common requirements above which Member States can
legislate further.
Despite high consumption levels in the US –
no duty to advise
Despite generally higher levels of consumer protection rules
in the US a duty on lenders to advise consumers on the most
appropriate type of credit does not exist there. This could in
any case be deemed an unnecessary requirement under a
system which aims to ensure that consumers receive all the
necessary information so that they can make the best
choice: a common aim of both the US and EU systems.
At the European level the debate on a mandatory duty to
advise is still on-going, in which the industry draws attention
to the fact that the responsibility for a credit decision can
and should not be taken by the bank, but by the consumer
himself as he knows his own situation best.
US credit data market – triggered by high
consumption levels
The credit data market in the US is larger than in the EU, and
in the US credit data is made available not only to financial
institutions (as in the EU) but also to many other actors to
whom credit data is of interest such as employers and
landlords. Given the large number of consumer credit
reports put into circulation in the US, legislation has been
put in place to limit the risk of data errors and abuses.
In the EU the categories of databases are very heterogeneous
(content and ownership wise), and the levels of personal
data protection are very different. Bilateral and multilateral
agreements among owners of central credit databases are
likely to increase if there is a larger demand from lenders to
access credit databases from different Member States. It is
noteworthy in this context that global credit data firms
already operate on both sides of the Atlantic.
Customer Satisfaction Index –
a model for the EU
In contrast to the common use of a uniform Customer
Satisfaction Index in the US, it seems difficult to establish or
to further promote a uniform tool to measure consumer
satisfaction levels in the EU as a whole. While in the
European political debate, there are increasingly calls to
increase consumer satisfaction levels, in particular in the
context of consumer opportunities arising from the EU
single market, there appears to be an important information
gap concerning what are the real expectations and current
needs of European consumers. What is more, sometimes
evidence on the potential gains for European consumers
from introducing further internal market legislation is not
sufficiently compelling to justify an increase in the regulatory
burden. There is thus a strong argument in favour of
establishing a European Customer Satisfaction Index to
assist companies as well as policy makers to measure and
analyse the real needs and expectations of consumers.
Home lending - different market sizes
and different players
Credit to buy residential property represents the main type
of credit to households in both the EU and the US. In terms
of size, the US home loan market is more than twice the size
of the EU market, each representing respectively, €6.1 trillion
and €3.5 trillion. The EU home loan market is also much
smaller relative to GDP (38%) than that of the US (63%),
though a few EU countries have a similar or higher ratio of
residential housing debt to GDP than the US.
While retail banks are the main lenders and players in
the European home loan market, this is not so in the US,
where specialised mortgage banks are the main lenders,
and government sponsored entities the main sellers of
mortgage loans via secondary markets.
16

Mortgage funding – pronounced differences
between both markets
In Europe retail bank deposits continue to be the largest
source of funding for housing loans and the proportion of
outstanding housing debt that is funded via retail deposits
has remained constant in the last two decades. There are a
number of explanatory factors for this state of affairs (such as
the high savings rate of Europeans, the attraction of deposits
as a funding source and the limited availability of alternatives
such as covered bonds and RMBS in many parts of Europe)
which also clarify why funding via secondary markets
remains low, in aggregate, in the EU.
In sharp contrast, the US mortgage market is largely a
securitised market, where the great majority of mortgage
funding originates from the capital markets. Issues that
dominate in the US mortgage market today include the
strength and competitive advantage of government sponsored
entities, as well as the possible systemic risk to the financial
system of their hedging activities.
Looking to the future, it seems unlikely that the EU market
for home loans will emulate the US market as it is today.
The determining factors of the extensive securitisation that
came about in the US: shortage of deposits to fund home
loans and interest rate instability, are not relevant in Europe
today. Nor has securitisation in the US brought about the
reductions in mortgage funding costs that could have been
expected, a possible consequence of increased prepayment
risk inherent in mortgage backed securities, the main mortgage
funding instrument there.
In addition, there is no appetite (from policy-makers or the
industry) in Europe to have in place a state-backed system
such as exists in the US.
SME lending – predominantly bank financed
in both markets
In both the US and the EU, banking finance is the most
important type of external finance for SMEs while external
equity financing represents only a small part of their funding.
In terms of the types of banks which provide SME loans,
commercial community banks in the US and savings as well
as cooperative banks in the EU are important providers
of loans to SMEs, and regard SME lending as a major area
of activity.
An important explanation for that is the relationship banking
which such banks engage in, and which small enterprises
are so dependent on for financing. This way of banking is
important because in both the US and the EU, small businesses
represent the backbone of the economy. Relationship banking
has also been regarded as important as a means of insulating
firms from the effects of changes in interest rates, and thus
important in maintaining a stable economic cycle.
Growing consolidation – a threat to
the relationship banking model
In turn, this explains why in both the US and the EU, much
concern is regularly expressed on the future of financing
small businesses. The challenges to such enterprises are the
same in both regions. The growing concentration of the
banking sectors in both the EU and the US as consolidation
has intensified has led a number of commentators, not least
in Europe the European Central Bank and the European
Commission, to voice concern over the possible disappearance
of the types of banks that fund enterprises or, indirectly, to
express fear of the loss of the relationship lending methods
employed by such banks to fund enterprises. Evidence of
the (growing) reluctance of large banks to finance
enterprises has also been reported in both regions.
Securitisation of SME loans – complementary
to bank lending but no substitute
The above fears can hardly be allayed by the promises of
securitisation of SME loans in either market. In both the US
and the EU, SME securitisation issuance is very low, particularly
in the US in spite of securitisation of other types of loans being
widespread there. Many reasons explain this state of affairs,
among which the fact that the characteristics of SME loans
make it difficult or even prohibitively expensive to securitise
them. In any case, if government subsidisation of a secondary
mortgage market for such loans encourages the securitisation
of relationship loans, with a corresponding loss in relationship
benefits, the securitisation of SME loans may add to the
problem of SME access to finance, rather than help resolve it.
Market-driven or regulatory-driven approach
to shaping the payments market
In the European Union, policy makers and regulators, on the
heels of the introduction of the Euro in 12 Member States,
are preparing to "promote" the transformation and migration
of the currently mainly national-based payments markets
into SEPA, the Single Euro(pean) Payments Area.
17

In that context, it is tempting to look at the United States as
the region in the world that for the last two centuries has
had a single currency and, assumedly, a single internal market
for payments and try and understand the respective roles of
market forces, authorities and regulators in its development.
It seems fair to state that regulators take quite a different
approach to retail and commercial payments on both sides
of the Atlantic. To a large extent the current US payments
market is the result of market development that allowed
market forces to play a significant role. In the US it required
an unforeseeable and tragic event (September 11) for regulators
to revert to legislative intervention which within a few years
triggered structural change in retail and commercial
payments in order to overcome the "single point of failure"
(impossibility to timely clear cheques) pinpointed by the
terrorist attacks. In the EU, on the other hand, regulators
seem far less prone to let market forces play their role to the
fullest extent to achieve the internal market for payments.
Testament to the legislative approach taken at EU level is
e.g. Regulation 2560, which stipulates that prices for cards
and credit transfers within the EU cannot exceed prices
charged for cards/transfers within one EU Member State.
It must be noted in this context, that Regulation 2560
impacted negatively on price levels in some Member States.
Furthermore, the recent proposal of the payment services
directive, also shows the legislative approach in the EU as
the Commission’s proposed directive goes beyond what is
actually required to establish SEPA, an industry driven
project, which has kept up its commitments both in terms of
timing and content.
It should be noted that neither in the US nor in the EU has
new technology triggered a rapid, large scale change in
customer behaviour as regards payment practices. In both
areas there always is a significant lapse of time between
technology becoming available, and its wide adoption in
payments. It remains to be seen whether the sudden interest
for "contactless cards" could invalidate this conclusion.
Finally it should be highlighted that (according to the latest
CapGemini World Banking Report) on average US credit
institutions seem to perform better in product managing
account and payment services, and transmitting the
appropriate price signals to the market, than their EU
counterparts. US credit institutions decreased their prices for
account management and payment services (by respectively
16 and 14% between 2004 and 2005) whilst continuing to
marginally increase the prices for cash utilisation and
exception handling. EU credit institutions, for their part, made
cash utilisation cheaper (by 11%) – in spite of the significant
loss it represents to them – whilst prices for account
management and payment services remained almost
unchanged (falling by 1.6% and 2.4% respectively).
This could well be a reflection of political and regulatory
hurdles continuing to exist for EU credit institutions
preventing them effectively to price cash utilisation.
Distribution channels in retail banking
The branch is the primary distribution channel in both the
US and the EU. This is evidenced by the growth of branch
banking in the last two decades in both markets, in response
to customer preferences for relationship or proximity banking.
The growth in branch banking in the US and the EU is
also the result of widespread realisation among banking
executives that technologies like telephones and computers
are much less good than people for selling complex
products such as mortgages and mutual funds, as well as
selling a whole portfolio of services. The US and EU banking
markets have also experienced (substantial) growth in the
number of ATMs. Put in the context of an ever growing
branch network, it suggests that in both markets ATMs are
regarded not as substitutes but as a complimentary channel
to the retail branch. The same can be said about online
banking. The prevailing view today in both the US and
the EU is that internet banking can only succeed if it is
thoroughly integrated within the existing infrastructure,
which should combine click and mortar.
Competition in retail banking –
different developments in both markets
The largest competitive threat to traditional credit institutions
in the US has come in the form of private and public issuers
of asset-backed securities in the last twenty years. As US
domestic debt has moved from being funded via traditional
intermediation to being funded directly through credit
markets, ABS issuers have clawed significant parts of the
residential and business mortgage markets as well as the
consumer credit market. The threats of non-banks (credit
unions, auto financing from the large car makers, broking
houses etc) on the traditional activities of retail banks have
in contrast not been significant in the US.
In Europe, while non-banks such as credit companies,
auto companies (providing credit) and retailers banks have
emerged in the consumer credit area, they have not made a
significant impact in terms of market share to date. As banks
themselves are getting involved in a number of non-bank
ventures it also means that the threat is measured.
18

2. GENERAL INTRODUCTION
This study provides a comparison of the US and EU retail
banking markets. Each important aspect of each market is
looked at and explained in the context of the current situation
as well as what existed previous to it or what led to it, when
that is useful to understand the present. A comparison of
the two markets is carried out in parallel, highlighting the
main similarities and differences between the US and EU
retail banking markets on the topic in question. The aim of
this study is to provide the reader with a good grasp of the
economic and legal realities of each market as well as an
understanding of how they have evolved and how they are
today relative to one another.
The study begins with an institutional comparison, which
contains a description of the main types of credit institutions
that form part of the respective retail banking markets. It then
provides some detail in terms of historical background,
permissible activities and ownership structures of those credit
institutions. It also provides information on the taxation
regimes and deposit insurance schemes that these credit
institutions are subject to. A final section compares definitions
of financial conglomerates in each market.
This is then followed by an economic comparison which
begins by looking at the size of the markets and average size
of credit institutions. This is followed by a section which
reports and comments on consolidation and concentration
in both markets. The characteristics of credit institutions are
then looked at in more detail, such as their balance sheet
structures, profitability and cost efficiency.
The final chapter of the study represents a product and
distribution comparison of the US and EU retail banking
markets. The aim of this chapter is to focus on certain key
aspects of retail banking product and distribution. In the first
instance, we provide a comparison of activity in the two
most important areas of retail banking: lending and
payments. We then draw a comparison on the channels of
distribution in use in the US and the EU, and then in the final
section of the chapter we contrast key issues of competition
faced by retail banks in both markets.
The subsequent chapter is a regulation and supervision
comparison. In that chapter, the regulatory and supervisory
systems of each market are looked at in some detail and
compared. The chapter begins by describing and comparing
the legislation process for credit institution in both markets.
It then lists and defines the main bodies in charge of
regulating, supervising and licensing credit institutions in the
US and the EU. It then follows with sections on licensing/
chartering, supervision and regulatory trends. The chapter
ends with a section on the regulation of capital markets.
19

3. INSTITUTIONAL COMPARISON
3.1 Section introduction
This section presents the profiles of the different types of
credit institutions that are present in the US and the EU.
For every type of credit institution present in each market,
a definition and historical background is first given. This is
followed by an outline of the ownership structure, or
prevailing ownership structure(s), common to each type of
credit institution. Details are then given on how such
institutions are insured and on the bodies which insure
them. The activities which the various types of institutions in
question are legally allowed to carry out are then listed.
Finally, information about the taxation regime which each
type of institution is subject to is provided.
Looking at the different types of institutions in the US and
the EU, the distinction is made between, on the one hand,
the legal forms of credit institutions present in each market,
and the different types of actors also present in each market.
Very briefly, as this is covered in more detail in the regulation
and supervision comparison chapter, US credit institutions
can decide to obtain their charter either at the state or the
federal level, which in turn will determine whether they are
regulated and supervised at the state or the federal level.
For this reason, the regulatory system in the US is referred to
as a ‘dual’ system, symbolised by the simultaneous existence
of different regulatory options that are not alike in terms
of statutory provisions, regulatory implementation and
administrative policy.
In the EU on the other hand, credit institutions are supervised
at the country level, but mainly regulated at the EU level
as a number of areas of banking have been harmonised
throughout the EU via directives which are applicable to all
credit institutions.
3.2 Types of banking institutions
This distinction is necessary, given that in the US commercial
banks, thrifts 5 , credit unions and mortgage banks each have
their own specific charter (or license to operate) according
to bank type, and thus each of these denominations represent
distinct and specific legal forms. Further, credit institutions
in the US are regulated and supervised by distinct bodies,
according to their charter type.
This is not so in the EU, where commercial, cooperative and
savings banks represent different types of actors which are
not tied to any particular charter at the EU level. Also, unlike
US banks, they are bound by the same laws and regulations,
and supervised by the same bodies.
Another important distinction which exists between credit
institutions in the US and the EU retail banking markets is
in terms of the differences in the system of regulation.
3.2.1 United States
3.2.1.1 Legal forms in the US market
3.2.1.1.1 Introduction
In the United States, three different types of financial
institutions can be distinguished:
■
■
Depository institutions, commonly referred to as
banks, are defined as financial intermediaries that
accept savings and/or demand deposits from the
general public;
Non-depository institutions, on the other hand,
generate funds from sources other than deposits
and include:
i. Securities market institutions: investment banks,
brokerage firms, and organised exchanges;
ii. Contractual savings associations such as
insurance companies and pension funds;
5 Savings banks and savings and loans institutions.
21

■
iii. Investment intermediaries such as finance
companies, mutual funds and money market
mutual funds; and
iv Government financial intermediaries -
government-sponsored financial institutions
(GSEs) such as Fannie Mae, Ginnie Mae and
Freddie Mac.
Financial institutions that provide certain banking
services without meeting the legal definition of a
bank, so-called non-banks.
This section is concerned with describing depositary
institutions, the three different types of which can be
distinguished in the United States according to charter
types: commercial banks, savings or thrift institutions
(including savings and loans associations and mutual
savings banks) and credit unions. Mortgage banks –
which do not operate under a bank charter – as well
as other non-banking institutions offering financial
services, are also present in the US retail banking
markets, and are thus also briefly described here.
The CRA and its implementing regulations require
federal financial institution regulators to assess the
record of each bank and thrift in helping to fulfil
their obligations to the community and to consider
that record in evaluating applications for charters or
for approval of bank mergers, acquisitions, and branch
openings. The law provides a framework for depository
institutions and community organisations to work
together to promote the availability of credit and
other banking services to underserved communities.
Under its impetus, banks and thrifts have opened
new branches, provided expanded services, adopted
more flexible credit underwriting standards, and
made substantial commitments to state and local
governments or community development organisations
to increase lending to underserved segments of local
economies and populations 7 .
3.2.1.1.2 Commercial banks
3.2.1.1.2.1 Definition and historical background
The act of ‘chartering’ in the United States refers to the
equivalent act of licensing in Europe, or obtaining
authorisation to operate. The decision of a credit
institution to choose a particular type of charter –
commercial bank, thrift or credit union – will be
based on the business needs or marketing strategy
of the institution, and, as stated in this chapter’s
introduction, will determine the regulator that they
will be subject to.
Before we begin with the individual descriptions of
the different types of credit institutions in existence
in the US, we point out one common legal requirement
on the activities of all US credit institutions,
regardless of charter type, which is that imposed
by the Community Reinvestment Act (CRA). The CRA
requires credit institutions to act in a socially responsible
manner. It was enacted in 1977 to prevent redlining 6
and to encourage banks and thrifts to help meet the
credit needs of all segments of their communities,
including low- and moderate-income neighbourhoods.
It extends and clarifies the longstanding expectation
that banks will serve the convenience and needs of
their local communities.
Modern banking in the United States began in 1781
with an act of Congress that established the Bank
of North America in Philadelphia. It was succeeded
by the First Bank of the United States, which was
chartered in 1791 under federalist pressure, combining
elements of a private and a central bank. Its charter
was not renewed in 1811 however due to political
interests which opposed centralised banking and
advocated chartering by states. Similarly, the Second
Bank of the United States was chartered in 1816 but
ceased operation in 1836.
The early commercial banks catered mainly for the
needs of business by pooling the wealth of a large
number of savers and lending fractions of that pool
to commercial and industrial enterprises. By the mid-
1800’s however, commercial banks also started
providing savings accounts to small wage earners
and thus began to compete with savings banks.
Commercial banks have since broadened their offer
of financial services, though they continue to
specialise in providing business loans.
Commercial banks are created as for profit
organisations. While in the past their profits derived
mostly from interest income, today they increasingly
turn to fee income.
6 ‘Redlining’ refers to the refusal of a credit institution to extend credit to, lend to or otherwise assume some financial risk involving property or a business located
in a high-risk geographical area, usually a declining inner-city neighborhood.
7 Source: website of the Office of the Comptroller of the Currency www.occ.treas.gov/crainfo.htm
22

The market share of the US banking market of
commercial banks in terms of total assets at the end
of 2003 was 78% 8 .
3.2.1.1.2.2 Ownership structure and activities
The ownership structure of choice for US commercial
banks, which is that of the bank holding company,
is directly linked to the activities that banks were
permitted to perform. For this reason, we speak of
ownership structure and activities in the same section.
In practice, commercial banks can be independently
owned by private investors (stockholders) or by bank
holding companies. The vast majority of commercial
banks in the US today are owned by bank holding
companies. These are corporations or other entities
that own a majority of stocks or securities of one
(one-bank holding company) or more (multi-bank
holding company) banks, thus obtaining control of
the other corporation(s). Bank holding companies
own nearly all – 97% – of the insured commercial
banks by assets 9 .
The bank holding company form of ownership
became increasingly attractive to commercial banks
in response to restrictions on the scale and scope of
banking. On the liability side, commercial banks
were limited in terms of the types of liabilities they
could issue and the rates they could pay depositors.
They were generally relegated to the business of
making (primarily) business loans and providing
transaction accounts (or close substitutes) in fairly
localised areas.
This stemmed from the Acts put in place in the US to
keep the businesses of commercial banking and
investment banking strictly separate: the Glass-
Steagall Act of 1933, which prohibited banks from
engaging directly or indirectly in the underwriting of
or dealing in securities, and the Bank Holding
Company Act of 1956, which prohibited banks from
affiliating with insurance underwriters and nonfinancial
firms. Thus, for investment banking and
insurance services, individuals and corporations had
to go to other financial-service providers.
After these prohibitions gradually eroded because
of decisions by regulators and courts as well as
market place practises, Congress passed the Gramm-
Leach-Bliley Act (GLB) that further blurred those
distinctions by facilitating financial sector combinations
and regulatory change in November 1999. The GLB
repealed Sections 20 and 32 of the Glass-Steagall
Act which prohibited affiliations between banks and
securities firms and amended the Bank Holding Act.
Under the GLB banks and securities firms continue to
be prohibited from directly engaging in each other’s
business. However, the GLB created a new form
of bank holding company, the financial holding
company, which is allowed to engage in an
expanded range of activities.
The expanded permissible activities for these holding
companies include securities underwriting and dealing,
insurance agency activities and insurance underwriting,
acting as a futures commission merchant, and merchant
banking (‘financially related activities’). The Federal
Reserve Board and the Secretary of the Treasury have
the authority to determine whether other activities
are financial in nature or incidental to financial
activities and hence permissible for these holding
companies to engage in.
Furthermore, a financial holding company may engage
in any non-financial activity if the Federal Reserve
Board determines that they are complementary to a
financial activity and do not pose a substantial risk to
the safety or soundness of depository institutions or
the financial system (‘complementary activities’).
Thus, financial holding companies are simply a subset
of bank holding companies that are authorised to
engage in an expanded range of activities.
Commercial banks can therefore become affiliates of a
larger banking organisation, including also non-bank
financial firms as affiliates 10 , thereby allowing the
holding company to expand the scope of its activities
into areas not permitted to independently owned banks.
Using the holding company form of organisation
therefore allows bankers to diversify their product
lines and offer services requested by their customers
and provided by their European counterparts.
8 ESBG calculation based on figures from the Federal Deposit Insurance Corporation (FDIC) and the Credit Union National Association (CUNA).
9 From remarks by Governor Mark W. Olson at the Fortieth Annual Conference on Bank Structure and Competition, Sponsored by the Federal Reserve Bank of
Chicago, May 6, 2004.
10 Section 4 (c) of the Bank Holding Company Act provides a "laundry list" of permissible interests of bank holding companies in non-bank activities. Bank holding
companies may hold shares of other companies as a fiduciary, and may own less than 5% of the shares of any other company. They may also own the shares
of foreign companies that do most of their business abroad, and the shares of export trading companies. Furthermore, section 4(c)(8) of the Bank Holding
Company Act empowers the Board of Governors of the Federal Reserve System to approve other non-bank activities that are "closely related to banking",
such as for instance the provision of: consumer finance, credit cards, mortgage finance, financial counselling, securities brokerage, government securities
underwriting, printing and selling checks.
23

Also, many states had laws that restricted a bank
from opening branches to within a certain number
of miles from the bank’s main branch 11 . By setting up
a holding company, a banking firm could locate new
banks around the state and therefore put branches
in locations where it was not previously possible.
Regarding the restrictions on the activities of
commercial banks that do not form part of a holding
company however, the distinction must be made
between federal and state chartered banks.
For such banks with a federal charter, as mentioned
above, the GLB continues to prohibit from engaging
directly or indirectly in insurance underwriting or
merchant banking as well as from directly underwriting
and dealing in many types of securities,
including corporate debt and equity securities 12, 13 .
Indeed, the activities of federal-chartered (also referred
to as national) banks are limited to those deemed
"incidental to its organisation" by the National Bank
Act 14 . These activities include collecting deposits and
making loans, buying, selling and circulating currency,
holding real estate, providing fiduciary services and
trading certain securities for clients. Further the Office
of the Comptroller of the Currency has the discretion
to allow other activities that may be considered
"incidental" to banking and continues to allow new
activities under this "incidental powers" authority 15 .
With regard to the activities of state-chartered banks,
many states allow their state-chartered banks to offer
non-bank products and services to their customers
beyond the "incidental" powers of national banks.
In addition, the 1991 Federal Deposit Insurance
Corporation Improvements Act (FDICIA) does not
restrict state-authorised bank agency activities in which
a bank acts on behalf of a customer 16 . In fact, the
FDICIA grants state-chartered banks greater flexibility
than national banks regarding certain investments
and activities, such as insurance underwriting and
stock investments.
Several states allow their state-chartered banks to
offer full or discount brokerage services and to sell
real estate and insurance. FDIC (Federal Deposit
Insurance Corporation 17 ) approval is not necessary
for these activities. Some states also allow banks to
underwrite securities and to engage in real estate
equity and development activities which require FDIC
approval. In addition, many states have enacted
"wild card" statutes, which grant state-chartered
banks parity with the powers of national banks.
3.2.1.1.2.3 Deposit insurance
All national banks and state member banks 18 are
required to be insured by the FDIC. The FDIC collects
contributions from banks four times a year on the
basis of a biannual evaluation. The contribution is
based on the balance of insured deposits held by the
bank in the preceding two quarters and on the degree
of risk that the institutions represent. The money
collected by the FDIC from banks is subsequently
distributed into two different FDIC accounts: the Bank
Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF).
The BIF and SAIF were established in the wake of
the savings and loans crisis under the Financial
Institutions Reform, Recovery, and Enforcement Act
(FIRREA) of 9th of August 1989. SAIF was established
to insure deposits in savings institutions. It replaced
the former (FSLIC) insurance fund. SAIF was to be
managed separately from the new BIF (formerly the
Deposit Insurance Fund).
11 Most states have eliminated restrictions on intrastate branching for commercial banks since 1985. In those remaining states which still have restrictions,
statewide branching through acquisition is however allowed.
12 See Title 12 Section 1.3 of the US Code.
13 National banks in towns of fewer than 5,000 people may sell insurance, and the OCC has recently authorised national bank sales of other uninsured products
(e.g. mutual funds and annuities) as well.
14 Title 12 Section 24 (Seventh) of the US Code.
15 Activities authorised by the OCC under this provision include selling credit life insurance, offering banking-related data processing services, issuing credit cards,
acting as leasing agents for personal property, warehousing and servicing loans, assisting customers in tax preparation, operating postal substations, acting as
payroll issuers, maintaining business records for customers and providing consulting and auditing services for other banks.
16 See § 362.1 (b)(1) of FDIC’s rules and regulations, which implements section 24 of the FDICIA.
17 FDIC is one of the federal agencies that insure consumer deposits in a commercial bank or savings and loan institution for up to $100,000 per account. Deposits
include checking and savings accounts and certificates of deposit. See more on FDIC in the regulatory comparison chapter.
18 State chartered commercial banks in some states may instead insure customer deposit accounts through state or private deposit insurance programs.
24

FDIC-insured commercial banks are in the normal
case members of the BIF. But they can also be members
of SAIF or of both funds 19 :
- SAIF Members are predominantly savings and
loan associations supervised by the Office of Thrift
Supervision (OTS) 20 . In addition, so called “Sasser
financial institutions”, are insured by the SAIF.
These are SAIF member thrifts, which converted
to a bank charter and retained their SAIF
Membership 21 .
- BIF Members are predominantly commercial and
savings banks supervised by the FDIC, the Office
of the Comptroller of the Currency (OCC) 22 , or the
Federal Reserve Board (FED) 23 . Furthermore, so
called “HOLA thrifts” are insured by the BIF.
HOLA thrifts are BIF-member banks, which
converted to a thrift charter and retained their BIF
membership 24 .
- The Federal Deposit Insurance Act (FDI Act),
section 5(d)(3) enables the member of one
insurance fund, with the approval of its primary
federal supervisor, to merge, consolidate with, or
acquire the deposit liabilities of an institution that
is a member of the other insurance fund without
changing insurance fund status for the acquired
deposits. These institutions with deposits insured
by both insurance funds are referred to as Oakar
financial institutions.
Since 1980, combined savings, checking and other
deposit accounts have been insured for up to
$100,000 per depositor in each financial institution
the FDIC insures. Deposits held in different
categories of ownership – such as single or joint
accounts – may be separately insured. Also, the FDIC
generally provides separate coverage for retirement
accounts. Furthermore, the FDIC insures deposits
only. It does not insure securities, mutual funds or
similar types of investments that banks and thrift
institutions may offer.
3.2.1.1.2.4 Taxation
Commercial banks are subject to regular corporate
income tax.
3.2.1.1.3 Savings Banks and Savings and
Loan Associations (S&Ls)
3.2.1.1.3.1 Definition and historical background
Savings institutions (also known as thrifts) in the
United States include savings and loan associations
and savings banks.
Savings and Loan associations (S&Ls) originated as
state chartered mutual building and loan societies
accepting deposits from their members and offering
them loans to build homes. The first S&L was founded
in 1831. The modern savings and loans industry
emerged in the 1930s as part of a general federal
government policy of subsidising home ownership.
It started in 1932, when the Federal Home Loan
Bank Act created the Federal Home Loan Bank
System to oversee the S&Ls, with deposits to be
insured by the Federal Savings and Loan Insurance
Corporation (FSLIC).
In the 1950s and 1960s, savings and loans institutions
grew much more rapidly than commercial banks, but
when interest rates went up sharply from the late
1960s to the early 1980s, S&Ls experienced
difficulties that slowed their rapid growth.
By law and regulation, S&L assets were permitted to
be invested primarily in fixed-rate mortgages and
long-term bonds, but as interest rates rose to
historically high levels between 1979 and 1982, the
market value of these assets plunged. At the same
time, the liabilities of S&Ls were composed almost
exclusively of short-term deposits paying rates of
interest subject to deposit interest rate-ceilings – and
as market rates rose, even small savers began to think
like investors. S&L deposits were withdrawn and
placed in higher-yielding investments. As a result, in
the 1980s and part of the 1990s, S&Ls suffered large
losses and declined significantly in numbers (from
approximately 4,000 in 1980 to less then 2,000 by
the mid 1990s).
19 FDIC Annual Report 1999.
20 See more on the role of the Office of Thrift Supervision in the regulatory comparison chapter.
21 This is allowed under Section 5(d)(2)(G) of the Federal Insurance Deposit Act (FDI).
22 See more on the role of the Office of the Comptroller of the Currency in the regulatory comparison chapter.
23 See more on the role of the Federal Reserve Board in the regulatory comparison chapter.
24 This is allowed under Section 5(o) of the Home Owners’ Loan Act (HOLA).
25

Savings banks, in contrast to the focus of S&Ls on
promoting home ownership, were established to
promote savings among the working and lower
classes, who in earlier times were effectively ignored
by the large and established commercial banking
community, by accepting deposits and providing
interest. The intent was not to earn a profit for the
founders of the bank. Instead, the earnings would
go to the depositors.
The first savings banks of the United States were
established in 1816, when the Philadelphia Saving
Fund Society began operations on a voluntary basis
and the Provident Institute for Savings in Boston was
granted the first savings bank charter. Soon after the
early success of those two savings banks, other
savings banks were chartered in a number of states,
primarily in the Mid-Atlantic region and the industrial
North-east, where there were large numbers of wage
earners seeking a safe haven for their savings 25 .
In the early 1980s however many savings banks
failed for the same reasons as S&Ls. In addition, many
failures of thrifts occurred between 1985 and 1994
as a result of banking legislation 26 .
Banking legislation of that era also changed
considerably the profile of thrifts. For example,
federal deregulation laws in the 1980s gave savings
banks the opportunity to be federally chartered as
well as to become capital stock corporations (see
ownership structure section below). Also, the
activities of thrifts were much broadened (see
activities section below).
The market share of savings institutions in the US
banking market in terms of total assets at the end of
2003 was 15% 27 .
3.2.1.1.3.2 Ownership structure
The system for savings institutions incorporates basically
two choices for corporate governance, the mutual
and the capital stock (e.g. mutual holding) form of
ownership.
The original corporate organisation of both S&Ls and
savings banks was the mutual one. In a mutual
savings association, depositors are technically also the
‘owners’ of the assets and are therefore entitled to a
share of the profits. In a mutual savings association
however depositors do not have the same rights as
members or shareholders since the ownership rights
do not provide either voting rights or any influence
in managing the business 28 . Instead, such rights are
exercised by trustees in these institutions.
The ‘Trustee system’ is the principle characteristic
that distinguishes mutual thrift associations from
member-owned banks. Trustees are members of a
larger group known as the Corporators. Corporate
powers of the mutual savings association are vested
in the Corporators, and this group represents the
diverse interests and communities served by the bank.
Corporators elect individuals from the group to
govern the operations of the bank without profit to
themselves. The elected Trustees are responsible to
ensure that the interests of the depositors, borrowers,
and members of the community in which they serve
are considered when management decisions are made.
Further, a Board of Trustees ensures that the customers’
deposits are kept and invested safely, interest is paid
to the depositors out of the revenues generated
from investments after deducting expenses, and that
the principal is available to customers on request.
In mutual savings associations, profits are distributed
to the customers in proportion to the business they
do with the institution.
A newer mutual charter variation is that of the mutual
holding companies (MHCs) 29 . This is a corporate
structure that combines elements of a mutual savings
association with a stock entity. In a basic MHC
reorganisation, a mutual savings institution forms a
new, wholly-owned subsidiary stock savings institution
and transfers substantially all of the mutual's assets and
liabilities to the stock institution. The original mutual
institution then becomes a MHC by adopting a new
mutual holding company charter. In effect, the mutual
account holders of the mutual savings institution
become the owners of the mutual holding company.
25 About three-quarters of all mutual savings banks in the US today are located in Connecticut, Massachusetts and New York. Demographic and economic
conditions in the South and the expanding West favoured more the development of commercial banks and stock savings associations.
26 In the early 1980s, congressional activity was dominated by actions to deregulate the product and service powers of thrifts (and to a lesser extent of banks).
These deregulatory actions were generally unaccompanied by actions to restrict the increased risk taking they made possible, and so they contributed to bank
and thrift failures. A detailed analysis of the impact of regulation on the failure of thrifts can be found in “History of the Eighties: Volume 1: An examination
of the Banking Crisis of the 1980s and early 1990s”, Chapter 6, FDIC website.
27 ESBG calculation based on figures from FDIC and CUNA.
28 “History of the Eighties: Volume 1: An examination of the Banking Crisis of the 1980s and early 1990s”, FDIC website.
29 Mutual holding companies were first authorised by the Competitive Equality Banking Act of 1987. Those provisions were clarified by congress in the Financial
Institutions Reform, Recovery and Enforcement Act in 1989.
26

The subsidiary stock institution issues the stock, the
majority of which is owned by the MHC (no less than
50.1%). A minority portion may be publicly offered.
The MHC's board of directors/trustees is elected
by the same group (corporators or depositors) who
elected the directors/trustees of the mutual savings
institution.
Originally, most savings institutions were mutuals.
But since the early 1980’s, there has been a growing
trend of shifting ownership from depositors to
shareholders through the so-called mutual-to-stock
conversion 30 , the main reason being to raise equity
capital 31 .
Also, the mutual holding company form allows thrifts,
as commercial banks with the holding company
form, to be part of universal finance groups offering
insurance and securities services and underwriting as
well as investment banking.
3.2.1.1.3.3 Deposit insurance
Savings institutions, as commercial banks, are insured
by the FDIC 32 . The money collected by the FDIC savings
institutions is subsequently distributed into two
different FDIC accounts: the Bank Insurance Fund
(for savings banks) and the Savings Association
Insurance Fund (for S&Ls ). However, in special cases
they can also be insured by the respective other
fund or even both funds (see insurance part of
commercial banks section for more detail).
3.2.1.1.3.4 Activities
Until the 1980’s savings institutions were mainly active
in those fields they had originally been chartered for.
Savings banks focussed on receiving savings deposits
from individuals, investing them 33 and providing a
modest return to their depositors in the form of
interest, while S&Ls focussed on mortgage lending.
However, over the years, the charter of savings
institutions has changed considerably.
The Garn - St. Germain Act of 1982 broadened the
savings institutions’ powers allowing savings banks
to issue credit cards, make non residential real estate
loans and commercial loans; activities previously
only allowed to commercial banks. S&Ls were also
permitted to invest up to 30 percent of their assets in
consumer loans, and were allowed to invest in state and
local government revenue bonds. This deregulation
practically eliminated the distinction between
commercial and savings institutions.
As a further result of this deregulation, most federally
chartered S&Ls and savings banks today have
identical powers 34 .
Although the FIRREA 35 imposed back some restrictions
on thrift activities in 1989 36 , commercial banks and
savings institutions can today offer virtually the same
bundle of financial services products, from transactions,
savings, and time deposits to consumer, real estate,
and commercial loans. They nevertheless differ
noticeably in their commercial lending capacity
because "basket limits" were imposed to preserve
their primary character as retail mortgage-lending
institutions. Under these limits, a savings institution
can engage in mortgage lending without limit,
consumer lending up to 35% of its assets and
commercial lending up to 10 % of its assets (with an
additional 10% for small-business loans) 37 .
The elimination of lending limits on small business
loans and an increase of the lending limit on other
business loans from 10% to 20% of assets is
however likely to be introduced soon given that the
US House of Representatives voted overwhelmingly
in favour of regulatory relief legislation H.R.3505,
which proposes such changes, in March 2006.
The measure now has to be passed in the Senate.
30 In 1983, 77 percent of all S&Ls were mutual institutions. By 1996, only 42 percent of all institutions were mutuals. This trend is still ongoing. Source:
http://www.siue.edu/~jso/Papers_Publications/thrift.doc
31 “Mutual to stock conversions, problems with the pricing of IPOs”, J.A. Colantuoni, FDIC Banking Review.
32 The FIRREA abolished the FSLIC as the original insurer of S&Ls in 1989 and turned the responsibilities over to the FDIC.
33 Originally, the investment of savings banks funds was restricted to government bonds, but soon high-grade municipal, railroad, utility and industrial bonds,
blue-chip common and preferred stocks, first mortgage loans and real estate as well as other collateralised lending were added.
34 The only exception is mutually state chartered savings banks that convert to a federal savings bank charter.
35 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 9th of August 1989.
36 Thrifts were required to adhere to national-bank limits on loans to one borrower and on transactions with affiliates, limits were imposed on state-chartered
thrifts, the use of deposits was restricted and investments in junk bonds were prohibited.
37 Garn-St. Germain Depository Institutions Act of 1982, SS 321-335, 96 Stat. 1469, 1499-1505 (1982) (codified at 12 U.S.C. 1464(c)).
27

Finally, to be eligible to obtain advances from a Federal
Home Loan Bank 38 , a thrift must meet the Qualified
Thrift Lender test (QTL test). This test restricts a thrift's
commercial lending by requiring that 65 percent of
its portfolio assets be in mortgage and consumerrelated
assets 39 .
3.2.1.1.3.5 Taxation
Historically, mutual depository institutions were
exempt from federal corporate income tax, which had
given them a competitive advantage over taxable
commercial banks and life insurance companies 40 .
However, in 1951 thrift institutions lost their right to
tax exemption. The Senate report to the Revenue Act
of 1951 41 stated that mutual savings banks and S&Ls
would lose their right to tax exemption because they
had become competitors of commercial banks.
Furthermore, Section 593 of the Internal Revenue
Code of 1986 permitted thrifts that met the definition
of a domestic building-and-loan association to claim
deductions for additions to a bad-debt reserve. With
the enactment of the Small Business Job Protection
Act on the 20th of August 1996, the special baddebt
reserve provisions for thrifts were repealed.
According to this law, thrifts are now treated the
same as banks for federal income tax purposes.
3.2.1.1.4 Credit unions
3.2.1.1.4.1 Definition and historical background
Credit unions (CU’s) are member-owned, non-profit
financial cooperative institutions that offer a range
of financial services to their members. They are
organised around a particular group of individuals
with a common bond (such as a common employer
or union) and as a result tend to be much smaller
than other depository institutions. Credit unions do
not issue capital stock but build up capital by
retaining earnings.
The credit union structure in the United States is
organised in a three tiered system:
- Natural-person credit unions provide financial
services to qualifying members of the general
public. A special form of credit union in this
respect is the low-income designated credit union
that serves primarily low-income members in
distressed and financially underserved areas 42 .
- Corporate credit unions occupy the middle tier.
They were introduced in the latter half of the
twentieth century in order to meet the naturalperson
credit unions need for a source for costeffective
financial services. Today 31 corporate credit
unions offer a variety of investment services, payment
systems, loans and correspondent products and
service to their member credit unions 43 .
- The US Central Credit Union was created in 1974
to act as a central bank for credit unions. It is the
nation’s only wholesale corporate credit union
and is chartered as a commercial bank. Its primary
functions are to provide banking services and
operational support to the corporate credit
unions and to act as the corporate system's chief
liquidity centre.
From their early origins credit unions were depository
institutions created not for profit, but to serve
members as credit cooperatives. The first credit
union in the United States was established in 1909.
In the same year the Massachusetts Credit Union Act
became the first U.S. piece of legislation dealing with
credit unions.
With the upswing of the U.S. economy in the 1920's,
the credit unions became increasingly popular,
particularly for the provision of consumer credit, since
commercial banks and other credit institutions were
generally not interested in this field. By 1930, already
32 states had passed credit union legislation and
a total of 1,100 credit unions were in existence.
They grew steadily in the 1940s and 1950s, and
by 1960 credit union membership amounted to
more than 6 million people in over 10,000 federal
credit unions.
38 Federal Home Loan Banks (FHLB) are wholesale banks which community financial institutions turn to for funds. The 12 banks of the FHLB System are owned
by approximately 8,000 community financial institutions. Eligible Members are financial institutions, regardless of size, with at least 10 percent of their
assets in residential mortgage loans, or any FDIC-insured institution with average total assets over the preceding three years period of less than $500 million
adjusted annually.
39 The QTL test was introduced by the Competitive Equality Banking Act of 1987, Pub. L. 100-86 S 104 (1987).
40 “Comparing Credit Unions With Other Depository Institutions”, United States Department of the Treasury, January 2001.
41 See Senate Report No. 781 of 1951.
42 Credit unions with the low-income designation may obtain low-cost government loans through the so called Community Development Revolving Loan Fund.
43 Source: http//:www.ncua.gov/.
28

Regulatory reform over the past thirty years has
allowed credit unions to evolve from niche players to
full-service retail depository institutions. Credit unions
now behave just like other depository institutions,
offering virtually the same financial services as banks,
savings banks and savings and loan associations.
By June 2003, 9,529 credit unions provided financial
services to 81.8 million U.S. consumers 44 .
The credit union market share of the US banking
market in terms of the total assets of financial
institutions was 7 % by year-end 2003 45 .
3.2.1.1.4.2 Ownership structure
Credit unions are organised as mutuals. Customers
receive shares when a deposit is made and earn
dividends instead of deposit interest. The amount of
dividend is not guaranteed, but is estimated in
advance and paid if possible.
Members exercise democratic control of the credit
union by attending and participating in annual
meetings. In these meetings, they vote for a
volunteer, unpaid board of directors 46 from the ranks
of membership who in turn elects officers from its
own membership and appoints a supervisory
committee 47 and – where the bylaws have such a
provision – a credit committee 48 .
Each depositor has one vote regardless of the amount
of money that has been deposited. Because credit
unions are cooperative businesses, management
differs from other businesses and the use of
volunteer help and donations are common.
The common bond membership is the most distinct
feature of credit unions as compared to other
depository institutions. Only members of a particular
association, occupation 49 or a well defined local
community, neighbourhood or rural district 50 are
permitted to join 51 . Credit union’s bonds define their
field of membership.
The most frequent type of common bond is the single
employer or occupation. For example, most state
employees are eligible to join the state credit union.
With the Credit Union Membership Access Act of
1998 the limits on credit union membership were
expanded by permitting federal credit unions to
serve multiple groups with no common bond
between them (so called multiple common-bond
credit unions). Moreover, the membership rules of the
National Credit Union Association (NCUA) implementing
the Act set practically no limits to adding new groups
and their future growth 52 . At state level, regulators
and legislators have also, in many cases, broadened
the authority of state chartered credit unions to
expand their common bonds. Since one problem
with the common bond membership has always
been that it prevents credit unions from diversifying
their risk, this access to new groups helps credit
unions to mitigate this problem. Furthermore, this
virtual dissolution of the common bond led to an
approximation between credit unions and other
financial services providers.
3.2.1.1.4.3 Deposit insurance
In 1970, the National Credit Union Share Insurance
Fund (NCUSIF) was created by Congress. The fund is
operated and managed by the NCUA 53 . By law, the
insured credit unions maintain 1 % of their deposits
in the NCUSIF and the NCUA Board can levy a
premium if necessary 54 . In case of illiquidity of the
fund the US government will pay for the full amount
of insured deposits.
The majority of both federally and state-chartered
credit unions – 97% 55 of all natural-person credit
unions and all of the 31 corporate credit unions – are
insured by this fund. The NCUSIF protects member
deposits up to $ 100,000 per depositor and bank 56 .
44 Source: the 2003 midyear statistics for federally ensured credit unions.
45 ESBG calculation based on figures from FDIC and CUNA.
46 The board’s responsibility is to provide sound and effective management.
47 The supervisory committee’s responsibility is to make an audit at least once a year and to verify the accounts of members with the records of the financial
officer at least every two years. The committee is also responsible for reviewing the performance of the officials and employees and making recommendations
to the board of directors for improvement in the operations of the credit union.
48 Sections 110 et sqq. of the Federal Credit Union Act.
49 So called common-bond credit unions.
50 So called community credit unions.
51 Section 109 of the Federal Credit Union Act.
52 Interpretive Rule & Policy Statements (IRPS) 03-1, Chartering and Fields of Membership Manual, Chapter 2.
53 See chapter on regulatory and supervisory issues for further information.
54 Section 202 of the Federal Credit Union Act.
55 The remaining 3 % are uninsured state-chartered credit unions.
56 Section 207 of the Federal Credit Union Act.
29

Multiple accounts in the same name and in the same
bank are normally combined for the purposes of the
limits. Additional insurance coverage on multiple
accounts may be obtained if the member has
different ownership interests or rights in different
types of accounts. The remaining credit unions are
privately insured.
Since the underlying goals of the NCUA’s regulatory
system are protection of the credit union system and
soundness of the NCUSIF it regulates not only federal
credit unions but also certain aspects of federally
insured state-chartered credit unions. In some cases
the regulation of the latter by the NCUA is even
congressionally mandated 57 . In carrying out this
regulation the NCUA has to strike a balance
between regulating all federally insured credit
unions and maintaining the integrity of the dual
chartering system.
3.2.1.1.4.4 Activities
Since credit unions' financial power has expanded
they now offer almost anything a bank or savings
association does, including mortgage loans, credit
cards, traveller’s checks, money orders and commercial
loans. They sometimes even deal in sophisticated
investment products, including euro-dollars, cash
forward agreements etc.
Credit unions are primarily engaged in accepting
members' share deposits in order to offer them
consumer loans. They usually accept deposits in a
variety of share accounts like regular shares, share
drafts, share certificates, money market and retirement
plan accounts. Every credit union must offer its
member a regular share account, either as a separate
account or in combination with any of the other
available accounts. Share accounts and share certificate
accounts are the credit unions’ main sources of funds.
Loans to members represent the credit unions’ main
investment. The spectrum of the loans offered by credit
unions covers relatively small unsecured consumertype
loans as well as large loans which are secured
by a guarantee or other collaterals. Common types
of secured loans credit unions allow are ‘co-maker’
loans 58 , share-secured loans and auto loans.
Credit unions’ powers are limited to those mentioned
in section 107 of the Federal Credit Union Act.
The section includes some direct (express) powers
like for example accepting share deposits and making
loans to members as well as indirect (incidental)
powers. These are powers which are considered
necessary to enable a credit union to carry out the
business for which it was chartered.
They are specified in the rules and regulations
prescribed by the NCUA 59 . Every credit union has to
assure that the services it provides are within its
direct or indirect powers.
Since all kinds of insurance products, securities
brokerage, real estate brokerage and other financial
trust services were for a long time not permissible to
credit unions according to the Federal Credit Union
Act, they were all offered through credit union
service organisations (CUSOs). In 2001, the NCUA
extended the incidental powers rule to allow credit
unions to pull some of these activities back into the
credit union itself.
With regard to the main distinctions in powers between
credit unions and other depositary institutions, taking
the example of federally chartered institutions,
federal credit unions face stricter limitations on their
commercial lending and securities activities than
national banks and federal savings associations.
In addition, a usury ceiling prevents them from
charging more than 18 percent on any loan, and the
term of many types of loans may not extend beyond
12 years. At the same time, however, federal credit
unions have ample authority to offer most other
consumer products and services, whether directly or
through an affiliate, including stock/bond brokerage
and mutual funds services as well as internet
banking 60 .
3.2.1.1.4.5 Taxation
Federal credit unions are generally exempt from all
federal, state and local income or franchise taxes.
The only taxes they pay are real and tangible personal
property taxes, social security and unemployment
compensation taxes. State chartered credit unions are
exempt from federal and most state income taxes.
57 For example Section 201(b)(9) of the Federal Credit Union Act.
58 The co-maker is an experienced borrower with a credit history who secures the loan by offering to co-sign. Co-makers need not benefit from the proceeds of
the loan (as opposed to a co-applicant who does).
59 NCUA – Rules and Regulations November 2001, Part 721.
60 “Comparing credit unions with other depositary institutions”, United States Department of the Treasury, January 2001.
30

State credit unions were first exempted from federal
income tax in a 1917 administrative ruling of the U.S.
Attorney General 61 on the grounds that they closely
resembled the cooperative banks and similar
institutions that had been expressly exempted from
tax by legislation.
By 1937, after the establishment of federally chartered
credit unions in 1934, some states had begun to
tax federal credit unions. Since virtually all other
cooperative organisations including mutual savings
banks, mutual insurance companies and mutual
savings and loans were tax exempt at that time,
Congress amended the Federal Credit Union Act to
exempt federally chartered credit unions from
substantially all taxes, too 62 .
In 1951, Congress preserved the tax exempt status
of state-chartered credit unions 63 . Although this
exemption applies to both state and federal credit
unions, federal credit unions enjoy the broader tax
exemption enacted by Congress in 1937.
The institutions with which credit unions were
identified when their tax exemption was initially
granted lost their tax exemptions in 1951 when they
had reached the point of “active competition” 64 with
taxable institutions. Although this point has also
been reached with regard to credit unions, the tax
advantage for them still exists today.
3.2.1.1.5 Mortgage banks
During the savings and loan crisis in the 1980’s a lack
of capital forced institutions to remove loans from
their balance sheets through securitisation. Those
circumstances provided an opportunity for a new
type of lender, the mortgage banks, which originate
and warehouse mortgage loans for a short period
before reselling them.
Mortgage banks in the US do not operate under a
bank charter. Instead, they need a special mortgage
banking licence, to be issued by the respective state
department (for example the department of
corporations or the mortgage lending division).
As mentioned above, the main business of mortgage
banks is to originate and package mortgage loans,
holding them on the balance sheet for a short period
of time before selling them into the secondary market.
Primarily, loans are sold to the US government
sponsored agencies Ginnie Mae, Freddie Mac and
Fannie Mae that bundle them and issue so called
mortgage backed securities.
3.2.1.1.6 Non-banking institutions offering
financial services
Non-banking institutions offering financial services in
the US are called non-bank banks or limited service
banks. Both terms arose because of the “and” in the
Bank Holding Company Act’s definition of a bank:
According to the Act a bank is an organisation that
"accepts demand deposits and makes commercial
loans." Thus, a financial institution that either only
accepts demand deposits or only makes commercial
loans but does not do both, is not a bank for the
purposes of the Bank Holding Company Act.
Because limited-service institutions fail to satisfy
the legal definition of a bank, neither their parent
corporations nor other subsidiaries are subject to the
strictures imposed by the act. They may engage in any
activities they wish, including activities that are closed
to traditional banks and to bank holding companies
– manufacturing, retailing, corporate securities
underwriting, and insurance brokerage, to name a
few. Anyone can acquire a non-bank bank and this
can be done anywhere, breaching the still existing
legal geographic restrictions for banks as well 65 .
Companies in a wide range of industries have
acquired limited-service banks. They have done so
for a variety of reasons: Gulf & Western 66 , one of the
first companies to acquire a limited-service bank, did
so to support its credit card and consumer lending
activities. Merrill Lynch obtained its non-bank bank
so that it could process its cash management account
customers' check and credit card transactions in-house.
Other firms have acquired non-bank banks in order
to offer customers access to their funds through
nationwide automatic teller machine networks.
61 Op. Att’y Gen. 176 (1917).
62 Pub. L. No.416, c. 3, section 4, 51 Stat. 4 (Dec. 6, 1937); Section 122 of the Federal Credit Union Act (12 U.S.C. § 1768).
63 Now section 5(c)(14)(A) of the Internal Revenue Code.
64 See Senate Report No. 781 of 1951.
65 See section on regulatory trends in the US in the chapter on regulatory issues for more detailed information on these restrictions.
66 Gulf & Western was a US conglomerate the legal successor of which is Viacom.
31

Most non-bank banks however accept deposits
but make no commercial loans; they lend only to
individuals. Since the law is not absolutely clear
about whether the personal loans made by nonbank
banks must be confined to consumer loans or
whether they may be used by their recipients
for business purposes, most limited-service banks
furthermore lend only for consumption.
Most non-bank banks are federally insured and
consequently are regulated by the FDIC and subject
to capital and reserve minimums, examinations and
other requirements much like those imposed on fullservice
banks. Thus, it is not the non-bank banks
themselves that are unregulated, it is their parent
organisations that enjoy more freedom than the
owners of traditional banks 67 .
However, though non-bank competition of the
traditional kind like auto financing from large car
makers and Wall Street broking houses offering
quasi-banks accounts is widespread, there are only
limited examples of banking carried out by retailers
(for example banking offshoots of supermarkets and
utilities) or completely new start-ups. Savings and loan
institutions owned by retailers are rare, very small
and localised 68 .
3.2.1.2 Actors present in the US market
It should be noted that a number of the independent
banks and savings institutions present in the US
market are known specifically as Community banks.
Community banks share the following two key
characteristics – they are small in size and do most of
their business in the community in which they are
located. Because those characteristics tend to go
together and size is easy to measure, common
practice is to define community banks as those
below a certain threshold. One of the thresholds
most used by banking analysts is $1 billion in total
banking assets.
Community banks have a clear place in the US
banking system, which resulted largely from a legal
framework that restricted banks’ abilities to diversify
geographically 69 . However, with increasing merger
activity in the last 20 years, the number of
community banks – while still quite large – has
declined 70 . There were about 7,300 FDIC insured
community banks at year-end 2003, some 140 fewer
(1.9%) than a year earlier and about 500 (or 11%)
fewer than existed five years earlier 71 .
The special economic role of community banks is to
be a provider of relationship-based banking services.
In both rural and urban areas, they satisfy the needs
in this sector especially by providing credit to small
businesses and farmers, attracting retail deposits
from small depositors and offering personal services
to their customers.
3.2.2 European Union
3.2.2.1 Legal forms (and harmonisation)
in the EU market
As credit institutions have been incorporated under
the national law of the respective Member State,
their legal structure varies considerably from one
country to the next. An array of different legal forms
including joint stock, mutual, limited liability, public,
private foundation, public foundation, etc. is therefore
in existence in the EU.
In addition, two European company statutes based
on European Community law now give companies
the option of forming either a European public limitedliability
company – known formally by its Latin name
of ‘Societas Europeae’ (SE) 72 , or a cooperative or SCE
(Societas Cooperativa Europeae) 73 . The objective of the
statutes is to provide companies with adequate legal
instruments to facilitate their cross-border and transnational
activities. Both statutes provide an additional
optional legal form and do not replace existing laws
governing companies at national or regional levels.
67 Source: http://www.cato.org/pubs/pas/pa085.html.
68 Source: “Europe’s new banks – The “non-bank” phenomenon”, Study by the CSFI, June 2000.
69 See chapter on regulatory trends for more information.
70 Small community banks (those with less then $100 million in assets) were most affected by this trend. (http://www.fdic.gov/bank/analytical/future/fob_03.pdf ).
71 Source: http://www.federalreserve.gov/boarddocs/speeches/2004/200405063/default.htm.
72 The regulation on the Statute of the European Company (2157/2001/EC) and the related Directive concerning worker involvement in European Companies
(2001/86/EC) entered into force on the 8th of October 2004. An SE can either be established, or it can be set up by merger or by establishing a holding
company or a joint subsidiary, provided at least two of the participating companies are established in different Member States of the EU. Another way an SE can
be set up is via incorporation, by transforming a public limited-liability company, provided it has had a subsidiary in another Member State for at least two years.
73 The Regulation on the Statute for a European Cooperative Society (1435/2003/EC) and the Directive supplementing the Statute for a European Cooperative
Society with regard to the involvement of employees (2003/72/EC) were formally adopted by the Council of Ministers on 22nd of July 2003. The SCE statute
provides a legal instrument for companies of all types wishing to group together for their common benefit. An SCE is treated as any other multi-national
company for tax purposes according to the national fiscal legislation applicable at company or branch level. It will continue to pay taxes in those Member States
where it has a permanent establishment.
32

There has however been much effort at the EU level
to ensure that the many different actors present in
the EU banking sector are regulated in the same way.
Thus, a number of areas of banking have been
harmonised across Member States by EU Directives
which are applicable to all kinds of credit institutions,
irrespective of their legal form. Three examples are
the universal banking model, minimum amount of
own funds and deposit guarantee schemes 74 .
3.2.2.1.1 The “Universal Banking” model in Europe
A key feature of the 1989 Second Banking
Coordination Directive relates to the fact that the
activities in which credit institutions can engage in
are defined exhaustively 75 . The model promoted by
the Directive, and imposed throughout the EU, is the
“universal banking” model, as the Directive foresees
that credit institutions can engage in activities such as
“acceptance of deposits and other repayable funds”,
“lending”, “trading for own account or for account
of customers” or “safekeeping and administration
of securities”.
Before the adoption of the Directive, important
differences existed between Member States, as in
some countries strict limitations were imposed with
regards to authorised activities for banks, whereas in
other countries the model was already that of
universal banking. The Directive was thus a very
important milestone in terms of the creation of a
level playing field in the EU banking sector.
Noteworthy is also the fact that the activities defined
in the Directive apply to the institutions defined as
“credit institutions”, which includes institutions such
as banks, savings banks and cooperative banks.
Concretely, this means that whereas the legal
environment of individual Member States can
foresee specific features for the different categories
of credit institutions, the activities in which these
credit institutions can be engaged are the same and
are those defined by the Directive.
3.2.2.1.2 Minimum amount of own funds
Another key part of the Second Banking Co-ordination
Directive defines what is to count as capital for credit
institutions. In order for a national authority to grant
authorisation to prospective banks, the initial capital
must be no less than 5 million Euros and there is also
a provision intended to ensure that the component
authorities collect information on the identities of
shareholders or qualifying members. The competent
authorities shall refuse authorisation, taking into
account the need to ensure the sound and prudent
management of a credit institution, if they are
not satisfied as to the suitability of shareholders.
The directive lists a number of activities permissible
for a credit institution. Based on the universal banking
model the list contains a number of securities
activities in addition to traditional banking activities.
3.2.2.1.3 Deposit guarantees
Another example of bank harmonisation in Europe is
the requirement 76 that all credit institutions are either
member of a deposit guarantee scheme or that they
are covered by a protection scheme 77 , and that all
deposits must be at least covered up to 20,000 Euros
in the event of deposits being ‘unavailable’ 78 .
Member States may limit the guarantee provided to
a specified percentage of deposits. The percentage
guaranteed must, however, be equal to or exceed
90% of aggregate deposits until the amount to be
paid under the guarantee reaches the amount of
20,000 Euros. This limit applies to deposits placed
with the same credit institution irrespective of the
number of deposits.
Some Member States however – such as Germany,
the UK, Denmark, France and Italy – also have in
place additional voluntary protection schemes with
coverage levels which are significantly superior to the
minimum 20,000 Euros level, with Germany for
example requiring coverage of up to 100,000 Euros.
74 Note however that there is no EU-wide tax system as regards direct taxation since the EC-Treaty does not contain specific provisions to that regard. Direct and
indirect tax law is therefore only harmonised where required by the four freedoms enshrined in the Treaty.
75 Annex I to Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of
credit institutions.
76 Set in law by Article 3 sec. 1 of Directive 94/19/EC, as follows: “Each Member State shall ensure that within its territory one or more deposit-guarantee schemes
are introduced and officially recognised. Except in the circumstances envisaged in the second subparagraph and in paragraph 4, no credit institution authorised
in that Member State pursuant to Article 3 of Directive 77/780/EEC may take deposits unless it is a Member of such a scheme. A Member State may, however,
exempt a credit institution from the obligation to belong to a deposit-guarantee scheme where that credit institution belongs to a system which protects the
credit institution itself and in particular ensures its liquidity and solvency, thus guaranteeing protection for depositors at least equivalent to that provided by a
deposit-guarantee scheme, and which, in the opinion of the competent authorities, fulfils the following conditions…”
77 For example the savings banks in Germany have their own protection scheme in the form of deposit guarantee funds.
78 A deposit is regarded as being unavailable if it was due and payable and has not been available to a depositor for 21 days in succession, Article 1 Nr.3 of the
Directive 94/19/EC.
33

The deposit guarantee funds in the respective EU
Member States are in general funded by contributions
from their members. In some countries 79 , there is
one big fund for all kinds of financial institutions,
while in other states 80 , there are separate funds for
commercial banks, savings banks and cooperatives.
There exist certain types of credit institutions that are
only present in one or a few Member States, such as
certain highly specialised financial institutions or credit
unions, which are only established in the British
Islands and in certain Eastern European countries,
but not on the Western European continent.
3.2.2.2 Actors present in the EU market
3.2.2.2.1 Introduction
In Europe, financial intermediaries fall into three
categories, as follows:
i. Monetary financial institutions (MFIs), which are
central banks, resident credit institutions as
defined in Community law, and other resident
financial institutions whose business is to receive
deposits and/or close substitutes for deposits
from entities other than MFIs and, for their own
account (at least in economic terms), to grant
credits and/or make investments in securities 81 ;
ii. Insurance corporations and pension funds (ICPFs),
comprise all financial corporations and quasicorporations
that are engaged primarily in
financial intermediation as the consequence of
the pooling of risks 82 ;
iii. Other financial institutions (OFIs), which are
mainly investment firms.
Credit institutions in Europe, which are part of MFIs,
are defined in the Banking Coordination Directive
2000/12/EC of 20 March 2000, as amended by
Directive 2000/28/EC of 18 September 2000 (including
the exempt credit institutions), as “(a) an undertaking
whose business is to receive deposits or other repayable
funds from the public and to grant credits for its own
account; or (b) an electronic money institution within
the meaning of Directive 2000/46/EC of the European
Parliament and of the Council of 18 September 2000
on the taking up, pursuit and prudential supervision
of the business of electronic money institutions”.
Historically, the banking market in Europe has
developed separately in each country and not on a
Europe-wide basis. Thus, the types of institutions
that are active in banking are not the same in every
EU Member State.
Notwithstanding the differences in detail, European
credit institutions can be divided into four main
groups: commercial banks, savings banks, cooperative
banks and building societies and mortgage banks 83 .
Further, all credit institutions in Europe have to
comply with the minimum requirements set in the
Second Banking Coordination Directive.
3.2.2.2.2 Commercial banks
3.2.2.2.2.1 Definition and historical background
The first bank to offer most of the basic banking
functions known today was the Bank of Barcelona
in Spain. Founded by merchants in 1401, this bank
held deposits, exchanged currency, and carried out
lending operations. It is also said to have introduced
the bank cheque. Three other early banks, each
managed by a committee of city officials, were the
Bank of Amsterdam (1609), the Bank of Venice
(1587), and the Bank of Hamburg (1619). These
institutions laid the foundations for modern deposit
and transaction banks.
For more than 300 years, banking in the European
continent was then in the hands of powerful
statesmen and wealthy private bankers, such as the
Medici family in Florence, the Fuggers in Germany
and also the Rothschild family.
Today commercial banks still include many large
banks, many of which have a big market share in
their national market, and act as global players,
though most of them are not in the hands of
wealthy individuals anymore, but are legal entities
like joint stock companies.
Commercial banks account for about 33% of total
banking assets in Germany 84 , 48% in the UK 85 , 54%
in Spain 86 , 68% in France 87 and 73% in Finland 88 to
give a few examples.
79 E.g. in Finland, Luxembourg, the Netherlands, Sweden and the UK.
80 E.g. in Austria, France, Norway and Spain.
81 See glossary in www.ecb.int.
82 See glossary in www.ecb.int.
83 The latter two are grouped separately due to their special field of activity although they are also always part of one of the first three categories.
84 ESBG calculation on the basis of information from Deutsche Bundesbank.
85 ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003.
86 ESBG calculation on the basis of information from Banco de España (Boletín Estadístico).
87 ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003.
88 ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003.
34

3.2.2.2.2.2 Ownership and corporate structure
The corporate structure of commercial banks is not
uniform throughout the EU. There are some European
countries in which a bank will only be granted a
license to engage in banking if it is organised as
laid down in law. For example in Greece, Norway,
Sweden and Spain banks can only be limited liability
companies. In certain countries commercial banks
can choose from a number of different corporate
structures (as in Belgium and Austria), while in a
number of other countries there are almost no
restrictions as in Germany or France.
The vast majority of the commercial banks in Europe
that have a choice of corporate structure opt for one
that gives them the opportunity to be listed on their
respective national stock exchange, like the public
limited company in France, the company limited by
shares in Switzerland or the joint stock corporations
in Germany.
3.2.2.2.2.3 Activities
According to the universal bank principle in Europe
commercial banks can engage in the full range of
banking activities, which includes retail as well as
direct or indirect engagement in wholesale and even
investment banking. This is the standard European
model allowed since the Second Banking Coordination
Directive of 1989.
However, in some countries such as the UK banks
need a separate license if they want to be active in
investment banking. In addition, banks can own nonfinancial
companies, including insurance companies 89 .
3.2.2.2.2.4 Taxation
Commercial banks are taxed according to their
respective corporate structure under the law of the
Member State they are located in.
3.2.2.2.3 Savings banks 90
3.2.2.2.3.1 Definition and historical background
There is no common definition for a savings bank
in Europe. In addition, savings banks in Europe
possess all types of different corporate structures.
European savings banks do however share common
characteristics, such as close local and regional ties
and proximity, the will and vocation for socially
responsible behaviour and a comprehensive range of
financial services for private and corporate customers
with a special focus on small and medium-sized
enterprises.
The savings banks concept is a European idea. Its
ideological roots date back to the enlightenment.
Literature unanimously claims the first (ideological)
savings banks project to be the work of the
Frenchman Hugues Delestre, dating back to 1611.
The idea was to offer banking services to the entire
population and especially its lower-income sections
in both towns and the countryside through a large
number of establishments distributed nationwide,
thereby contributing to social justice and greater
prosperity for all.
The first savings bank was founded in 1778 in
Hamburg, Germany. Many savings banks were then
established in a number of European countries at the
beginning of the 19th century.
Initially, savings banks were usually founded by
public or private institutions, which they were
dependent on. They operated only at local and
regional level, which had the advantage of giving
them great closeness to their customers. Their core
business then was deposits.
As of the end of 2004, there were about 725
savings banks with more than 50,000 branches in
the EU-15 91 .
The market share of savings banks in their national
domestic banking markets varies: accounting for
about 37% of the total assets in Spain, 35% in
Germany 92 , 18% in Austria, 12% in France, 6% in
Italy, 5% in Greece 93 and 4% in Finland 94 .
89 See Article 51 of the Consolidated Banking Directive.
90 Sources: Perspectives 44, ESBG, and “History of European Savings Banks”, published by Wissenschaftsförderung der Sparkassenorganisation in 1996.
91 Source: ESBG.
92 This figure includes the Landesbanken, which are owned by the German savings banks.
93 Sources: Calculations based on information from ESBG Members as well as the ECB and the National Banks.
94 Source: ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003.
35

3.2.2.2.3.2 Ownership structure
As stated above, the ownership structure of savings
banks in the EU differs from state to state. They are
for example organised as joint stock companies (such
as in the UK and Sweden), cooperatives (France),
foundations (Spain and Finland) or institutions
governed by public law (Germany).
The concrete legal structure of savings banks in a
country has always been very strongly influenced by
a variety of economic and social traditions at the
national level. However, in some countries there have
been changes in the savings banks’ form, structure
and organisation in recent years, arising from the
need to extend their activities, to adapt their
business ethics to market conditions and at the same
time to avail themselves of the new instruments for
capital formation.
3.2.2.2.3.3 Activities
As explained previously, savings banks in Europe are
subject to the same laws applicable equally to all
credit institutions. Most savings banks in Europe
today are universal banks which provide a full range
of banking activities 95 . Many are, as most commercial
banks, multi-channel all-finance organisations which
also make use of partner companies to offer certain
specialised products. Though certain European savings
banks also have significant wholesale banking
divisions, all are focussed mainly on retail banking
and traditional banking activities, and are especially
active in providing financial services to SMEs and
local authorities.
Liberalisation has also taken place concerning the
traditional regional principle of the savings banks.
Although the majority of savings banks continue to
operate at a regional level, there are generally no
longer any limits to branching outside the regions in
which they have their headquarters.
The exception in that respect is Germany, where the
savings banks are subject to restrictions of geographical
reach according to the savings banks laws of the
federal regions (Länder).
Furthermore, savings banks are socially active.
This means on the one hand that they offer their
financial products to all sections of the population
and all sizes of enterprises. It means also that savings
banks invest in social, cultural and/or welfare
projects and/or give part of their profits to charitable
foundations. In several EU Member States the social
and welfare aims of savings banks are even laid
down in law 96 .
3.2.2.2.3.4 Taxation
Savings banks are taxed according to their respective
corporate structure under the law of the Member
State they are located in.
3.2.2.2.4 Cooperative banks
3.2.2.2.4.1 Definition and historical background
According to the definition of the International
Cooperative Alliance (ICA) 97 a cooperative is an
autonomous association of persons united voluntarily
to meet their needs and aspirations through a jointly
owned and democratically controlled enterprise.
The defining characteristics for a cooperative are:
i. Possibility of free and voluntary association and
withdrawal from the enterprise;
ii. Democratic structure, where each member has
one vote (or a limited amount of votes), majority
decision making and an elected leadership
accountable to its members;
iii. Equitable, fair and just distribution of economic
results.
The European cooperative banking industry has
existed for more than 100 years. The first cooperative
was organised in 1844 by a group of workers in
Rochdale, England. That same year in Germany,
Victor Aime Huber developed some of the early
European cooperative theories. The idea of credit
societies was a part of this effort.
95 Some exceptions include: Austria, where only the two largest of the 58 savings banks are allowed to grant mortgage and municipal bonds; Germany (where
the public charter of savings banks is regulated by the savings bank laws of the German Länders (regions) under the relevant state legislation), where a number
of transactions featuring particularly high risk are either ruled out or subject to certain restrictions.
96 Examples are the Savings Banks Acts of the Bundesländer in Germany, Article L. 512-85 of the Code Monétaire et Financier in France and the Obra Social in Spain.
97 ICA is an independent, non-governmental association which unites, represents and serves co-operatives worldwide. Founded in 1895, ICA has 221 member
organisations from 88 countries active in all sectors of the economy. Together these co-operatives represent more than 800 million individuals worldwide.
36

Hermann Schulze-Delitzsch and Friedrich Wilhelm
Raiffeisen created the first true credit unions in
Germany in 1852 and 1864. In 1849, Raiffeisen
founded a credit society in Flammersfeld, but it
depended on the charity of wealthy men for its
support. In 1864, Raiffeisen organised a new
cooperative credit society along principles still
fundamental today. Germany's credit societies and
similar institutions that Luigi Luzzatti founded in Italy
were the forerunners of today's large cooperative
banks in Europe.
Cooperative banks account for about 8% of the
total banking market assets in Germany 98 , 16% in
Finland 99 , 19% in France 100 and 4% in Spain 101 .
3.2.2.2.4.2 Ownership structure
In general, a cooperative bank can adopt any other
legal form which can be adapted to the above
definition and characteristics. Accordingly, cooperatives
can be incorporated under general company law
and can take several company forms in a number of
European countries like Denmark, Germany or
Luxembourg, but in the majority of states in the EU
cooperative banks are not only subject to the general
law that applies to all credit institutions but also to
laws governing cooperatives in general 102 . In several
of those laws, there is a special legal form of company
foreseen for cooperatives 103 .
3.2.2.2.4.3 Activities
According to the universal banking principle in Europe,
cooperative banks in general offer a full range of
banking services just as commercial banks and savings
banks do. Cooperative banks are in this respect often
subject to the same legislation as other financial
institutions. But as already mentioned above, a
considerable number of cooperative banks in Europe
are also subject to laws governing cooperatives in
general or even special sector-based legislation
for cooperatives 104 . Both kinds of laws may restrict
the activities of cooperatives, mainly due to their
mutual nature: historically, cooperatives were only
allowed to carry out business with their members.
However, in eight countries, where laws on
cooperatives have been adopted recently (France,
Italy, Spain, Belgium, Portugal, Denmark, Finland,
Sweden), third parties who are not members of a
cooperative have been authorised to invest in it.
When the exclusivity principle (under which cooperatives
may have business relations only with their members)
is enshrined in the legislation, it is usually couched in
terms allowing for some flexibility. For example, many
countries authorise transactions with third parties
that are not members of the cooperative provided
that these transactions remain ancillary in nature and
do not jeopardise members’ interests. In several
countries trade with non-members is tolerated, even if
it runs contrary to the definition of a cooperative
under national law. Certain Member States do not
allow non-user (investor) members to benefit from
surpluses resulting from trade with non-members.
Cooperative banks have traditionally focussed on
supplying financial services to rural communities and
also to small and medium-sized enterprises.
Many cooperative banks also act in a socially responsible
manner. First of all, their corporate structure is defined
by the principles of democratic participation, the fair
distribution of surpluses and solidarity. In addition,
cooperative banks may also integrate other stakeholder
interests and engage in respective projects, for
example in the communities they are located in.
3.2.2.2.4.4 Taxation
In Austria, Germany, Greece, Ireland, the Netherlands
and Luxembourg, cooperatives are subject to the same
provisions and rates as other companies. However, in
many EU Member States there are special tax regimes
for cooperatives which grant them certain benefits.
One common beneficial rule is a tax exemption /
reduction for trade with members, but there are also
other specific provisions like withholding tax reductions
of 25% for the first 125 Euros per annum invested
per member, reduced rates of corporate tax for
approved cooperatives (Belgium) or exemption from
stamp duty on certain books and documents
(Portugal). Those tax benefits basically result from
the mutual nature of cooperatives.
98 ESBG calculation on the basis of information from Deutsche Bundesbank.
99 ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003.
100 ESBG calculation on the basis of data from the OECD publication “Bank profitability” for 2003. Note: In France savings banks have been organised as
cooperatives since 1999. They are not however included in this calculation of market share.
101 ESBG calculation on the basis of information from Banco de España (Boletín Estadístico).
102 Exemptions are Denmark and Luxembourg.
103 E.g. in Austria, Belgium, Italy, Ireland, the Netherlands and Germany.
104 E.g. Austria, France, Ireland (credit unions), Spain, Sweden, UK (credit unions and building societies).
37

3.2.2.2.5 Building societies and specialised
mortgage banks
3.2.2.2.5.1 Definition and background
Mortgage banks are credit institutions that offer
housing loans only. The history of mortgage banking
and mortgage bonds goes back to the 17th century.
In Prussia, an association of large land owners was
established for the purpose of obtaining cheap loans
for the agricultural sector operating in a territorially
limited area. The model of such land credit associations
soon spread over Europe and urban credit associations
started the financing of urban properties. The intensive
development of industry in other European states,
especially England, Holland and France was the reason
why in those countries the idea arose to finance the
construction of urban infrastructure and housing by
means of letters of lien 105 . In the 18th and 19th
centuries the system of mortgage bonds became
popular all over Europe. The principles of functioning
of mortgage banks have survived unchanged until
today in European countries, and the system of
mortgage bonds has developed in 14 European states,
where there are a total of 130 mortgage banks.
Building societies pay interest on deposits and lend
money on the security of property to enable
members to buy their own homes. This money used
to come exclusively from individual saving deposits.
These days an increasing proportion is raised on the
commercial money markets, though this still
represents a minority of the funds.
The first building societies were set up in Birmingham,
United Kingdom, in 1775. They consisted of mutual
aid groups which collected and pooled the savings of
their members. When there were sufficient funds, a
building was bought or constructed and lots were
drawn to see which member it would be allocated
to. The group was dissolved when all the members
had somewhere to live. From the UK, the concept
then spread quickly all over Europe.
With the exception of the UK, Austria and Germany
however, the bulk of the housing credit markets of
Europe are shared among non-specialised lenders
such as commercial and savings banks.
3.2.2.2.5.2 Ownership and corporate structure
The corporate structure of building societies and
mortgage banks is as different as it is for other credit
institutions in the EU: in the UK for instance building
societies are mutual institutions 107 ; in Germany the
only possible legal form for a private building society
is that of joint stock corporation 108 while the legal
form of public building societies is regulated in
different ways by the Bundesländer 109 , that is to say
that they are either divisions of public banks or
institutions incorporated under public law with their
own legal personality, or they are public limited
companies. German private mortgage banks can
only be organised as stock corporations or as
partnerships limited by shares 110 .
3.2.2.2.5.3 Activities
Mortgage banks are specialised in granting credits
backed by mortgages and issuing mortgage bonds.
According to the mortgage bank Acts in the
respective European countries the sole purpose of
mortgage banks is to acquire and grant loans that
are mainly refinanced by mortgage bonds.
The function of building societies is to enable people
to have loans that help them buy their own homes.
However, the systems in place across Europe are
slightly different. For example in Germany, the
building societies offer households fixed below
market rate savings contracts that, once completed,
entitle the saver to fixed below market rate loans to
be used for housing purposes. The government
subsidises the savings through a lump sum grant
payable upon completion of the contract. Those
building societies may carry out only banking
activities closely related to such contracts.
The modern building society dates back to 1850,
when they began accepting investments from people
who did not necessarily want to buy a house 106 .
105 Legal right to hold property of another party or to have it sold or applied in payment of a claim.
106 Source: the Commission’s consultation document “Mutual societies in an enlarged Europe”, 3.10.2003.
107 Between 1995 and 2000 there was a period of demutualisation. A lot of building societies became banks because banks were then permitted to also conduct
mortgage business and a lot of mutual institutions recognised that stock market flotation would enable easier access to capital markets and fewer restrictions
on the products they could market.
108 § 2 Bausparkassengesetz.
109 In Bremen, Hamburg and Eastern Germany they are organised as joint stock corporations, in Hessen-Thüringen, the Saarland and Bavaria they are legally dependent
entities of the Landesbanken; the LBS Berlin-Hannover, the LBS West and Baden-Württemberg are public corporations (Source: the respective LBS websites).
110 § 2 Hypothekenbankgesetz.
38

In contrast, building societies in the British Islands
have as their purpose or main purpose making loans
which are secured on residential property and
funded substantially by their members. But they also
have the freedom to engage in any other activities
like current accounts, credit cards, travel money,
unsecured loans, and various types of insurance and
estate agency services. Legislation only imposes
restrictions on some matters relating to securities,
commodities or currency markets.
3.2.3 Comparison
3.2.3.1 Types of institutions and their activities
Notwithstanding the details, both the US and the
European banking markets are characterised by
the same three major types of credit institutions:
commercial banks, savings banks and cooperative
banks/credit unions.
The simple explanation for this is that the ideological
roots of American institutions are in Europe.
The existence of different types of credit institutions
in the US as well as in the EU also highlights that in
both markets there is a common need from banking
customers for pluralism in banking structures.
One key difference between the US and EU banking
markets however is that in the US credit institutions
each have their own specific charter according to
bank type, such that each of the above listed major
types of credit institutions represent distinct and
specific legal forms in the US. In contrast in the EU,
commercial, cooperative and savings banks represent
different types of actors which are not tied to any
particular legal form.
Another important difference between the US and
EU banking markets also stems from the chartering
system in place in the US, whereby credit institutions
are regulated and supervised by distinct bodies,
according to their charter type. In Europe, all credit
institutions, irrespective of their legal form, are bound
by the same laws and regulations, and supervised by
the same bodies.
With regard to the activities of credit institutions
such as commercial banks and thrifts in the US,
restrictions are circumvented by most such
institutions via the bank and mutual holding form of
ownership, with the consequence that commercial
and savings banks in the US perform much the same
activities as their European counterparts.
Another similarity between the EU and the US is that
the gradual removal of the restrictions of the
activities of savings banks (as well as savings and
loans associations in the US) has meant that such
institutions, as their commercial counterparts, are
today by and large 111 universal banks which provide
a wide range of banking services. However, in the US
as well as in Europe savings banks in general
continue to focus on their traditional retail business.
The only difference is with regard specifically to
savings and loans associations in the US which,
unlike US savings banks, were especially established
to promote the finance of housing. While US savings
and loan associations – just like the British building
societies – also benefit today from almost identical
powers to other financial institutions, and are thus
able to a bundle of different products, they are
required by law to preserve their primary character as
retail mortgage lending institutions. In contrast in
the few European countries in which mortgage
banks and building societies dominate the housing
finance market, they still have their original profile as
well as a legal obligation to focus exclusively on
providing housing finance.
Equally, regulatory reform over the past thirty years has
allowed credit unions in the US to evolve from niche
players to full-service retail depository institutions.
Credit unions now behave just like other depository
institutions, offering virtually the same financial
services as banks, savings banks and savings and
loan associations. There are still some distinctions
though such as the existence of stricter limitations
on the commercial lending and securities activities of
federally-chartered credit unions compared to
national banks and federal savings associations, as
well as usury ceilings and limitations on loan terms.
EU cooperatives are also universal banks, able to
engage in a wide range of banking as well as other
financial activities. Both US credit unions and EU
cooperatives can also nowadays offer their services
to non-members.
As regards mortgage banks, these institutions are
quite different in the US from those in the EU.
Since mortgage banks in the US sell their loans to the
secondary mortgage market, they require only
limited own funds to do their business. In contrast,
EU mortgage banks need to fund their loans – which
remain on their balance sheets – for the lifetime of
the loan. European mortgage banks also have to
fund their loans on the basis of their own financial
strength or the quality of securities.
111 There are a few notable exceptions in Europe, as expressed in the description of European savings banks.
39

In terms of market share measured by total assets,
commercial banks are in the US as well as in the
EU the market leaders, followed by the savings
institutions. In Europe on average (across all Member
States), the market share of credit unions and
cooperative banks is the lowest.
3.2.3.2 Ownership structure
As explained above, the vast majority of US
commercial banks are owned by bank holding
companies, primarily because holding companies are
not restricted as are banks themselves in terms of the
activities they can carry out. No such need has
existed in Europe for a common form of ownership
which means that the corporate structure of
commercial banks is not uniform throughout the EU.
However, in certain European countries, commercial
banks can only be limited liability companies, while
in the many remaining Member States, commercial
banks have opted for the public form of the limited
liability company, giving them access to shareholders
on public stock markets.
Originally, most US savings institutions were mutuals.
But since the early 1980’s, there has been a growing
trend of shifting ownership from depositors to
shareholders through the so-called mutual-to-stock
conversion, the main reason being to raise equity
capital, such that today most US thrifts are stock
companies. Also, the mutual holding company form
allows thrifts, as commercial banks with the holding
company form, to be part of universal finance
groups offering insurance and securities services and
underwriting as well as investment banking.
In contrast in Europe, savings banks come in a variety
of legal forms, from being privately to publicly
owned, to being limited liability companies,
cooperatives or even (private or public) foundations.
Credit unions in the US and cooperative banks in the
EU naturally have a cooperative ownership structure.
3.2.3.3 Deposit guarantee systems
All credit institutions in the US as well as in the EU
are legally obliged to be members of some kind of
deposit guarantee scheme.
The federal insurance funds BIF, SAIF and the NCUSIF
insure deposits up to $100,000 per depositor and
bank, while the minimum guarantee sum according
to the Directive 94/19/EC is 20,000 Euros.
But given that the directive only sets a minimum,
individual Member States are free to establish a higher
level of protection nationally. Thus, a number of EU
Member States have voluntary protection schemes
which impose a much higher minimum guarantee
than that required by the EC directive, with Germany
for instance requiring coverage of €100,000.
The insurance system in the US is a two-tiered one,
since credit institutions may be insured either at state
or federal level and the affiliation to one or the other
insurance fund is then further determined by the
type of charter of the institution in question. In the
EU on the other hand, guarantee and protection
schemes and the laws governing them only exist at
national level. There are clear requirements for the
national regimes given by the above mentioned
directive, but within this framework Member States
may choose the structure that suits the conditions in
their banking environment best. Thus, there are for
example Member States with funds for all credit
institutions and others, in which several funds or
protection schemes have been established.
3.2.3.4 Corporate Social Responsibility
Credit institutions in the US, regardless of type, are
legally required to serve the convenience and needs
of all segments of their local communities via the
Community Reinvestment Act (CRA). A satisfactory
CRA-rating is required to get the approval for
charters or bank mergers, acquisitions and branch
openings.
In Europe on the other hand, there is no equivalent
responsibility imposed by regulation at the EU
level 112 , though there are laws in certain EU Member
States 113 that require companies to report on their
social activities. In some EU Member States even, the
social and welfare aims of savings banks are laid
down in law 114 .
112 While no legislation exists at the level of the European Union which imposes rules of corporate social responsibility (CSR) on industry (in general, not just the
banking industry), there has been a Green Paper and two communications by the European Commission on CSR. The Green Paper suggested that a European
approach, or a European framework, could help increase the coherency and credibility of companies' work on CSR and as a follow up to the Green Paper, a
2002 communication was issued by the Commission which did not include any calls for mandatory regulation in the field of CSR. The latest communication,
of March 2006, calls on businesses to strengthen their CSR commitment in order to contribute to EU sustainable development, economic growth and job
creation. Further, it defines broad orientations for EU CSR policy, based on a number of principles and set of actions.
113 Namely in France (Nouvelles Régulations Economiques (NRE), which is applicable to public limited companies) and the UK (Corporate Responsibility (CORE) Bill).
114 Examples are the Savings Banks Acts of the Bundesländer in Germany, Article L. 512-85 of the Code Monétaire et Financier in France and the Obra Social in Spain.
40

The commitment of savings banks is however not
limited to what is laid down in national law.
Contributing to the improvement of living conditions,
supporting the local economic development and
building greater social cohesion in the local
communities where they operate is an integral part
of European savings banks’ identity and one of their
distinctive features among financial players.
These commitments to society activities, traditionally
developed by savings banks, are however only one
of the pillars of savings banks’ broader Corporate
Social Responsibility (CSR) approach. Their long-term
commitment towards meeting the critical needs of
local communities and society have increasingly
materialised via the integration of social, environmental
as well as economic concerns in their business
operations and stakeholder relations. Savings banks
have thus adopted, on a voluntary basis, a balanced
and comprehensive approach to socially responsible
practices, covering a whole range of aspects,
including economic (e.g. microcredit, regional
development, financial inclusion), social relations
(e.g. workforce life-long learning, training), and
environmental (e.g. preservation of natural heritage,
protection of the environment campaigns) issues.
3.2.3.5 Taxation
In the US, both commercial banks and thrifts are
subject to regular corporate income tax. In contrast
federal and state chartered credit unions still enjoy
some tax exemptions in spite of the fact that, as with
thrifts, credit unions have reached the point of active
competition with taxable institutions.
The situation in Europe is comparable, with cooperative
banks being the only types of credit institutions still
benefiting from tax exemptions. On the other hand,
the tax benefits of European cooperative banks are
not as advantageous as in the US where federal
credit unions are exempt from all federal and state
taxes and state chartered credit unions are exempt
from all federal and most state taxes.
3.3 Financial Conglomerates
3.3.1 United States
As explained in the ownership structure and activities
section of the US commercial banks description, repeal of
the Glass-Steagal Act via the Gramm-Leach Bliley (GLB) Act
has led to 97% of insured commercial bank assets in the US
today being owned by bank holding companies.
The creation of a new form of bank holding company
under the GLB, the financial holding company, allowed
banks for the first time to engage directly in activities such
as securities underwriting and dealing, insurance agency
activities and insurance underwriting, acting as a futures
commission merchant, and merchant banking (‘financially
related activities’).
Other activities, financial or non-financial, may also be
engaged in by financial holding companies, by special
permission from the Federal Reserve Board and the Secretary
of the Treasury (refer to US commercial banks description of
this chapter for more detail).
A financial holding company has to be registered with the
Federal Reserve Board. The registration requires that each of
the subsidiary banks is well-capitalised and well-managed
and that all of its insured subsidiary banks maintain a
Consumer Reinvestment Act-rating of at least satisfactory.
3.3.2 European Union
3.3.2.1 Introduction
Because of demographic developments, deregulation,
increasing competition and innovation, financial
companies are increasingly moving into each other’s
areas. In Europe the combination of banking and
insurance has become increasingly popular. Banks are
now acting as insurance agents or brokers by selling
insurance policies through their branch networks,
insurance companies are selling insurance policies
that have all the characteristics of investment
products, and many commercial banks have moved
into the securities business. In the area of banking,
this corresponds to the universal banking model
where commercial and investment banking are
combined in the legal entity. This is the standard
European model allowed under the Second Banking
Coordination Directive.
41

However, in order to protect the interests of insured
parties from the risks associated with other business
activities, combining insurance with banking, securities
or any other commercial business in the same legal
entity is prohibited by law according to the
specialisation principle 115 .
3.3.2.2 Definition
The term ‘financial conglomerate’ is legally defined
for the EU in the Directive 2002/87/EC, which
introduced a legal framework for supplementary
supervision of financial conglomerates on a groupwide
basis. According to Article 2 n°14 of that
Directive, the following formal requirements have
to be met for a group to qualify as a financial
conglomerate 116 :
- The presence in the group of at least one
regulated entity in the EU. A “regulated entity” is
a credit institution, insurance undertaking or
investment firm as defined under the respective
EU directives for those sectors.
- If the group is headed by a regulated entity, it
must be the parent of, hold a participation in or
be linked through a horizontal group with an
entity in the financial sector.
- If the group is not headed by a regulated entity, its
activities should occur mainly in the financial sector.
A quantitative threshold, based in principle on
balance sheet data, is used to define what “mainly
occur in the financial sector” means. The ratio of
the balance sheet total of the financial sector
entities in the group to the balance sheet total of
the whole group has to be greater than 40% 117 .
- The group should have at least one insurance or
reinsurance undertaking and at least one entity
from a different financial sector. It is not required
that there is a regulated entity in each financial
sector covered by the group.
- The group must have significant cross-sectoral
activities. For this assessment, two sectors are
considered: (i) the insurance sector and (ii) the
banking/investment services sectors taken together,
and both have to be significant. Again, quantitative
criteria are used to define what “significant” means.
There is a relative criterion and an absolute criterion.
The relative criterion refers to the importance of
the sector in the group’s total assets and solvency
requirements, which has to be on average more
than 10%.
The absolute criterion is that when the smallest
sector, measured according to the abovementioned
relative criterion, has a balance sheet
total of more than 6 billion Euros, the crosssectoral
activities are also presumed to be
significant. But if the group does not meet at the
same time the minimum threshold of the relative
criterion, the competent authorities may decide not
to treat the group as a financial conglomerate 118 .
3.3.3 Comparison
Although it is apparent that a significant number of the
companies that are registered as a financial holding
company in the US would also satisfy the definition of a
financial conglomerate as stipulated in the EC Directive,
there are two important aspects where the definition of a
financial conglomerate and the one of a financial holding
company are clearly not equivalent.
According to the EU framework, it is at least theoretically
possible (although less likely in practice) to have a group
without a credit institution that qualifies as a financial
conglomerate. The presence of an insurance or reinsurance
undertaking in the group is the essential element for such
qualification. In general, it also seems that there can be a
much larger non-financial component in an EU financial
conglomerate than in a US one.
Another difference is that the US regulation poses more
organisational restrictions. At the level of shareholders of
the financial holding company, non-financial commercial
companies continue to be barred from owning banks.
Financial holding companies that were previously not bank
holding companies are nevertheless permitted to retain limited
commercial activities at the level of the parent company,
but only under strict restrictions. Another example is the
prohibition against banks engaging directly or indirectly in
insurance underwriting or merchant banking, or directly in
securities business. Such restrictions have the advantage of
providing additional safeguards against possible spill-over
effects on depository institutions in the event of financial
difficulties. But they also imply costs for the group and may
only provide protection that is more apparent than real.
In the EU framework, there are no special requirements
regarding the shareholders of the financial conglomerate
apart from the indirect requirements through the specific
sectoral rules. In addition, banks can own insurance
companies and directly or indirectly build up substantial
activities in securities business and merchant banking.
115 See Article 6(1)(b) of the Life Assurance Directive (2002/83/EC) and Article 8(1)(b) of the Non-Life Insurance Directive (92/49/EEC).
116 Definition taken from ECB Occasional Paper Series Nr.20, August 2004.
117 See Article 3 Nr.1 of the Directive.
118 See Article 3 Nr.2 and 3 of the Directive.
42

4. REGULATION AND SUPERVISION COMPARISON
4.1 Section Introduction
In this chapter, a comparison is proposed between the US and
the EU on two distinct issues: first on their respective banking
regulatory and supervisory frameworks and then on the
regulation applicable to capital markets.
The main goal of the first part of the chapter is to underline
the differences and similarities that exist as regards the
supervision of the banking sector in the US and in the EU, in
terms of architecture, responsibilities and level playing field
between the different categories of market participants.
In order to achieve this objective, it has been deemed necessary
to provide some background information about related
topics, including in particular the legislative process, as it
applies to the area of financial services. Information is then
provided about how financial institutions are chartered,
regulated and supervised in Europe and in the United States.
The main bodies involved in this context are also presented.
It should be noted that while the focus of the chapter is on
banking, the areas of securities and insurance are also at
times covered, as especially in the United States these fields
are regulated and supervised differently as compared to the
banking sector. The most relevant regulatory trends in the
US and in Europe are then finally listed.
The second part of this chapter proposes an overview of the
regulation of the capital markets in the United States and in
Europe. The objective pursued was not only to explain how
the markets are regulated, but also to show the clear trend
towards convergence that has arisen in recent years.
Notably, over the last decade the US and EU law-makers
have opted for similar measures to address emerging market
developments. The chapter presents the most significant
pieces of legislation and their origin. Finally, it shows that
increased regulatory convergence tends to boost the level of
integration of capital markets.
4.2 Regulation and supervision
of the banking sector
4.2.1 Main features of the legislative process
in the US and in the EU
4.2.1.1 Legislative process in the United
States
4.2.1.1.1 Key Features
Legislative powers in the US are divided between
the individual states and the federal level by the US
Constitution. This means that the power to enact
legislation is theoretically delegated to only one of
them, as the idea of shared responsibility is not known
in the Constitution. Along those lines, the federal
rights of the United States are listed exhaustively
in Articles I and II of the Constitution. The rights of
the individual states result from these two articles
in conjunction with the 10th amendment to the
Constitution: “The powers not delegated to the United
States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to
the people” 119 . In practice, the powers delegated
to the United States are few and defined whereas
those which remain with the individual states are
numerous and undefined.
It should be noted that in case of conflict of laws, the
state law which is not in line with the provisions of a
federal law, is “pre-empted” by the related federal
law as according to the US Constitution, federal
law 120 supersedes state law when they both cover the
same subject.
119 Amendment X of the US Constitution – “Powers of the States and People”.
120 See Art. VI Clause 2: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall
be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing
in the Constitution or Laws of any State to the Contrary notwithstanding.”
43

With regard to the banking sector, even though
competences are not expressly granted to the federal
government, the implied power to enact banking
law at federal level results in particular from the
Commerce Clause in the Constitution (Art. II sec. 8
clause 3), which gives Congress the power to regulate
interstate commerce 121 .
As regards the instruments used to pass new
legislation, in the US most of the legislation takes
the form of bills 122 . This is also the case in the
banking sector.
4.2.1.1.2 Delegation of powers
4.2.1.1.2.1 General principles
The delegation of powers to regulatory agencies is
a specific feature of the US law-making process.
Some 55 regulatory agencies in total are empowered
to create and enforce regulations that carry the full
force of a law. The oldest federal regulatory agency
still in existence is the Office of the Comptroller of
the Currency, established in 1863 to charter and
regulate national banks.
Federal regulations are created in compliance with
the Federal Rulemaking Process. First, Congress passes
a law (i.e. a bill) designed to address a social or
economic need or problem. This law is normally
of a general nature, setting the objectives to be
achieved 123 . The appropriate regulatory agency then
proposes and adopts regulations necessary to
implement the law. Regulatory agencies create
regulations according to rules and processes defined
by the Administration Procedure Act (APA) of
1946 124 . According to the APA, all proposed
regulations need to be published in the Federal
Register with disclosure of a comment period, within
which the public has the opportunity to send views
and comments on the proposed regulation to the
agency. Depending on the statutes of the agency in
question, the agency may additionally convoke a
public hearing for certain proposed regulations.
The process of rulemaking of a regulation is finalised
by the publication of the “final” regulation in the
Federal Register and by its codification in the
Code of Federal Regulations (CFR) 125 . The final
regulation is usually also posted on the Web site of
the regulatory agency.
4.2.1.1.2.2 Control of the delegated powers
The regulation developed by regulatory agencies
(also referred to as “rules”) is generally considered as
having the same status as laws 126 . The growing
importance of this type of law explains why
additional review processes have been designed
specifically for them. Important initiatives in this
context are the Executive Order 12866 Regulatory
Planning and Review, adopted in 1993 and the
Congressional Review Act (CRA) of 1996.
The Executive Order 12866, adopted in 1993, was
presented as the start of a program to reform and
make more efficient the regulatory process.
Specifically, its objectives were “to enhance planning
and coordination with respect to both new and
existing regulations; to reaffirm the primacy of
Federal agencies in the regulatory decision-making
process; to restore the integrity and legitimacy of
regulatory review and oversight; and to make the
process more accessible and open to the public”.
The measures introduced by the Order to achieve its
objectives include the obligation to analyse the costs,
benefits, and other effects of proposed regulations.
121 It should be mentioned that the US Supreme Court ruled in 1819 (Case McCulloch v.Maryland) that the implied powers granted to the US the right to enact
a federal law. In the case in question the Court had to decide whether the act of chartering a bank by the US was in line with the Constitution.
122 The other means of legislation that can be passed are “joint resolutions”, which have the same effect as bills. The difference between bills and joint resolutions
lies in the fact that joint resolutions are used to propose amendments to the Constitution.
123 Examples of such laws passed by the Congress are the Banking Act of 1933 in the banking area and the Securities Act of 1933 and the Securities Exchange
Act of 1934 in the securities area.
124 Administrative Procedure Act of 11 June 1946, 79th Cong., 2nd sess., Public Law No. 404.
125 More precisely, the CFR is the codification of the general and permanent rules published in the Federal Register by the executive departments and agencies
of the Federal Government.
126 Executive Order 12866 provides a definition of the regulations developed by agencies which confirms this legal status (section 3(d)): “"Regulation" or "rule"
means an agency statement of general applicability and future effect, which the agency intends to have the force and effect of law, that is designed to
implement, interpret, or prescribe law or policy or to describe the procedure or practice requirements of an agency. (…)”.
44

In addition, for regulations defined as “major rules” 127 ,
the Order requires the preparation of a more detailed
Regulatory Impact Assessment (RIA), which must
include an assessment of the potential costs and
benefits of the proposed regulation as well as of
potential alternatives. This RIA must be transmitted
to the Office of Management of the Budget (OMB) and
approved by it before the regulation can take effect.
Executive Order 12866 also imposes other obligations,
notably in the area of “planning management”; for
example, all regulatory agencies must prepare and
submit to the OMB annual plans, in order to improve
the coordination of the Administration’s regulatory
programme.
The Congressional Review Act (CRA) of 1996 is also
important in this context. It allows Congress 60 days
to review and possibly reject new rules developed by
regulatory agencies. More precisely, the CRA requires
the regulatory agencies to submit all new rules to
each House of the Congress, together with the
relevant information, such as a copy of the costbenefit
analysis, if any. In addition, for each major
rule, the Comptroller General shall provide a report
to the committees of jurisdiction in each House of
the Congress.
The CRA foresees a “Congressional disapproval
procedure”, which states that the Congress can issue
a ‘joint resolution’, as a consequence of which the
rule “shall have no force or effect”. Since entering
into effect in 1996, the disapproval procedure
was used once, in October 2001, in relation to the
“final regulations on ergonomics” created by the
Occupational Health and Safety Administration
(OHSA).
4.2.1.1.3 Specific features of the financial
services area
A distinctive feature of the US regulatory system in
the financial area is that it is based on a functional
division of the tasks between the different bodies in
charge of regulation in that area, meaning that
financial products and activities are generally regulated
according to their function.
Broker-dealer activities, for instance, are generally
under the jurisdiction of the Securities and Exchange
Commission, whether the broker-dealer is a subsidiary
of a bank holding company subject to Federal Reserve
supervision or a subsidiary of an investment bank.
The regulation and supervision of the financial
services sector is divided into three main areas:
banking, securities and insurance. Each of the three
areas has followed a specific evolution, which explains
why they are organised so differently, as will be
explained in the following sections.
4.2.1.2 Legislative process in
the European Union
4.2.1.2.1 Key features
The main objective set by the Treaty establishing
the European Community is the establishment of an
internal market, characterised by the abolition of
obstacles to the free movement of goods, persons,
services and capital between Member States.
The achievement of these four fundamental
freedoms constitutes the corner stone of the internal
market. However, neither the Treaty establishing
the European Community nor the Treaty on the
European Union confer on the Community and its
institutions any general power to take all measures
necessary to achieve the objectives of the Treaty,
but rather lay down in each chapter the extent of
the powers to act (principle of conferred powers).
With regard to the distribution of powers in the
European Union, it should be noted that the EU has
exclusive powers in certain fields, while in others,
such as in the financial services area, as explained
below, the powers are shared between the Union
and the Member States. In addition, the European
Union has further powers to legislate and take
measures which are indispensable for the effective
and meaningful implementation of powers that have
already been expressly conferred on it (doctrine of
implied powers). Finally, there still exist areas where
the Member States remain sovereign and directly
responsible and no powers are conferred to the
Community institutions 128 .
127 Section 3(f) of Executive Order 12866 provides a definition of “significant regulatory action”: “"Significant regulatory action" means any regulatory action
that is likely to result in a rule that may:
(1) Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities;
(2) Create a serious inconsistency or otherwise interfere with an action taken or planned by another agency;
(3) Materially alter the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or
(4) Raise novel legal or policy issues arising out of legal mandates, the President's priorities, or the principles set forth in this Executive order.”
128 In these areas, the Union shall have competence to carry out supporting, coordinating or complementary action. These areas include culture, civil protection
or administrative cooperation.
45

The exercise of the legislative power by the Community
in the areas where the competences are shared
between the Community and the Member States is
governed by the subsidiarity and the proportionality
principles 129 . According to the former, “In areas
which do not fall within its exclusive competence,
the Community shall take action only if and insofar
as the objectives of the proposed action cannot be
sufficiently achieved by the Member States and can
therefore, by reason of the scale or effects of
the proposed action, be better achieved by the
Community”. As such, according to this principle,
national regulation focuses on those non-specified
areas that are unrelated to the establishment of the
European Single Market but rather concern day-today
regulatory activities such as recommendations on
the interpretation of legislative provisions. With regard
to the proportionality principle, the Community shall
legislate only to the necessary extent and its actions
shall not go beyond what is necessary to achieve the
objectives of the Treaty. The application of these
principles draws the line between the competences
of the Community and of the Member States and
regulates the choice of a specific legal instrument.
Given that Community law may confer direct rights and
impose obligations on EU citizens, it is possible that
conflicts between community law and national law
arise. A fundamental principle of European Community
Law is that Community law supersedes all national
provisions that diverge from a Community rule 130 .
4.2.1.2.2 Specific features of the financial
services area
A regulation can be originated in Europe at several
different levels: national, European and international.
Each of these levels has different responsibilities and
means at its disposal for adopting legislation.
In the last 30 years, regulations in the financial services
area have increasingly been developed and adopted
at the European level, following the European legislative
process, and increasingly the co-decision procedure 131 .
It is generally estimated that currently about 80% of
legislation in the financial services area in the EU
originates from the EU level, while 20% originates
from the Member States.
In terms of the legal instruments used in the financial
services area, it can be said that directives have
been the most predominantly used type of legislative
instrument. Directives tend to afford a certain degree
of flexibility, which results in room for interpretation
by the Member States when implementing the
regulatory provisions 132 .
One specific feature of the law-making process in
the financial services area is the application of the
so-called ‘Lamfalussy process’, a four level approach
to legislating. This process was introduced in 2002 in
the securities area as a response to a Report drafted
by a Committee of wise men chaired by Mr. Lamfalussy,
which had identified “an urgent need to strengthen
cooperation at the European level between financial
market regulators and the institutions in charge of micro
and macro prudential supervision” 133 . The Lamfalussy
process was extended in 2004 to the banking, asset
management and insurance areas.
The key characteristics of the four levels of the
Lamfalussy process are as follows:
- The first level is aimed at establishing framework
and core political principles for the legislation.
Level 1 follows the co-decision procedure, and
results in legislation which normally takes the
form of a Directive. The first level should also
result in defining the mission of level 2.
- The second level focuses on the technical
implementing measures. These implementing
measures are conducted via the “comitology
procedure” 134 , which involves mainly the European
Commission and specific committees: the European
Securities Committee (ESC), the European Banking
Committee (EBC) and the European Insurance
and Occupational Pensions Committee (EIOPC),
which are made up of representatives of the
Member States.
129 Art. 5 of the EC Treaty.
130 In the absence of any relative provision in the Treaties, the principle of the primacy of Community law was established and has been further developed by the
European Court of Justice. Specifically, the Court established the primacy of Community law over national law in its decision Costa v. ENEL.
131 The co-decision procedure, the most widely applied law-making procedure in the European Union, gives the European Parliament the power to adopt
instruments jointly with the Council of the European Union, on the basis of a proposal made by the European Commission. The procedure comprises one,
two or three readings. The co-decision procedure is defined in Article 251 of the EC Treaty.
132 Directives bind the Member States as to the results to be achieved; they have to be transposed into the national legal framework and thus leave a margin for
manoeuvre as to the form and means of implementation. Regulations, the other main category of legislative instrument at EU level, are binding in their
entirety and directly applicable in all Member States.
133 Final report of the Committee of wise men on the regulation of European securities markets, Brussels, 15 February 2001. Available from the address:
http://www.europa.eu.int/comm/internal_market/securities/docs/lamfalussy/wisemen/final-report-wise-men_en.pdf.
134 The “comitology” is a specific procedure according to which the European Commission, assisted by a technical committee, designs measures that aim
at implementing the legislation adopted at EU level. Information on the comitology procedure can be found in the Council decision 1999/468/EC of
28 June 1999 (“Comitology decision”).
46

The European Parliament has to be kept fully
and regularly informed about all developments
throughout the procedure. The technical measures
defined under the second level of the process
should stay within the framework defined at the
first level.
- The third level concentrates on fine-tuning the
measures agreed upon in level 2. The goals of the
third level are to ensure the consistency of the
transposition and implementation of European
legislation and to increase regulatory and
supervisory convergence. In order to achieve these
goals, the “Level 3 Committees” (CESR, CEBS and
CEIOPS 135 ) can adopt non-binding texts, such as
standards, guidelines and recommendations.
- The fourth level of the Lamfalussy process is that
of enforcement: the European Commission has to
make sure that the adopted legislation is properly
enforced.
Important features of the Lamfalussy process are the
consultation with stakeholders as well as the high
level of transparency required. These requirements
should apply to all bodies involved, at all levels of
the process.
4.2.1.2.3 Delegation of powers
At the EU level, there is no delegation of powers to
independent agencies. If legislation originates at the
European level, it either has to be transposed into
national law (in the case of a Directive) or it can apply
directly at the national level (in the case of a
Regulation). In both cases, the result is a law that
applies at the national level and that has been
developed by the relevant (European and national)
law-making bodies.
At the national level however, there can be cases
where legislative power is granted to an agency.
This is for example the case in the UK, where the
Financial Services Authority (FSA) has rule-making
powers. This is a choice left to the individual Member
States, which however have to guarantee that the rules
at the national level are in line with the European
legal framework.
It should be noted here that the rules developed in
the financial services area by the newly-established
“Level 3” Committees cannot be regarded as a form
of delegation of power, for a number of reasons.
First, the guidelines developed by the “Level 3”
Committees have to stay within the strict framework
defined by European law, under the levels 1 and 2
(when they relate to issues covered by EU legislation).
In addition, while the rules defined under the levels 1
and 2 constitute European legislation, the guidelines
defined by the “Level 3” Committees do not. In order
to gain legal power, they have to be transposed into
national legislation or be integrated in the rules of
the national supervisory authorities. As explained
in greater detail below, the roles assigned to the
“Level 3” Committees include coordinating the
implementation of EU law and converging national
supervisory practices, but not the power to develop
legislation. While there is no formal delegation of
power to the “Level 3” Committees, it seems safe to
say, that the Commission has to some extent gained
power in the Lamfalussy process: After all, it is
the Commission who decides (on the basis of advice
provided by the “Level 3” Committees) the exact
content of the implementing measures of financial
services directives. These powers have been transferred
to the Commission and are currently subject to a
(limited) review process by the European Council and
the European Parliament, who monitor whether the
Commission stays within the remits described at level
1 of the Lamfalussy process.
4.2.1.2.4 Functional approach
In Europe, legislation in the financial services area
has been traditionally divided by sector. As such,
specific rules have been designed in the areas of
banking (which have been compiled in the
Consolidated Banking Directive 136 ), of securities,
insurance and asset management.
Currently, although the different financial services
sectors still feature different regulatory characteristics,
convergence can be noted on some aspects.
For example, there has been a willingness to apply
the same regulatory principles (such as for instance
the principle of home country supervision) in all
sectors, as will be explained in more detail in the
following sections.
135 A presentation of these committees will be provided in the next section on “responsible authorities / relevant bodies in the financial services area”.
136 The Consolidated Banking Directive (“Directive [2000/12/EC] relating to the taking up and pursuit of the business of credit institutions”), adopted on 20 March
2000, brought into one single document a series of EU directives related to the area of banking, such as the Second Banking Directive (89/646/EEC), the
Banking Supervision Directive (83/350/EEC), the Own Funds Directive (89/299/EEC), the Solvency Ratio Directive (89/647/EEC) and the Large Exposures
Directive (92/121/EEC). It is therefore the core legal text at EU level for the banking sector.
47

Similarly, some of the rules initially developed for one
sector have been extended to others. This is for
example the case of the rules in relation to capital
requirements, initially developed for the banking
sector, which now also cover investment firms, and
will in the future be extended to the insurance
sector, in an amended version, as a consequence of
the current “Solvency II” project 137 .
4.2.1.3 Comparison
4.2.1.3.1 Origination of legislation
Both in the US and in the EU, legislation can either
originate at the central level or at the level of the
entities (states or Member States).
- In the US, as will be explained in greater detail
in the following sections, the situation is very
different according to the area of financial services
under consideration. For example, in the securities
area, the rules mostly originate at the federal level.
In the insurance area however, most of the rules
originate at the state level. The banking sector lies
in between, with rules originating at the federal
level and rules originating at the states level.
- In the EU, there is a clear tendency towards
originating legislation at the EU level in all the
financial services areas, although some differences
can be observed. In asset management for
instance, an important share of the business is not
covered by EU law, such as for hedge funds.
However, in general, the areas not covered by EU
legislation in the financial sector are rather few,
and there is a clear trend towards covering more
rather than less areas via EU legislation.
Another important difference in this context relates
to the “rule of law” in the US and the EU. In the EU,
the rules adopted at the EU level always supersede
the rules adopted at the Member States level. Very
often, specifically in the financial services area, the
European legislation sets a (precise) framework
which has to be strictly respected by the legislation
adopted at the Member States level. In the US, the
situation is different, in particular in the banking
area, as the dual banking system implies that laws
can originate at both the federal and the state levels.
However, like in the EU, if a conflict arises between
federal and state law, the federal provision supersedes
the state provision covering the same issue.
4.2.1.3.2 Delegation of powers
Delegation of powers is a fundamental characteristic
of the US system, where agencies have far-reaching
rule-making powers. This is explained by the fact
that the acts passed by the Congress are generally
limited to defining the objectives that have to be
achieved, as opposed to providing strict rules that
have to be filled with technical details.
This trend contrasts with the situation in the EU, where
legislation at the EU level is passed by the traditional
law-making bodies. It should also be noted that the
agencies created recently in the EU in the different
areas of the financial services sector do not have
rule-making powers, as their power is limited to
providing advice to the EU law-makers (at “level 2”)
and to issuing guidelines or recommendations to
facilitate and coordinate the implementation of EU
law and to enhance the convergence of the practices
of the national supervisors (at “level 3”) 138 .
This being said, a certain degree of delegation of
powers takes place in Europe, in the context of
the Lamfalussy procedure. As explained above, this
procedure allows the European Commission, with
the assistance of a technical committee, to design
technical measures to facilitate the implementation
of EU legislation. In contrast with the US situation,
the areas in which the European Commission should
develop implementing measures are generally
specific and well-defined. The delegation of powers
is therefore much more limited to concrete tasks in
Europe as compared to the US.
A parallel can also be drawn between the situation
in the US and in the EU as regards the review of the
delegated powers. In the US, the power to review
the acts adopted by regulatory agencies is granted to
the Congress. In Europe, where responsibility is
granted to the European Commission to develop
implementing measures, a control of the delegated
powers is performed by the Council of the EU and
by the European Parliament.
137 The Solvency II project, currently conducted at the EU level, is a fundamental and wide-ranging review of the current insurance Directives. One key objective
of the project is that the requirements better reflect the true risks of an insurance undertaking.
138 It should however be noted that concerns have been raised by the industry at some occasions concerning the real powers of the “level 3” committees.
Specifically, this relates to the fact that standards developed by the “level 3” Committees without any formal mandate may acquire the form of European
legislation if they are enforced by all national supervisory agencies in the EU, without following the traditional law-making process. Such concerns have been
raised especially when CESR and the European System of Central Banks (ESCB) developed together standards on clearing and settlement.
48

In fact, it should be mentioned here that the role of
the European Parliament in the comitology procedure
has given rise to discussions in the last 5 years, as this
institution considered that its responsibilities had to
be similar to those of the Council i.e. right to call-back
implementing measures which are not in line with the
framework developed at level 1). Without entering
in more details, it can be said that discussions are still
ongoing in Europe as regards the precise role of the
European Parliament in this context.
4.2.1.3.3 Functional approach
Both the US and the EU follow a functional approach
in the area of financial services. However, the
differences between the various areas of the
financial sector seem to be more important in the
United States than in Europe. In the US, not only
are the applicable rules different from one area to
another, but also the structures are fundamentally
different, with a more federal approach in the
securities sector, a state approach in the insurance
sector and a mixed approach in the banking sector.
Although similar differences exist in Europe, illustrated
by the fact that the Lamfalussy process was originally
limited to the securities area as no need for such a
procedure was felt in the other areas, the differences
are not as important. The extension of Lamfalussy to
the other financial services sectors (banking, insurance
and asset management) illustrates a willingness to
apply the same rule-making process throughout the
different areas of the financial services sector.
4.2.1.3.4 Impact assessment
The US legal framework contains clear rules as regards
how regulatory impact assessments (RIA) should be
performed, and in which cases. For instance, the US
framework refers to a definition of “major rules”, for
which conducting a RIA is mandatory. This includes
not only an assessment of potential costs and benefits
of the proposed regulation, but also potential
alternatives to it. Ultimately regulation can only take
effect if the RIA is approved by the Office of
Management of the Budget (OMB). In Europe, the
topics of “better regulation” and “impact assessment”
have only recently reached the top of the agenda
of the EU law-makers. In the last five years however,
a number of impact assessments have been
undertaken by some individual Member States and
at the level of the European Union.
At EU level, impact assessments have however not
been conducted for all files and not yet with the
same level of quality. In this context, the importance
of improving economic analysis has been underlined
and some lessons could be learned from the more
formalised process in the US.
4.2.2 Responsible authorities/relevant bodies
in the financial services area
4.2.2.1 United States
As indicated above, in the US each sector (banking,
securities, insurance) is organised separately, which is
in general the result of a specific historical evolution.
Presenting the bodies involved in the regulation and
supervision of financial services therefore requires
presenting separately the three sectors.
4.2.2.1.1 Responsible authorities in the banking area
The responsibilities of the banking sector are shared
between authorities at the federal level and at the
state level.
4.2.2.1.1.1 Responsible authorities at the federal
level in the banking area
In the banking area, five “federal” bodies are involved
in the US regulatory and supervisory activities:
the Federal Reserve (Fed), the Federal Deposit
Insurance Corporation (FDIC), the Office of the
Comptroller of the Currency (OCC), the Office of
Thrift Supervision (OTS) and the National Credit
Union Association (NCUA).
4.2.2.1.1.1.1 Federal Reserve
The Fed was established in 1913 by the Federal
Reserve Act as the US central bank. As such, it was
given a monopoly power over the issuance of
currency. Currently, its primary responsibility is to
conduct US monetary policy. However, the Fed also
has regulatory and supervisory authority over a wide
range of financial institutions and activities.
Specifically, the Fed is responsible (either solely or
together with another agency) for regulating
and supervising the following categories of financial
institutions:
- All US bank holding companies, their non-bank
subsidiaries and their foreign subsidiaries;
49

- State-chartered banks that are members of the
Federal Reserve System (“state member banks”)
and their foreign branches and subsidiaries;
- US state-licensed branches, agencies, and
representative offices of foreign banks;
- Edge 139 and agreement corporations 140 , through
which US banking organisations may conduct
international banking activities.
4.2.2.1.1.1.2 Federal Deposit Insurance
Corporation (FDIC)
FDIC (Federal Deposit Insurance Corporation) was
created in 1933 by the Federal Banking Act as a
response to the numerous bank failures that resulted
from the 1929 crash and the economic depression
that followed. Its key responsibility was – and still is
today – to provide a federal government guarantee
of deposits so that customers’ funds, within certain
limits (up to USD 100,000 today), would be safe and
available to them. To achieve this role, the FDIC relies
on premiums that banks and thrift institutions pay
for deposit insurance coverage and on earnings from
investments in US Treasury securities.
The FDIC also plays a role in the prudential supervision
of banks and thrift institutions. Specifically, the FDIC
is the primary federal supervisor of state-chartered
banks that are not members of the Federal Reserve
System (the “state non member banks”), as opposed
to the “state member banks”, for which the primary
federal supervisor is the Fed. The FDIC is also the
back-up supervisor for all the other banks and thrift
institutions insured by the FDIC.
4.2.2.1.1.1.3 Office of the Comptroller
of the Currency (OCC)
The Office of the Comptroller of the Currency (OCC),
established in 1863, is the oldest of all federal
agencies. Its role today is to charter, regulate and
supervise all national (or federally-chartered) banks.
Together with the FED, the OCC also supervises the
federal branches and agencies of foreign banks.
The OTS charters thrift institutions at federal level
and is also the primary regulator and supervisor of
federally-chartered thrift institutions. It also regulates
and supervises the state-chartered thrift institutions
that are members of the FDIC (together with the
relevant state authority).
4.2.2.1.1.1.5 National Credit Union
Association (NCUA)
The NCUA was established in 1970 as the independent
federal agency which charters, regulates and supervises
federal credit unions. The NCUA also operates the
NCUSIF (National Credit Union Share Insurance Fund),
created to ensure credit union deposits. More precisely,
the Share Insurance Fund ensures the deposits of
account holders in all the federally-chartered credit
unions as well as in many state-chartered credit unions.
4.2.2.1.1.2 Responsible authorities at the state
level in the banking area
The state authorities charter, regulate and supervise
the institutions (banks, thrifts and credit unions),
which opt for a state charter. As explained below,
state-chartered institutions are regulated and
supervised both at the state and at the federal level.
As such, for these institutions, the responsibility for
supervision and regulation is shared with the
relevant federal agency: the Fed (for state member
banks), the FDIC (for state non member banks) or
the OTS (for state-chartered thrifts).
4.2.2.1.1.3 Coordination in the banking area
Given that a number of agencies are responsible for
the supervision of the banking sector, and that
supervision can be performed both at the state level
and at the federal level, the coordination of the
supervision functions is an important issue in the US.
As such, mechanisms have been established to
facilitate coordination between supervisors, both at
the state and at the federal level.
4.2.2.1.1.1.4 Office of Thrift Supervision (OTS)
The OTS was established as a bureau of the U.S.
Department of the Treasury in 1989, as part of the
major reorganisation of the thrift regulatory structure
under the FIRREA 141 , in the wake of the savings and
loans crisis.
139 A federally-chartered US corporation that is only allowed to engage in international banking or other financial transactions related to international business.
140 A corporation chartered by a state to engage in international banking.
141 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 9 August 1989.
50

As far as coordination at the federal level is
concerned, of note is the passing of the Financial
Institutions Regulatory and Interest Rate Control Act
of 1978 142 , which led to the establishment of a new
interagency body, the Federal Financial Institutions
Examination Council (FFIEC). This Council 143 was
formally established on 10 March 1979. Its main aim
is to coordinate the Federal examination of financial
institutions by the OCC, the FDIC, the Fed, the
Federal Home Loan Bank Board 144 , and the National
Credit Union Administration. Its role is thus to ensure
uniformity in the supervisory tasks of the abovenamed
bodies.
The main functions of the FFIEC, listed in the Act of
1978, include setting uniform principles, standards
and report forms for the examination of financial
institutions applied by the federal agencies as well as
making recommendations for uniformity in supervisory
matters and developing uniform reporting systems for
federally supervised financial institutions. Additional
tasks include conducting schools for examiners and
assistant examiners. In all, there are six interagency
staff task forces which administer projects in all
functional areas of the Council: Consumer Compliance,
Examiner Education, Information Sharing, Reports,
Supervision and Surveillance Systems. Additionally
the Council has a Legal Advisory Group.
Importantly, according to the same Act of 1978, the
Council may establish a liaison committee of State
agencies supervising financial institutions. This has
resulted in the establishment of the advisory State
Liaison Committee (SLC), the primary objectives of
which are to foster communication and cooperation
between state and federal supervisory authorities
and to reduce redundant supervisory procedures.
Several bodies were also established to foster
coordination between the state supervisors, such as
the Conference of State Bank Supervisors (CSBS),
the National Association of State Credit Union
Supervisors (NASCUS) and the American Council of
State Savings Supervisors (ACSSS).
4.2.2.1.1.3.1 The Conference of State Bank
Supervisors (CSBS)
The CSBS is the professional association of state
officials who charter, regulate and supervise the nation’s
approximately 6,200 state-chartered commercial and
savings banks, and more than 400 state-licensed
foreign banking offices nationwide. It was founded
in 1902 and aims to bring together all of the state
bank supervisors at the national level to coordinate,
communicate, advocate and educate on behalf of
the state banking system.
4.2.2.1.1.3.2 National Association of State Credit
Union Supervisors (NASCUS)
The NASCUS was founded in 1965. It represents
48 state governmental and U.S. territorial agencies
that charter, regulate and examine the nation’s statechartered
credit unions.
4.2.2.1.1.3.3 The American Council of
State Savings Supervisors (ACSSS)
The ACSSS is a national organisation of state
savings institution regulators. It was formerly called
the National Association of State Savings & Loan
Supervisors (NASS&LS).
4.2.2.1.2 Responsible authorities in
the securities area
The organisation of regulation and supervision in the
securities area is different from that of the banking
sector in as much as the supervision takes place
exclusively at the federal level. The responsibilities
are shared between the agencies (the Securities and
Exchange Commission – SEC, the Commodity Futures
Trading Commission – CFTC) and the so-called Self
Regulatory Organisations (SROs).
The Securities and Exchange Commission (SEC) is
responsible for ensuring the smooth functioning of
the US financial markets. Its main missions are to
ensure the protection of investors as well as the
integrity of the markets. In this context, one task of
the SEC consists in monitoring the Self Regulatory
Organisations (SROs), such as the traditional stock
exchanges (including for instance the New York
Stock Exchange and the American Stock Exchange)
and most alternative markets (such as NASD and
most Electronic Communication Networks – ECNs).
142 Financial Institutions Regulatory and Interest Rate Control Act of 1978, Title X Federal Financial Institutions Examination Council (also called Federal Financial
Institutions Examination Council Act of 1978), Sections 1001 and following.
143 According to its purpose the Council consists of the Comptroller of the Currency, the Chairman of the Board of Directors of the FDIC, a Governor of the Fed
Board of Governors, the Director, Office of Thrift Supervision and the Chairman of the National Credit Union Administration Board.
144 The Federal Home Loan Bank Board was established as an independent agency by the Housing Amendments of 1955. Its functions were to provide reserve credit
for member institutions engaged in home mortgage lending. It governed the Federal Home Loan Bank System. It was abolished on 8 October 1989 by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989. Among its successor agencies is the Office of Thrift Supervision, Department of Treasury.
51

The SROs have the responsibility to develop rules
which guarantee the integrity of the markets they
are responsible for and the protection of investors.
These rules must be submitted to the SEC, which
has to agree on them, after having performed a
public consultation. However, the SEC also has the
possibility to draft rules which are directly applicable
to the entirety of the market.
It should be noted here that in the American regulatory
system, a distinction is made in terms of responsible
authorities between securities and futures; in the
futures area, like in the securities one, supervision
and regulation are organised at the federal level. In
this field however, federal oversight is ensured by the
Commodity Futures Trading Commission (CFTC) (and
not by the SEC), whereas industry oversight is the
responsibility of the SROs – the futures exchanges
and the National Futures Association (NFA).
4.2.2.1.3 Responsible authorities in
the insurance area
The regulation and supervision of the insurance area
is the exclusive responsibility of regulators at the states
level, unlike in the other financial services sectors.
The view that regulation should take place at the
states level was defended by the McCarren-Ferguson
Act of 1945. A central structure was however
established to help coordinate the approaches of
the 50 state regulators: the National Association of
Insurance Commissioners (NAIC).
Historically, state regulators in the insurance area
have stressed specifically the safety and soundness
issues, as well as the conduct-of-business area,
especially in relation to sales practices.
4.2.2.2 European Union
4.2.2.2.1 EU bodies
In the European Union, the responsibility for supervising
the financial services area lies entirely at the Member
States level. There are therefore no EU bodies in the
financial area comparable to the US regulatory
agencies. Some “Committees” however play a
coordinating role, and will therefore be presented in
the subsequent section “Coordination in the EU”.
4.2.2.2.2 Member State level
Member States are responsible for organising the
supervision of their financial services sector in the
way they consider the most appropriate. Consequently,
there is much variety among the supervisory
structures of the 25 individual Member States.
Historically, in most EU Member States supervision
was organised for each different area of the financial
services sector individually: banking, securities and
insurance. However, this situation changed in recent
years in several Member States, with a clear trend
towards the establishment of a single authority to
supervise the three traditional sectors. This move was
often presented as a response to important changes
in the financial sector, such as the increasing blurring
of the specificities of the different types of financial
services businesses and the trend towards more
consolidation and conglomeration in the financial
sector, especially at the level of the Member States.
The first country to establish an independent single
supervisory authority was the UK in 1997 with the
establishment of the Financial Services Authority (FSA).
The FSA is responsible for the prudential supervision
and more general business supervision of all financial
institutions and markets. Other countries have also
re-examined their supervisory arrangements. A single
authority was for instance created in Luxembourg 145
in 1998. A proposal for a single authority in
Germany 146 was put forward in January 2001 and
entered into force in April 2002. In Austria too, a
single authority 147 was formally established in April
2002. In each of these cases, the single authority is
independent from any other institution.
National central banks also play a role in supervision.
Traditionally, their direct role in the supervisory
process was limited to the banking sector. In certain
Member States however, a decline in this role has
been observed in recent years as a direct consequence
of the combining of financial supervisory competences
in just one agency. There are nevertheless exceptions,
such as Ireland, where a single authority has been
created under the wing of the national central bank,
and the Netherlands, which is the first EU Member
State in which the central bank will take over the
supervision of all three financial sectors, thus
breaking with a long supervisory tradition, where the
role of the central bank is generally limited to
maintaining financial stability.
145 Commission de surveillance du Secteur Financier.
146 Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).
147 Finanzmarktaufsichtsbehörde (FMA).
52

Despite the trend towards the establishment of a single
supervisor at the national level, it should be mentioned that
some Member States have decided to maintain the
traditional division between sectors, such as for example
France, Spain and Italy 148 .
The following table provides a summary of the state of play
in the 25 EU Member States plus the two countries of the
European Economic Area (Norway and Liechtenstein) 149 .
COUNTRY BANKING SECURITIES INSURANCE
Austria FSA FSA FSA
Belgium FSA FSA FSA
Cyprus CB SI SI
Czech Rep. CB S G
Denmark FSA FSA FSA
Estonia FSA FSA FSA
Finland BS BS I
France B / CB S I
Germany FSA FSA FSA
Greece CB S G
Hungary FSA FSA FSA
Italy CB S I
Ireland FSA FSA FSA
Latvia FSA FSA FSA
Lithuania CB S I
Liechtenstein 150 FSA FSA FSA
Luxembourg BS BS I
Malta FSA FSA FSA
Netherlands CB / FSA CB / FSA CB / FSA
Norway 151 FSA FSA FSA
Poland CB S I
Portugal CB S I
Sweden FSA FSA FSA
UK FSA FSA FSA
Slovak Rep. CB SI SI
Slovenia CB S I
Spain CB S I
Note:
B = specialised banking supervisor
BS = banking and securities supervisor
CB = Central Bank
FSA = single financial supervisory authority
G = government department
I = specialised insurance supervisor
S = specialised securities supervisor
SI = specialised securities and insurance supervisor
4.2.2.2.3 Coordination in the EU
Although supervision in the European Union is an
area left to the Member States, some EU bodies do
play a coordinating role of the actions of all the
national supervisory authorities. This is in fact one of
the main tasks assigned to the “level 3” Committees
(CESR, CEBS and CEIOPS), created in the context of the
establishment of the Lamfalussy process. Their main
role is to improve the coordination among national
regulators / supervisors and to ensure more consistent
and timely day-to-day implementation of community
legislation in the Member States.
CESR (Committee of European Securities Regulators),
established in 2001 152 , is the oldest of the “Level 3”
Committees.
Originally created to be active in the securities area,
its functions were extended in 2003 to the area of
asset management 153 . The members of CESR are the
heads of the national public authorities competent in
the field of securities, with one member on the
committee for each EU Member State. Norway and
Iceland, as members of the European Economic Area
(EEA) are also represented at a senior level.
CEBS (Committee of European Banking Supervisors)
and CEIOPS (Committee of European Insurance and
Occupational Pensions Supervisors) were established
officially in 2003 154 , to cover the areas of banking
and insurance respectively.
CEBS is comprised of high level representatives from
the banking supervisory authorities and central
banks of the European Union. CEIOPS is composed
of high level representatives from the insurance and
occupational pension supervisory authorities from
Member States of the European Union. As with
CESR, the authorities of the Member States of the
European Economic Area also participate in CEBS
and in CEIOPS.
148 France is an interesting case, as not less than five different authorities share the responsibility of the control of the financial sector: Commission de contrôle
des assurances, des mutuelles et des institutions de prévoyance; Commission bancaire; Comité des enterprises d’assurance; Comité des établissement de credit
et des entreprises d’investissement; Autorité des marchés financiers.
149 The information contained in the table builds on a document by CEPS (Centre for European Policy Studies), “Supervising the European financial system”, Karel
Lannoo, CEPS policy brief No 23, May 2002.
150 EEA country.
151 EEA country.
152 CESR was established under the terms of the European Commission’s Decision of 6 June 2001 2001/527/EC.
153 The scope of the activities of CESR was extended by Commission Decision 2004/7/EC of 5 November 2003 amending Decision 2001/527/EC establishing the
Committee of European Securities Regulators.
154 CEBS and CEIOPS were established on 5 November 2003 under the terms of the European Commission’s Decisions 2004/5/EC and 2004/6/EC respectively.
53

4.2.3 Chartering / Licensing
4.2.3.1 United States
4.2.3.1.1 Dual banking system
In the United States, banking institutions determine
their regulator by choosing a particular type of charter
– commercial bank, thrift, credit union or industrial
loan company, and by deciding to obtain this charter
at the state level or at the national level 155 . The system
is therefore called “dual” because it consists of separate
federal and state components. Put differently, the
dual banking system means the simultaneous
existence of different regulatory options that are not
alike in terms of statutory provisions, regulatory
implementation and administrative policy. In the US,
this feature of the banking system is widely regarded
as one of its strengths 156 .
Against this background, the decision by a financial
institution on the charter, which can be based on
the business needs or marketing strategy of the
institution, will directly determine the regulatory and
supervisory regime the institution will be subject to.
The decision on the charter will therefore also include
factors such as regulatory philosophy, the perceived
quality of supervisory services and the cost of those
services. Furthermore, a financial institution can
also decide to change or convert its charter. This is
ultimately a decision by the financial institution which
allows its managers to respond either to structural
changes (e.g. as the result of a merger with another
financial institution) or a change in business model.
There are advantages and disadvantages in both the
federal and state charters, a number of which are
described in the following section.
4.2.3.1.2 Comparative analysis of the federal
and state charters
One of the advantages of a federal charter is that a
federally-chartered institution has one primary
regulator while a state bank is subject to examination
and supervision by the relevant State Department in
charge of banking supervision and either the Federal
Reserve or the FDIC. The presence of multiple
regulators increases the "soft" cost of a state charter
relative to a national charter. Having overlapping
regulatory authorities will however also have other
consequences. For example, in relation to the
supervision of a state-chartered bank, there may be
cases where the State Banking Department, on the
one hand, and the FDIC or the Federal Reserve, on
the other hand, disagree on an issue. In those cases,
the bank will in principle be required to abide by the
less favourable treatment.
A federal charter can also be the preferred option for
banks willing to be involved in interstate banking.
As a matter of fact, a state-chartered bank that
operates in several states is supervised and regulated
by every competent authority in each of these states
while a federally-chartered bank is supervised only at
the federal level. In addition, the dual banking
system means that federal thrifts and banks are
required to operate under one set of federal rules,
rather than complying with a number of different
state statutes.
This can enhance their capacity to provide financial
services across the country. Moreover, federally
chartered banks and thrifts can always operate
branch offices nationwide without geographic
restrictions 157 . State-chartered banks may on the
other hand be involved in interstate branching only
if their state law grants them the authority to
operate on a multi-state basis 158 .
155 This possibility to decide whether the charter shall be obtained at the state or federal level does in fact not exist for industrial loan companies, which are
chartered only at the state level.
156 As an example, Mr J.D. Hawke Jr, Comptroller of the Currency, stated that “Competition between state and national charters has always been one of the
hallmarks of the dual banking system – and one of its greatest strengths” (J.D. Hawke Jr., «Deposit Insurance Reform and the Cost of Bank Supervision»,
Exchequer Club Washington DC, 20/12/2000). Similarly, in a statement of June 24, 2005, the Conference of State Bank Supervisors (CSBS) and the American
Bankers Association indicated that “The United States has the strongest and most innovative banking system in the world, in large part because banks have
the choice of being chartered by the state or federal government”. America’s Community Bankers (ACB) is also supportive of this system. In 2005, ACB noted
that it strongly supports the dual banking system, as “charter choice promotes economic freedom and economic freedom promotes growth” (America’s
Community Bankers, 2005 Policy Positions, page 29).
157 It was the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 that removed the barriers and allowed interstate banking and interstate
branching.
158 It must be noted however that most states now allow interstate branching, allowing banks to expand in another state either by establishing new branches
(i.e. de novo interstate branching) or by acquiring another bank and merging the two structures.
54

Another important factor in the choice between a
state charter and a federal charter are the chartering
costs. Currently, national banks are charged higher
assessment costs annually than are state banks in
most states. In fact, some states, such as Georgia 159 ,
charge less than half of what a comparably sized
national bank or thrift would pay the OCC or the
OTS respectively. Others charge slightly more than
half of the amount charged by the corresponding
federal agencies, such as the State of Louisiana 160 .
More generally, many states promote state chartering
of banks and try to attract credit institutions by
highlighting the difference between the fees assessed
by their Banking Department and those charged by
the federal supervisors (OCC or the OTS) 161 .
Worthy of note on the subject is the view that has
been expressed by some in the US that state banks
actually benefit from “federal subsidies”.
This view stems from the fact that apart from being
supervised at the state level, state-chartered banks
also have a primary federal supervisor, as stated
above (which is the Federal Reserve in the case of
state member banks and the FDIC in the case of
state non member banks), yet these federal agencies
do not receive specific funding to perform these
supervisory duties. The FDIC for example funds its
own operations on the basis of premiums and
earnings from the deposit insurance fund, paid both
by federally-chartered and state-chartered institutions.
Given that an important part of this funding goes
towards the supervision of state-chartered banks,
some would argue that federally-chartered banks
effectively pay for part of the supervision of statechartered
banks 162 . The same argument goes for the
funding of the supervisory operations of the Federal
Reserve with regard to Member State-chartered banks.
This view is however not shared by all. America’s
Community Bankers (ACB) 163 for example are of the
opinion that “state banks should not have to pay the
cost of their FDIC examinations”, as “the FDIC should
not be required to subsidise the operating costs of
the OCC or of the OTS”. The ACB indicates that
examination fees will “increase costs and encourage
unnecessary or duplicative examinations”. In addition,
they point out that “the new fees will reduce funds
available for lending to local communities and will tilt
the dual state/federal system of bank regulation
further toward federal domination by increasing the
relative appeal of a national bank charter” 164 .
Other factors which are often considered when
choosing a charter concern dividends, other fees
(other than the already mentioned chartering
assessments) and lending limits for state-chartered
banks, for the following reasons:
- Generally, it is observed that state laws governing
the payment of dividends are less restrictive than the
provisions on dividends relating to national banks 165 .
- Similarly, the legal lending limit for a national
bank is in general stricter than for a state bank.
Currently, the OCC rules permit national banks to
make loans to a single borrower up to an amount
equivalent to 15% of their unimpaired capital and
surplus 166 . National banks may extend that credit
by another 10% of capital and surplus to the
same borrower if the amount of the loan that
exceeds 15% is secured by “readily marketable
collateral”. On the other hand, the lending limits
for state-chartered banks vary substantially from
one state to the other, with differences in terms
of lending limit, of the definition of a single
borrower, and of exceptions for fully collateralised
loans. In several states, state-chartered banks are
entitled to a legal lending limit of 25% of their
capital. In Kansas, for example, the lending limit
mounts up to 25% and 35% in the case of loans
secured by real estate 167 .
159 Information concerning the department of banking and finance of the State of Georgia, available at: http://www.ganet.org/dbf/chartering_a_bank.html.
160 According to the Louisiana Office of Financial Institutions (http://www.ofi.state.la.us), OFI charges $25,000 for an assessment of a bank or a thrift with
average assets of $100 million, compared to $44,700 charged by the OCC and $33,870 charged by the OTS respectively.
161 Examples of this include the States of Arkansas, Tennessee, Florida, Texas and Missouri in the following respective websites: (http://www.accessarkansas.org/
bank/benefits_advantages.html), (http://tennessee.gov/financialinst/charter.html), (http://www.fldfs.com/ofr/banking/state_charter.htm), (http://www.banking.state.tx.us/
CORP/CHARTER/benefits.htm#Lower%20Costs), (http://www.missouri-finance.org).
162 Mr. John D. Hawke, Jr., Comptroller of the Currency argued that the fact that 52% of the premiums paid to rebuild the Bank Insurance Fund originate from
national banks implies that 52% of the costs for supervising non Member State-chartered banks at the federal level is paid by national banks. This, whereas
the supervisor of national banks (OCC) is funded entirely by the assessments paid by the national banks. See J.D. Hawke Jr., “Deposit Insurance Reform and
the Cost of Bank Supervision”, Exchequer Club Washington DC, 20/12/2000.
163 America's Community Bankers represents the nation's community banks of all charter types and sizes.
164 America’s Community Bankers, 2005 Policy Positions, page 71.
165 The restrictions on a national bank's ability to pay dividends arise principally from two National Bank Act sources: 12 U.S.C. § 60 and 12 U.S.C. § 56. Those
acts place a recent earnings limitation on the payment of dividends by a national bank by requiring prior OCC approval of a dividend if the total of all dividends
declared by a national bank in any year exceeds the total of its "net profits" of that year combined with net profits of the two preceding years, less any
required transfer to surplus. The OCC further restricts the ability of national banks to pay dividends on common stock by preventing national banks from
including provisions for loan losses in "net profits," and thus, in the funds available for payment of dividends.
166 12 CFR (Code of Federal Regulations) Part 32.
167 http://www.osbckansas.org/AbouttheOSBC/advantge.html.
55

- As far as fees are concerned, the OCC has an
extensive fee schedule for transactions, such as
mergers and branch applications. In contrast, the
State banking departments in charge of banking
supervision generally charge filing fees on fewer
types of transactions, and in those instances
where they do charge, those fees tend to be less
than those of the OCC 168 .
4.2.3.2 Europe
4.2.3.2.1 EU level
The ‘taking up and pursuit’ of the business of credit
institutions is dealt with in the EU by Directive
2000/12/EC. Contrary to the situation in the United
States, the granting of an authorisation to do business
to a credit institution is the exclusive responsibility of
the Member States. However, while the authorisations
are granted by the individual Member States, the
conditions under which an authorisation can be
granted are increasingly defined at the EU level and
applicable throughout the EU.
This evolution is intrinsically linked with the decision
to introduce the principle of the single passport, which
means that with a licence granted by one Member
State, a financial institution (e.g. credit institution or
insurance undertaking) can provide services or open a
branch in another Member State 169 . The single passport
system is indeed based on three key principles:
harmonisation of the key aspects at the EU level
(“minimum harmonisation”), prudential supervision
performed by the home Member State and mutual
recognition (of the authorisation and of the prudential
supervision performed by the home Member State).
These three elements are considered as the building
blocks for the achievement of the internal market.
The minimum requirements specified at EU level with
respect to the taking up and pursuit of the business
of credit institutions cover issues such as requirements
in terms of own funds (including the existence of
an initial capital of at least €5 million) and specific
conditions regarding the management body, the
shareholders and members 170 .
The three principles of minimum harmonisation,
home country supervision and mutual recognition
have been applied in the different financial sectors.
This has resulted in the creation of a single passport
for UCITS (Undertakings for Collective Investment in
Transferable Securities) 171 , for investment firms 172 , for
insurance undertakings and more recently for
regulated markets 173 .
4.2.3.2.2 Member State level
As stated above, authorisations to do business are
granted by the individual Member States, and this
is the case for all types of financial institutions.
The competent authorities of the Member States
may also withdraw an authorisation, in particular
when the minimum conditions under which an
authorisation was granted are no longer fulfilled.
4.2.3.3 Comparison
Differences between the American and European
banking systems on the issue of authorisation to
bank are considerable. While a fundamental feature
of the US system is the “dual chartering of banks”,
in Europe there is no dual charter, but rather a
‘division of tasks’: most of the criteria for the taking
up and pursuit of the business of banks are set at
the EU level, with the authorisations granted (and
withdrawn) by the individual Member States.
In a document published in June 2005, the Conference
of State Bank Supervisors (CSBS), together with the
American Bankers Association, provides its views on
the benefits of charter choice and why dual
chartering works 174 . The document develops three
main arguments: “dual chartering in banking has
strengthened the state charter”, “dual chartering
fosters innovation in financial products” and “dual
chartering fosters better financial supervision”.
168 The complete list of assessment fees is available from the website of the OCC at the address: http://www.occ.treas.gov/fees.htm.
169 In the case of banking for example, the single passport was introduced by the second banking Directive of 1989.
170 See Title II “Requirements for access to the taking up and pursuit of the business of credit institutions” of the Directive 2000/12/EC of the European Parliament
and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (“consolidated banking Directive”).
171 Directive 85/611/EEC of the Council of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for
collective investment in transferable securities as amended by Directives 88/220/EEC, 95/26/EC, 2000/64/EC, 2001/107/EC and 2001/108/EC.
172 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, amended by Directive 2004/39/EC of the European Parliament and
of the Council of 21 April 2004 on markets in financial instruments.
173 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments.
174 “The benefits of charter choice – the dual banking system as a case study”, American Bankers Association and the Conference of State Bank Supervisors,
June 24, 2005.
56

In the European Union, contrary to this, there has
been an evolution towards a greater convergence of
the criteria for granting an authorisation to a credit
institution. This culminated in the adoption of the
second banking directive in 1989, which created
the single passport for credit institutions within
the EU, based on the three principles of minimum
harmonisation, mutual recognition and home country
supervision. The underlying reasoning was that in
order to make it possible for a credit institution to
provide services cross-border on the basis of home
country supervision and of the principle of mutual
recognition, it was necessary to enhance the confidence
between the Member States. The belief was that the
best way to achieve this was to increase the level of
harmonisation by introducing comprehensive
minimum requirements in an attempt to create a
level playing field for all EU credit institutions.
As a conclusion, while the American banking system
explicitly promotes competition between the different
categories of charters and between the different
agencies in charge of the chartering by way of
charter choice and by offering even a possibility of
charter conversion or change, the European system
seeks to create an internal market which removes
the possibility for regulatory arbitrage. In the
European Union, this means a minimum level of
harmonisation (in terms of authorisation criteria, of
supervision, etc.) in order to create a level playing
field for all market participants, wherever they are
active in the EU.
4.2.4 Supervision
As explained above, in both the US and the EU the different
areas of the financial services sector have generally been
supervised separately. Although in some cases this has changed
in terms of structure, the focus of supervision in the
different areas is generally still different and well-defined:
- Banking supervision covers a wide range of issues:
consumer protection issues (rules on conduct of business
and the disclosure of information), micro-level prudential
supervision (dealing with the soundness of individual
institutions) and macro-level prudential supervision
(dealing with systemic issues). Traditionally the latter has
been the responsibility of the central bank. The former
have usually been the responsibility of a separate agency.
Each of these types of supervision covers distinct issues
that need to be addressed.
- Supervision in the securities sector has been traditionally
more focused on ensuring the smooth functioning of the
financial markets and on ensuring that investment firms
comply with the appropriate conduct of business rules.
- In the insurance sector, the focus has traditionally been
more on making sure that insurance companies are
capable of paying their duties.
In this section, we will focus in particular on the supervision
of the banking sector.
4.2.4.1 United States
In the US, the supervision of banks is determined
by the type of institution that has to be supervised.
As such, a banking institution chartered at the state
level will be primarily supervised by the relevant state
department, but will also have a federal supervisor
(either the Federal Reserve or the FDIC). In contrast,
a banking institution chartered at the federal level
will exclusively be supervised at the federal level.
As mentioned above, in the US, the bodies which
play a role in the financial services area generally
have both a regulatory and a supervisory function.
4.2.4.1.1 Supervision of federally-chartered
banking institutions
Banking institutions with a federal charter are
supervised by their chartering body: the OCC
supervises national banks, the OTS supervises thrifts
and the NCUA supervises credit unions. The Federal
Reserve supervises all bank holding companies, their
non-bank subsidiaries and their foreign subsidiaries.
In addition, the FDIC plays a role in the supervision of
individual entities, as the back-up supervisor for all
insured banks and thrift institutions.
4.2.4.1.2 Supervision of state-chartered banking
institutions
The situation is different for state-chartered banking
institutions, which are supervised both by the state
regulator and by a federal body. For example, statechartered
commercial banks, apart from being
supervised by the state department in charge of
banking supervision, are supervised either by the
Federal Reserve (if they are members of the Federal
Reserve system) or by the FDIC (if they are not
members of the Federal Reserve system).
57

The FDIC is also the federal supervisor of state savings
banks with federally insured deposits, while the OTS
supervises state-chartered savings associations that are
members of the Savings Association Insurance Fund.
4.2.4.1.3 Areas of responsibilities of the different
federal bodies in the area of supervision
(regarding federally and state-chartered
institutions)
The distribution of tasks among the different federal
bodies in the area of supervision can be summarised
as follows:
- The Federal Reserve supervises all bank holding
companies, their non-bank subsidiaries and their
foreign subsidiaries. The Fed also supervises statechartered
banks that are members of the Federal
Reserve System as well as their foreign branches
and subsidiaries.
- The OCC supervises all national banks and all
federal branches and agencies of foreign banks.
- The OTS charters thrift institutions at federal level
and is their primary regulator and supervisor.
The OTS also supervises state-chartered savings
associations that are members of the Savings
Association Insurance Fund.
- The NCUA is responsible for supervising federal
credit unions.
- Finally, the FDIC has a specific role as the back-up
supervisor for all insured banks and thrift
institutions. The FDIC is also the federal
supervisors of state-chartered banks that are not
members of the Federal Reserve System.
4.2.4.2 Europe
In the European context, there is a necessity to
differentiate clearly the areas of regulation and
supervision, as although the two spheres are
inextricably linked, on the question of the allocation
of competencies, the essential function encapsulated
in each of these responsibilities must be acknowledged.
In the EU the definitions given for each function are
as follows: supervision is the executive function
(control), while regulation is the underlying legislative
function (rule-making). The European project has, since
its inception, worked on the principle of establishing
the most effective allocation of governing competencies
(principle of subsidiarity) along these lines.
Although recent decades have seen a move towards
regulating at the European level (as explained in the
section “Legislative process in the European Union”),
supervision continues to remain firmly grounded in
the national remit. Moreover, a contrast exists in
terms of their operating procedures – while the
political element has always had a strong role in
regulation, it has been largely absent in supervision.
4.2.4.2.1 EU level
Supervision is the responsibility of the national
competent authorities 175 .
However, at the European level, a number of
mechanisms have been established to facilitate the
cooperation between national authorities. Specifically,
two forms of cooperation existed traditionally.
First, memoranda of understanding (MoU) were
passed between supervisors. These memoranda
could be either bilateral (in the banking and
insurance sector) or multilateral (in the insurance
sector). Second, forums were established for the
exchange of information and cooperation between
different supervisors.
The adoption of the Lamfalussy process in the
securities area (see also previous section on the
legislative process) and its subsequent extension to
the areas of banking, insurance and asset
management has changed significantly this second
form of cooperation, as the “Level 3” committees
(CESR, CEBS and CEIOPS) have as their main role
precisely to improve the coordination among
national regulators / supervisors and to ensure more
consistent and timely day-to-day implementation of
community legislation in the Member States. In fact,
since its creation in 2001, CESR has published
various standards, guidelines and recommendations
with a view to coordinating the approaches in the
EU, both in areas not covered by EU legislation
(e.g. standards for securities clearing and settlement
in the European Union 176 ) and in areas covered by EU
legislation (e.g. recommendations for the consistent
implementation of the EU legislation regarding the
drafting of prospectuses 177 ).
175 Article 26 of the Consolidated Banking Directive (Directive 2000/12/EC) states: “the prudential supervision of a credit institution (…) shall be the responsibility
of the competent authorities of the home Member State, without prejudice to those provisions of this Directive which give responsibility to the authorities of
the host Member State”. The Directive indicates that “‘competent authorities’ shall mean the national authorities which are empowered by law or regulation
to supervise credit institutions” (Article 1).
176 Standards for Securities Clearing and Settlement in the European Union, CESR and the European Central Bank, September 2004 Report (CESR/04-561).
177 CESR’s recommendations for the consistent implementation of the European Commission’s Regulation on Prospectuses nº 809/2004, CESR, February 2005
(CESR/05-054b).
58

Although younger than CESR, both CEBS and
CEIOPS also published standards aimed at national
supervisors, with a view to coordinating national
approaches 178 .
The establishment of the three “Level 3” Committees
does however not mean that all previously existing
forums have disappeared. Currently active forums
include the Banking Supervisory Committee (BSC), a
committee established by the European System of
Central Bank (ESCB) to assist in the ECB’s role in
prudential supervision, as well as the Groupe de
Contact, a forum for exchange of views and
practices between regulators and the conference of
insurance supervisory authorities (CIS), a forum for
exchange of views and practices between regulators.
4.2.4.2.2 Member State level
At present, the legal framework for the supervision
of credit institutions (as for insurance undertakings
and securities firms) is firmly grounded in one of the
core principles of the internal market, that of home
country control, which allows a financial institution
based in one country to be supervised by its national
competent authority. More precisely, it allows a firm
to provide services in another country or to open a
branch in that country while being supervised by its
national supervisor 179 . However, this principle does
not generally apply to cross-border business performed
on the basis of subsidiaries: when a firm decides to
open a subsidiary in another EU Member State, that
subsidiary becomes subject to the control of the host
Member State.
4.2.4.2.3 Cross-border supervision
The fact that the principle of home country
supervision does not apply to subsidiaries located in
another Member State has led to criticisms in recent
years. Specifically, a number of internationally-active
banks have argued that they operate on the basis of
business lines, which are European in scope, and that
this should be reflected in the organisation of
supervision in Europe.
This led some banks to ask for the supervisory
structure to be changed, for example by establishing
a single EU supervisor, a two-tier system of banking
supervision or a system of lead supervisors 180 .
With the adoption of the Capital Requirements Directive,
which transposes the new Basel II International
Framework into EU legislation 181 , the EU legislator
has brought few but substantial changes to the EU
framework for the supervision of banks. As an
illustration, the Directive enhances the powers
granted to the “consolidating supervisor”, defined
as the competent authority of the Member State
where the head office of a group is located, in the
case of a credit institution with activities in different
Member States. Specifically, the consolidating
supervisor has the final say in some specific areas of
banking supervision (i.e. the validation of internal
models), in situations where the different authorities
responsible for the supervision of a bank cannot
reach agreement. This is an important provision, as
for the first time the competent authority of a
Member State can theoretically go against the view
expressed by the competent authority responsible
for the subsidiary of a banking group.
The Capital Requirements Directive also clarifies the
mechanisms in place for Member States to cooperate,
coordinate their actions and exchange information.
In addition, certain provisions of the Directive aim at
increasing the convergence of supervisory practices
across the European Union, such as Article 144,
which forces competent authorities to disclose
information. Finally, in the area of banking, the
creation of the “Level 3” committees is widely seen
as an opportunity to facilitate the supervision of the
financial industry at the European level.
178 For example, CEBS published on 21 December 2004 “guidelines on prudential filters for regulatory capital”; CEIOPS published in September 2005
“recommendations regarding the implications of the IAS/IFRS – Introduction for the prudential supervision of insurance undertakings”.
179 There are however exceptions to this general principle. For example, with respect to liquidity risk, the supervision of a branch is the responsibility of the
competent authority of the Member State where that branch is located.
180 See for example three recent publications by the European Financial Roundtable: “EFR recommendations on regulation and supervision”, 28 Oct 2003; “EFR
report 'Towards a lead supervisor for cross border financial institutions in the EU'”, 15 Jun 2004; “Third EFR report on lead supervisor concept”, 29 Jun 2005.
181 The Basel II framework, published by the Basel Committee on Banking Supervision in June 2004, revises and upgrades the original Basel Accord of 1988 on
minimum capital requirements for banks. The Capital Requirements Directive, adopted in the European Union to transpose the Basel II framework, was
adopted in 2005 and published in the Official Journal of the European Union in June 2006. Formally, the Capital Requirements Directive consists of two
separate texts: Directives 2006/48/EC and 2006/49/EC.
59

4.2.4.3 Comparison
In the US, supervision in the banking sector can take
place either at the federal level (for federally-chartered
institutions) or at the state level (for state-chartered
institutions). In the latter case, a federal agency also
plays a supervisory function. In the EU, supervision of
banks takes place exclusively at the level of the
Member States; there is no agency responsible for
supervision in the European Union, nor is any
national agency entitled to supervise institutions
active in another Member State. However, branches
of a national institution located in another Member
State are supervised by the supervisory authority of
the home Member State, on the basis of the principle
of Home country supervision. Likewise, in the
case of subsidiaries, the “consolidating supervisor”
benefits from some specific powers, which have
been enhanced with the adoption of the Capital
Requirements Directive.
Another important difference between the two
systems relates to the level of competition between
supervisory authorities. While competition is promoted
in the United States as an efficient way to promote
financial innovation or dynamism, an important
characteristic of the European supervisory architecture
is the desire to ensure a level playing field for all
banks that are active in the EU, whatever their
country of origin, size or level of complexity.
Furthermore in the EU, recent developments in the
financial sector have lead to calls by certain actors
(notably internationally active banks) to change
radically the EU supervisory framework, for example
by setting up a single EU supervisor or by establishing
a two tier system, with a different supervisory
structure for institutions active in different countries
and for locally-active institutions. Such a system would
be more in line with the US structure, where banks
that are active in several states have the possibility to
opt for a federal charter, implying supervision at the
federal level by a federal agency.
The approach chosen in the EU, confirmed by texts
such as the Lamfalussy Report, the Capital
Requirements Directive or the European Commission’s
Green Paper on Financial Services Policy (2005-2010),
is however substantially different from the US
approach. As opposed to competition between
supervisors, the EU has introduced measures which
aim at achieving supervisory convergence.
Along the same lines, the EU opted for building on
the existing structures in the area of supervision,
instead of introducing radical changes. It should be
noted here that a partial replication of the US
framework in Europe would not be possible, given
that both systems are based on different building
blocks. Replicating the US supervisory structure in
the European Union would in fact require a complete
overhaul of the existing architecture.
4.2.5 Regulatory trends in the banking sector
The 20th century has been a period of varying regulatory
trends in the financial services sector of the industrialised
world, which has traditionally been particularly heavily
regulated. A number of regulations in this sector both in the
US and in European countries date back to the crash of
1929 and the ensuing great depression, in an attempt to
avoid a similar situation in the future.
Progressively, taking account of evolutions in the financial
markets, many of the measures taken following the 1929
crisis have been repealed, or amended. At the same time,
other measures have been introduced to address other,
more contemporaneous issues. An illustration of this are the
rules implemented to control the risks taken by financial
institutions.
This section will provide an overview of the regulatory trends
in both the US and the European Union, and will then
provide a comparison of these trends.
4.2.5.1 United States
4.2.5.1.1 Historical developments in the US
4.2.5.1.1.1 Background: from regulation
to deregulation
In the first half of the 20th century, regulatory
measures were taken in the US to limit the scope of
activities of financial institutions. Specifically, two
categories of measures can be mentioned: measures
which limit the geographical activities of banks and
measures which limit the activities in which the various
categories of financial institutions could engage.
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4.2.5.1.1.1.1 Limitation of the geographical
activities of banking institutions: from the
McFadden Act to the Riegle-Neal Act
The intention with the McFadden Act adopted in 1927
was to establish a level playing field between national
(federally-chartered) banks and state-chartered banks
and to promote competition between all categories
of banking institutions.
According to the McFadden Act, national banks were
allowed to open branches within their state (“intrastate
branching”) and outside the borders of their home
states (“interstate branching”) only to the extent
permitted by state law. Regarding interstate branching,
as no state allowed by the time interstate branching
for state banks, this meant effectively prohibiting it.
The McFadden Act is therefore widely regarded as
having maintained the particularly decentralised
structure of the US banking system, made up of an
important number of small, locally-active institutions.
Some banks circumvented the act by creating bank
holding companies. A bank holding company is not
a bank in itself, but a corporation which purchases a
bank located in another state and operates it as a
complete subsidiary. As a response to this, the Douglas
Amendment to the Bank Holding Company Act was
adopted in 1956, which prohibited bank holding
companies from acquiring banks without the home
state’s authorisation. Because no states permitted
interstate acquisitions, this effectively stopped all
interstate banking activities. In addition, the Bank
Holding Act of 1956 granted the Federal Reserve
sole regulatory responsibilities of bank holding
companies and prescribed the requirement to obtain
approval from the Fed for all firms wishing to
become a bank holding company.
The restrictiveness of these acts varied from state to
state, but was generally maintained until the adoption
of the Riegle-Neal Interstate Banking and Branching
and Efficiency Act passed in 1994, which allowed
national banks to operate branches in other states
(interstate branching 182 ). However, this law forced states
to allow branching through acquisition only, meaning
that a bank must acquire another bank and merge the
two structures in order to operate branches across state
lines. This rule has as a consequence resulted in an
increase in bank merger and consolidation activity.
In addition, states also obtained the power to
authorise “de novo” interstate branching across
state lines, allowing a bank to simply open a new
branch in another state without the requirement to
acquire an entire bank. Several states have decided
to allow this possibility, although most of them did it
only on a reciprocal basis. Furthermore, many states
that do not prohibit interstate branching still impose
certain restrictions on branching into the state.
All this explains why the deregulation of regional
banking has not proceeded uniformly across states.
The Riegle-Neal Act also changed the situation in
relation to interstate banking, as it repealed the
Douglas Amendment to the Bank Holding Act by
allowing banking across the whole country,
regardless of state law.
The Riegle-Neal Act of 1994 did however not seek
to change the law concerning the limitations to
intrastate branching, as it specifies that state law
continues to control intrastate branching, both for
state and national banks. Regarding the initial
restrictions to intrastate branching, the situation
today is that banks can open branches throughout
their respective states as since 1992, with the only
exception of the state of Hawaii, all states have
deregulated their restrictions on intrastate
branching.
In conclusion, it can be said that after very strict rules
restricted the possibilities for banks to operate across
the borders of their home state and severely limited
the possibilities to enter into intrastate branching
activities, most barriers to interstate banking and
branching as well as intrastate branching have now
been removed, notably through the adoption of the
Riegle-Neal Act in 1994.
4.2.5.1.1.1.2 Limitation of the activities of banking
institutions: from the Glass-Steagall Act to the
Gramm-Leach-Bliley Act (GLBA)
Following the Wall Street crash of 1929, very strict
rules were adopted to regulate the activities in
which the various types of financial institutions
could engage. Specifically, the fact that banks could
engage in both financial markets and credit-granting
activities was regarded as leading to conflicts of
interest and as decreasing the prudence that banks
normally show in their role as providers of credits.
182 Nevertheless, the Riegle-Neal Act allowed individual states to “opt out” of the interstate branching provisions by passing a new law prohibiting it before the
1st June 1997. Two states chose to opt out of interstate branching: Texas and Montana. The “opt out” provisions prevent both state and national banks from
branching into or out of their borders.
61

This blurring of roles is considered by some as one
of the causes of the crash of 1929. Against this
background, the Banking Act of 1933, also referred
to as the Glass-Steagall Act, imposed a separation of
ownership of commercial and investment banking
firms (and prohibited them to merge) and barred
banks from underwriting or even dealing in corporate
securities. Because of this division, banks and
investment firms did not compete with each other.
Some market participants took measures to avoid the
separation between the commercial and investment
bank activities, notably by creating bank holding
companies which hold both a commercial and an
investment bank. The Bank Holding Company Act of
1956 was also a policy response to this tendency,
seeking to maintain the division between the
different activities.
Most restrictions of the Glass-Steagall Act have been
lifted with the “Financial Modernisation Act” of
1999, also known as the Gramm-Leach-Bliley Act 183 .
Specifically, in the first title of the Act (“Title I –
Facilitating affiliation among banks, securities firms,
and insurance companies”), the following important
measures are included:
- repeal of some of the restrictions on banks
affiliating with securities firms contained in the
Glass-Steagall Act;
- creation of a new “financial holding company”,
which can engage in a statutorily provided list of
financial activities, including insurance and
securities underwriting and agency activities as
well as merchant banking and insurance company
portfolio investment activities;
- lifting of some of the restrictions governing nonbank
banks.
4.2.5.1.1.2 The savings and loans crisis: an example
of deregulation followed by re-regulation
The savings and loans crisis (“S&L crisis”) provides
us with an example of deregulation, which has led
to a crisis and subsequently resulted in a new phase
of regulation.
Until the end of the 1970’s, the savings and loans were
strictly limited in the activities they were allowed to
perform, notably accepting deposits and granting long
term fixed rate home mortgage loans. The regulation
of savings and loans also included a ceiling on the
interest rates they could offer to depositors.
At the end of the 1970’s / beginning of the 1980’s,
a series of measures were taken to lift the regulation
applicable to savings and loans. These new provisions
allowed them for instance to expand the activities in
which they could engage (e.g. make commercial
loans, issue credit cards) and to pay higher rates for
their deposits. Deregulatory measures included the
Depository Institutions Deregulation and Monetary
Control Act of 1980 and, most importantly, the Garn
– St Germain Depository Institutions Act of 1982.
However, the deregulation of the thrift industry has
not been accompanied by a parallel increase in
examination resources.
A combination of several factors caused serious
problems to the thrift industry, resulting in the failure
of hundreds of individual institutions. Deregulation
was often mentioned as a key reason for the
problems of the industry, as it made it possible for
these institutions to engage in more risky activities.
Savings and loans institutions were also highly
vulnerable to the strong interest rate volatility
experienced at the beginning of the 1980’s, as often
they had to pay higher interest rates on deposits but
were locked into their credit engagements by lower
long term fixed interest rates.
A bailout plan was finally adopted in August 1989,
the Financial Institutions Reform Recovery and
Enforcement Act (FIRREA). The plan included
important provisions, such as the abolishment of the
Federal Home Loan Bank Board and of the Federal
Savings and Loan Insurance Corporation (FSLIC) and
the creation of the Office of Thrift Supervision, newly
responsible for the supervision of S&L regulation.
Other measures included the shift of the deposit
insurance function to the FDIC and the creation of a
new entity, the Resolution Trust Corporation, to
resolve the insolvent S&Ls.
In a study published in December 2000 184 , the FDIC
estimated that the combined total for all direct and
indirect losses was an estimated USD 152.9 billion,
of which US taxpayer losses amounted to USD 123.8
billion and the thrift industry losses amounted to
USD 29.1 billion.
183 Information on the Gramm-Leach-Bliley Act can be obtained on the website of the US Senate at the address http://banking.senate.gov/conf/.
184 FDIC Banking Review - 2000 - Vol. 13 No. 2. Article available from: http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf.
62

4.2.5.1.1.3 Recent trend: regulation in specific areas
In parallel with the deregulation trend in the US the
financial services area, another important trend has
been that of regulating specific aspects of the sector.
In particular, it can be said that the restrictions for
some institutions to enter into particular types of
activities, such as those introduced by the Glass-Steagall
Act, have been replaced by strict and far-reaching
prudential rules. An illustrative example is provided
by the prudential rules put forward by the Basel
Committee on Banking Supervision, which set strict
prudential rules that have to be observed by banks.
4.2.5.2 Europe
4.2.5.2.1 Historical developments at the EU level
When describing the regulatory trends in the European
Union, a borderline should be drawn between the
period where the trends were mostly determined
at the level of the individual Member States, and
the period where the trends were triggered by
developments at the EU level. Unlike the US, which
at the beginning of the last century was already a
‘federally organised but united country’, Europe had
to decide to become more integrated; a first step
was taken in 1957, with the creation of an economic
community between six European countries.
At the European level, the first initiatives to coordinate
banking regulation started in 1969 and culminated
in the First Banking Coordination Directive, which
was subsequently adopted in 1977 185 . It contains
basic provisions about the authorisation of credit
institutions and branches, cooperation between
responsible supervisory bodies, and it led to the
establishment of the Banking Advisory Committee.
The adoption of the Second Banking Coordination
Directive 186 followed in 1989, introducing the
principle of mutual recognition and the home country
principle for supervision – the cornerstones of current
European regulatory principles. Further harmonisation
has also taken place in the following areas:
protection and control rules (Own Funds Directive) 187 ,
solvency ratios 188 , control of major risks (Large
Exposures Directive) 189 and deposit guarantees 190 .
These were all integrated in the consolidating
directive of March 2000 191 .
A similar legislative progression can also be observed
in the insurance (i.e. First Coordinating Directive
in Non-Life Insurance) 192 and securities sectors (i.e.
UCITS 193 and Investment Services Directive 194 ).
The most important achievement of the second banking
directive is that it has for the first time provided the
credit institutions of the European Union with a
single passport. This passport, granted by the
competent authority of the Member State where the
credit institution is located, allows the institution to
be active throughout the EU territory, through the
providing of services or the establishment of
branches. The passport does however not apply as
regards the setting up of subsidiaries: as a subsidiary
is considered as an institution of the Member States
in which it is located, it has to get an authorisation
from the competent authority of the Member State
in which it is located.
185 First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative provisions relating to the taking up
and pursuit of the business of credit institutions (OJ L 322, 17/12/1977 P. 0030 – 0037).
186 Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up
and pursuit of the business of credit institutions and amending Directive 77/780/EEC (OJ L 386, 30/12/1989).
187 Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions (OJ L 124, 05/05/1989).
188 Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (OJ L 386, 30/12/1989 P. 0014 – 0022), updated: 91/15/EC,
updated 94/7/EC, updated 95/15/EC.
189 Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions (OJ L 029, 05/02/1993 P. 0001 – 0008).
190 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ L 135, 31/05/1994 P. 0005 – 0014).
191 Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit
institutions (OJ L 126, 26/05/2000 P. 0001 – 0059).
192 First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit
of the business of direct insurance other than life assurance (OJ L 228, 16/08/1973 P. 0003 – 0019).
193 Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for
collective investment in transferable securities (UCITS) (OJ L 375, 31/12/1985 P. 0003 – 0018).
194 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ L 141, 11/06/1993 P 0027 – 0046).
63

4.2.5.2.2 The “universal banking” model
A key feature of the Second Banking Directive relates
to the fact that the activities in which credit
institutions can engage are defined exhaustively 195 .
The model promoted by the Directive, and imposed
throughout the EU, is the “universal banking” model,
as the Directive foresees that credit institutions can
engage in activities such as “Acceptance of deposits
and other repayable funds”, “lending”, “Trading for
own account or for account of customers” or
“Safekeeping and administration of securities”.
It should be noted that before the adoption of
the Directive, important differences existed from
Member State to Member State, as whereas in some
countries strict limitations were imposed as regards
to authorised activities for banks, in other countries
the model was already that of universal banking.
The Directive has thus been a key milestone in terms
of the creation of a level playing field in the EU
banking sector.
Noteworthy is also the fact that the activities defined
in the Directive apply to the institutions defined as
“credit institutions”, which includes institutions
such as banks, savings banks and cooperative banks.
Concretely, this means that whereas the legal
environment of individual Member States can foresee
specific features for the different categories of credit
institutions, the activities in which these can engage
are the same and are those defined by the Directive.
4.2.5.2.3 Most recent regulatory trends:
more detailed rules, based on
international standards
The 1929 crash in the New York Stock Exchange
also triggered reforms on the European side of the
Atlantic. In particular, in a number of European
countries, measures were taken that strictly regulated
the activities in which the different categories of
actors in the financial area were allowed to engage.
It is also in that period that some European countries
decided to set up supervisory agencies, in the banking
and securities areas.
As indicated, the second banking Directive has
imposed the universal banking model across Europe,
extending in many cases the activities in which banks
were allowed to engage and softening the limits
imposed previously. From that perspective, the
adoption of the second banking directive in 1989
can be regarded as the peak of a period of
deregulation that started in the 1970, and that
followed a period a regulation initiated in 1929 with
the great depression.
The 1980’ and to a greater extent the 1990’ has also
been a period of adoption of complex, detailed and
often burdensome regulation in the banking area,
which very often originated in international fora.
The Basel I accord, replaced recently by the much
more complex and comprehensive Basel II framework,
is probably the most well-known example of such
regulation, whose aim is to enhance the soundness
of the banking system worldwide. This has led some
to point out that while credit institutions have been
given more breathing space as regards the activities
in which they can engage, they are now more
limited by the much stricter prudential requirements
with which they are required to comply, and thus
that one type of regulation has been replaced by
another, new type of regulation.
The trend towards the development of international
standards accelerated in recent years, with for
instance the adoption of the International Financial
Reporting Standards (IFRS) and of rules relating to
the fight against the financing of terrorism and
against money laundering. The EU took the decision
to include all these new international rules in its own
regulatory framework.
4.2.5.3 Comparison
The EU countries and the US have gone through similar
experiences in the course of the 20th Century, often
deciding to apply similar solutions to similar problems.
As an illustration, the 1929 crash in Wall Street has
led many countries around the world to regulate
more strictly the area of financial services, while both
in Europe and in the US the 1980’ have been an
important period of deregulation. Likewise, the trend
towards the introduction of increasingly complex
and burdensome legislation could be observed in the
1990’ in the US and in Europe.
195 Annex I to Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of
credit institutions.
64

Another important common feature between the
US and the EU is the fact that in both cases, it has
been decided to go in the direction of the “universal
banking” model approximately during the same period,
i.e. the end of the 1980’ / beginning of the 1990’.
An important distinction worth underlining is the
fact that in the US, there are important differences in
the banking system between the different categories
of institutions, not only from the perspective of the
business model, but also from a legal point of view.
This is not so much the case in the EU, where the
2nd Banking Directive introduced the criteria that
have to be fulfilled by all credit institutions to be
authorised and to benefit from the single passport,
whatever their specific type (e.g. commercial bank,
savings bank, cooperative bank).
4.3 Regulation of the capital markets
4.3.1 Introduction
Sound and liquid capital markets are generally considered
necessary to facilitate the efficient allocation of capital through
a dynamic interaction between investors, issuers and
financial intermediaries. This chapter defines capital markets
as places where long-term equity securities are traded. As an
increasing number of retail banks are becoming active in various
operations on the global capital markets, it is important to
understand the legislative framework that determines a large
part of a bank’s behaviour in this respect.
The purpose of this section is to provide a presentation of
the regulatory frameworks of the US and EU capital markets
and to identify similarities and distinctions between them.
A comparative analysis of the two markets is useful in view
of the fact that these are currently the most developed
capital markets in the world. According to the Securities
Industry Association (SIA), the US and EU together account
for about 70% of global equity capitalisation: approximately
$16 trillion in the US and $10 trillion in the EU (equivalent
to approximately €13 trillion and €8 trillion respectively) 196 .
It is remarkable that only a couple of decades ago a comparative
analysis such as this one would have been practically
impossible, mainly because these two markets have
developed from a completely different basis, in a different
time span and with different objectives. In the meantime,
many global changes have affected both EU and US capital
markets equally, e.g. developments in the communication
industry and trading technologies, as well as increased
competition from new market players.
The US capital markets have traditionally played a leading
role in the global financial services industry. While not
comparable in size, a number of European countries have
developed national capital markets that are as competitive
and efficient as their bigger US counterparts. While a single
European capital market does not yet exist, despite the
efforts of the last twenty years of the European Union’s
policy makers, the national capital markets of a number of
European Member States fulfil important roles as prime
global financial exchanges. In fact, the rationale of attempts
to integrate European capital markets is still questioned by
some who argue that the domestic capital markets of
individual Member States are able to adequately satisfy
investors’ needs. Nevertheless, regulatory action at the EU
level is very much focussed on the aim of diminishing
barriers to integration and creating an efficient and
competitive single market for financial services.
Emerging legislative measures in both the US and the EU are
developing in the same direction, making it possible to
compare the two jurisdictions. In recent years, both the EU
and the US authorities have been active in revising the
existing regulatory framework, which resulted in adoption
of key legislative measures that will enter into force within
the next few years. The US regulators focussed their efforts
on revising the national market system which is set to
increase integration by creating equal rules for different
trading venues 197 .
EU regulators possibly have an even more challenging task,
trying to integrate 25 national markets and simultaneously
upgrade the legislation that can facilitate fair market
competition. The following chapters will describe all these
developments in more detail.
196 Testimony of Marc E. Lackritz, president Securities Industry Association, «The US-EU relationship: what comes next», 16 June 2005.
197 Different trading venues such as regulated exchanges, over-the-counter market makers, electronic communication networks, etc.
65

4.3.2 United States
4.3.2.1 Background
During the 1920s in the US, approximately 20 million
small and large shareholders were trading $50 billion’s
worth of securities on the stock market. It is estimated
that half of these securities became worthless following
the 1929 crash 198 . As early as 1933, the US Congress
passed the first two laws that govern the securities
markets as a response to the stock market crash: the
Securities Act of 1933 and the Securities Exchange
Act of 1934.
In response to the events of 1929, the 1933 Act
introduced laws that require full and fair disclosure
of the character of securities to ensure that investors
receive sufficient information to be able to make
informed investment decisions. Another objective was
to prevent misinterpretation and fraud associated
with the trading of securities. The 1934 Securities
Exchange Act set the basis to establish the Securities
and Exchange Commission (SEC), a regulatory agency
independent of federal government, but still under the
oversight of a number of congressional committees.
The SEC was assigned high level regulatory and
enforcement powers: power to register, regulate and
oversee the exchanges, broker-dealers, investment
advisors, transfer agents and clearing agencies 199 .
The Act also introduced the obligation for all publicly
traded securities to be registered with the SEC, bringing
in more transparency by requiring companies to
disclose all relevant information about their properties
and businesses, a description of the security to be
offered for sale, information about the management
of the company and its financial performance.
Several other Acts were adopted in the following
years (Public Utility Holding Company Act of 1935,
Trust Indenture Act of 1939, Investment Company
Act of 1940 and Investment Advisers Act of 1940),
but the next major change to the securities market
was introduced in 1975 with the amendment to the
1934 Securities Exchange Act 200 . This legislative reform,
which became known as the National Market
System (NMS), required the SEC to facilitate the
development of a national market system for the
trading of securities.
The objective of NMS is “promoting fair competition
among individual markets, while at the same time
assuring that all of these markets are linked together,
through facilities and rules, in a unified system that
promotes interaction among the orders of buyers
and sellers in a particular NMS stock. The NMS thereby
incorporates two distinct types of competition –
competition among individual markets and competition
among individual orders – that together contribute
to efficient markets” 201 . In response, a number of key
mechanisms were developed over the years to increase
market efficiency, transparency and investor protection.
- The best execution rule obliges investment firms
to execute clients’ orders under the most
favourable conditions to the client. Trading centres
are obliged to publish monthly statistics about
execution quality to enable investors to judge
whether best execution was achieved. Moreover,
investment firms must publish quarterly statistics
with a list of venues to which orders are routed to
give information on their relationship with the
market and to avoid conflict of interests between
investment firms and their clients.
- Order handling rules (quote rule and limit order
display rule) have the main objective to increase
market transparency. These rules provide public
information about the prices at which market
makers are prepared to trade their securities.
- Increased market interconnection makes it possible
to easily gain access to numerous trading venues.
These fundamental categories of measures set a solid
basis for the development of the US capital market
and served as a starting point for the new Regulation
NMS which was adopted in 2005. All mentioned
measures and the NMS Regulation are looked at in
more detail below.
4.3.2.2 Applicable legislation
4.3.2.2.1 Best execution
Whenever an investment company has a choice of
executing its client’s order in more than one trading
venue, it has a fiduciary obligation to choose the one
where the conditions are most favourable to the
client. This best execution rule is certainly one of the
most important mechanisms designed to ensure
investor protection.
198 US SEC «The investor’s advocate: how the SEC protects investors and maintains market integrity», July 2005.
199 Not all the powers mentioned were initially granted to SEC, but added subsequently over time.
200 The NMS was newly amended in 2005 as a response to market developments. This will be discussed in more detail below.
201 US SEC, Regulation NMS, Release No. 34-51808; File No. S7-10-04, June 2005.
66

The best execution rule was first mentioned in the
1934 Securities Exchange Act and upheld by the
NMS, however without specifying the actual scope
of the company’s responsibility when executing its
client’s order. For the first time, in the 1996 Order
Execution Obligations Act, the SEC stated that “the
duty of best execution requires a broker/dealer to
seek the most favourable terms reasonably available
under the circumstances for the execution of a
customer’s transaction” 202 . Although this definition
indicates the core of the best execution rule, one
could argue that it is also rather vague, as it does not
provide a detailed description of the steps which an
investment firm is expected to take to satisfy the
requirement imposed by the rule. The SEC justified
the lack of a precise definition by stating that “the
scope of this duty of best execution must evolve as
changes occur in the market that give rise to
improved executions for customer orders, including
opportunities to trade at more advantageous prices.
As these changes occur, broker-dealers' procedures
for seeking to obtain best execution for customer
orders also must be modified [...]” 203 .
A number of parameters which can affect the best
execution were also identified (among which price,
speed and probability of implementation), although no
clear priority was assigned to any of them. To introduce
some order, the SEC empowered Self Regulatory
organisations (SROs) to define their own definition of
best execution adapted to their trading mechanism 204 .
In addition, each investment firm is required to define
its best execution policy.
Moreover, the SEC undertook some actions to link
the prices on different markets and to make the
system more transparent. It set up a national best bid
and offer (NBBO) mechanism through which the best
available ask price and the best available bid price is
collected from all significant market centres and
disseminated to the public. It is important to note
that the best price available in the market is not
necessarily NBBO and that the traders in the US
are obliged to consider the possibility of price
improvement, i.e. to obtain a price better than the
NBBO through alternative markets.
The SEC found that “at some market centres as
many as 50% of certain orders, particularly market
orders for small sizes (less than 500 shares), are
executed at prices better than the public quotes” 205 .
In its constant effort to enhance best execution rules,
in 2001 the SEC adopted a rule to improve public
disclosure of order execution 206 . Namely, it introduced
an obligation on trading centres that trade national
market system securities to publish monthly electronic
reports with uniform statistical measures of execution
quality in order to enable investors to judge for
themselves whether best execution has been
achieved 207 . Such uniform information should enable
the investors to compare prices on different markets
as well as to encourage a fair competition between
trading centres. This information is necessary as the
same securities are nowadays traded on different
markets (e.g. on exchanges, over-the-counter market
makers, electronic communication networks, etc.)
making it harder to keep track of all offer prices and
trading conditions.
Finally, on the same day as the order execution rule,
the SEC also adopted a rule on routing practices.
It requires investment firms that route customer
orders in equity and option securities to publish
quarterly reports with a list of venues to which they
routed a significant percentage (more than 5%) of
clients’ orders 208 . Brokers must also identify the nature
of their relationship with those venues, enabling the
clients to observe and evaluate whether brokers’
routing practices are acceptable. This rule was imposed
after the practice showed that some brokers who
offer the lowest fees and a quick execution might
not be the best choice for retail investors. A decision
based only on these two parameters (low fees and
quick execution) might limit opportunities for
investors to obtain the best price and might lead to a
conflict of interest between the broker and investor.
4.3.2.2.2 Order handling rules
Order handling rules include the quote rule and the
limit order display rule. Their purpose is to increase
the information that is publicly available concerning
the prices at which market makers are prepared to
trade their securities.
202 US SEC, Order Execution Obligations Act, Release No.34-37619A, 6 September 1996.
203 Idem.
204 Each SRO can create unique rules to regulate the business conduct of its members with regard to equities trading, but on the condition that it recognises
national securities laws and various directives issued by the SEC. Some examples of SROs are NYSE, AMEX, NASD and regional stock exchanges.
205 US SEC, Disclosure of Order Execution and Routing Practices, Release No. 34-43590, 17 November 2000.
206 US SEC, Disclosure of Order Execution and Routing Practices, Release No. 34-43590, 17 November 2000.
207 Disclosure of Order Execution and Routing Practices, Rule 11Ac1-5.
208 Order Execution and Routing Practices, Rule 11Ac1-6.
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■ The Quote Rule
The objective behind the quote rule was to ensure
that no significant pools of liquidity are hidden from
the market. The Quote Rule requires market makers
to make their prices public, which would ultimately
enable wide dissemination of information in the form
of a consolidated quote. By including all the quotes
for securities into the consolidated quotation system,
market transparency increased and investors became
able to make a better informed investment decision.
The rule was introduced in 1996 following severe
deficiencies discovered on the NASDAQ market.
The SEC accused NASDAQ of inadequate reporting
of trading intentions which occurred due to the fact
that under the NASDAQ rules the market makers
were not obliged to incorporate limit orders into
their quotations even if these were better than the
best available price 212 . This was deemed as a serious
lack of representative information, having in mind
that the limit orders constitute two-thirds of all
orders on NASDAQ 213 .
The Quote Rule was introduced in 1975 and
complemented with two amendments in 1996.
The first one broadened the scope of the rule by
modifying the definition of OTC market maker, which
came to include investment firms which act on
their own accounts and which internalise orders 209 .
This applies to all bids and offers which they gather
from the market for any listed security when a
quotation represents more than 1% of the
aggregate trading volume for that security. The other
amendment allowed market makers to trade at
better prices in certain private trading systems, called
electronic communication networks (ECNs), without
publishing an improved quote (provided that the
ECN itself publishes the improved prices).
■
The Order Display Rule
The Order Display Rule requires the investment firms
covered by the rule 210 to publicly display those limit
orders received from clients which have better prices
than their own prices 211 . Market makers have three
options on how to comply with the rule: they can
display in their quotes these customer limit orders
that improve the price or add to the size of their
quotes, they can execute the limit order themselves
or they can transfer the order to another authorised
market maker.
According to a SEC study published some years after
the implementation of the rule, it is estimated that
the spreads in NASDAQ stocks had narrowed by
30 percent after implementing the Order Handling
Rules and that more than half of the decrease in
spreads was due to the Order Display Rule 214 .
4.3.2.2.3 Market interconnection
Numerous IT systems have been put in place over
time to ensure that a customer is aware of the best
available prices, although the existence of different
types of trading venues hindered the creation of a
single network. As securities were traded on separate
markets and under separate rules for a long time,
the need to link the markets did not exist 215 . Due to
technological developments, by 1975 it became
feasible to link nine markets by ITS computers, enabling
traders to seek the best available price on all the
connected markets, however leaving all the unlisted
stocks (including those traded on NASDAQ) out of
the NMS scope 216 . The practical implication of such
segregation was that investors still faced certain risks
as they could not compare prices on all markets.
209 Over The Counter (OTC) market makers trade securities over the phone, facsimile or electronic network instead of a physical trading floor.
210 Specialists and OTC market makers.
211 Limit order is an order to buy or sell a predetermined amount of shares at a specified price or better price.
212 US SEC, «Report pursuant to Section 21(a)of the Securities Exchange Act of 1934 Regarding the NASD and the NASDAQ Market», August 1996.
213 US SEC, «SEC Study Reveals Problems In Display Of Limit Orders», 4 May 2000.
214 US SEC, «SEC Study Reveals Problems In Display Of Limit Orders», 4 May 2000.
215 A clear distinction was traditionally made between the listed securities which are the ones that are traded on a recognised and regulated exchange, and
unlisted securities which are not traded on a regulated exchange (but for example those traded in the OTC market).
216 The linked markets were American, Boston, Cincinnati, Chicago, New York, Pacific, and Philadelphia and NASD over-the-counter market. In turn, NASDAQ
quotes are operated through another type of specialised systems.
68

4.3.2.2.4 National Market System rules
■
The Order Protection Rule
In 1975 the SEC has been mandated by the
Congress to use its rulemaking authority to develop
an efficient New Market System for equity securities.
The SEC was assigned with a power to “eliminate all
unnecessary or inappropriate burdens on competition,
pursue the goal to centralised trading of securities
and provide leadership for the development of a
more coherent and rational regulatory structure to
correspond to and to police effectively the new
national market system” 217 . The Congress furthermore
encouraged the SEC to "assure economically efficient
execution of securities transactions, fair competition
among brokers and dealers, among exchange
markets, and between exchange markets and
markets other than exchange markets" 218 .
To improve the functioning of financial markets
and to protect investors, the SEC adopted the NMS
regulation in April 2005 after years of extensive
consultations with the industry 219 . The regulation was
considered necessary to respond to the numerous
changes that were noted on the equities markets in
the last few years, as a result of new technologies,
new market participants and new types of markets.
According to the SEC, the NMS today encompasses
stocks of “more than 5,000 companies, which
collectively represent more than $14 trillion in US
market capitalisation (approximately €11.5 trillion)” 220 .
Once the Regulation NMS enters into force the two
biggest US stock exchange markets, the NYSE and
NASDAQ, will become subject to a common set of
rules, but without a tendency to merge their structures
in one. This is a significant step forward for exchanges
which have traditionally operated on completely
different platforms, the former with the physical
auction trading floor where buyers and sellers meet
directly and the latter with an electronic platform.
The NMS Regulation includes four straightforward
rules which are designed to modernise the regulatory
structure of the US equity markets: the order
protection rule, the access rule, the sub-penny rule
and the market data rules. Some of the rules existed
before, but had a more limited scope, while the
others are a response to new market developments.
The Order Protection Rule is designed to protect
displayed and immediately accessible automated
quotations from trade-throughs for all types of NMS
stocks (i.e. NYSE-, Amex- and NASDAQ-listed stocks) 221 .
It should be noted that the trade through rule was
already applicable on NYSE, but the Regulation NMS
brought in certain improvements and extended the
scope of the rule so that it now also applies to
NASDAQ. The rationale behind the rule is to ensure
fair market practice and increase protection of
investors, who are often unaware that their orders
have not been executed at best available prices.
A SEC study found that trade-trough became a
rather frequent practice on the US market, namely
that “1 out of 40 trades for both NYSE and NASDAQ
stocks were executed at prices inferior to the best
displayed quotations, which amounts to approximately
98,000 trades per day in NASDAQ stocks alone” 222 .
■
The Access Rule
The Access Rule requires trading centres to ensure
fair and non-discriminatory access to quotations
through a private linkage approach, so that investors
benefit from the possibility of indirect access through
the members, subscribers, or customers of a trading
centre in question. In addition, the rule establishes
a limit on access fees to harmonise the pricing of
quotations across different trading centres.
Furthermore, SROs (Self Regulatory organisations)
became obliged to enforce rules which would
prohibit their members to display quotations that
lock or cross the automated quotations of other
trading centres (this however does not apply to
manual quotations).
■
The Sub-Penny Rule
The Sub-Penny Rule prohibits market participants to
display, rank or accept quotations in NMS stocks that
are priced in an increment of less than $0.01, unless
the price of the quotation is less than $1.00 (in that
case the minimum increment is $0.0001). This rule
aims to prevent the practice of “stepping ahead”,
i.e. prevent displayed limit orders to be exceeded by
negligible amounts.
217 New York Court of Appeals, Kenneth H. Guice v. Charles Schwab & CO., 89 N.Y.2d 31, 674 N.E.2d 282, 651 N.Y.S.2d 352, 15 October 1996.
218 New York Court of Appeals, Kenneth H. Guice v. Charles Schwab & CO., 89 N.Y.2d 31, 674 N.E.2d 282, 651 N.Y.S.2d 352, 15 October 1996.
219 It became effective on 29 August 2005, and implementation is scheduled for 2006.
220 US SEC, «Regulation NMS: Final rules and amendments to joint industry plans», 9 June 2005.
221 Trade through is the execution at a price that is inferior than a price displayed on another market. Accordingly, trading centers must execute all the orders at
the best accessible prices or route these orders to trading centers where more favorable prices are displayed.
222 US SEC, «Regulation NMS: Final rules and amendments to joint industry plans», 9 June 2005.
69

■ The Market Data Rules
The Market Data Rules are designed to allocate
revenues generated by market data fees to the
various SROs to correct certain distortions. These
rules are promoting the wide availability of market
data and are allocating revenues to SROs that
produce the most useful data for investors.
4.3.3 European Union
4.3.3.1 Background
Following the US stock market crash in 1929, the crisis
spread to European capital markets by the following
year as over-exposed European banks could no
longer compensate for the money they lost through
investments in severely devaluated US securities.
In 1939, prices on securities markets plummeted once
again due to the start of World War II, after which
the situation finally began to improve as reconstruction
in Europe spurred economic growth. Over the years,
financial markets of European Member States
became globally competitive and attractive to all
kinds of investors 223 . After years of relying merely on
national legislation specific to each of the Member
States, an increased number of legislative initiatives
were delivered at the European level, which will be
discussed in the following paragraphs.
This situation changed in 1993 when the Maastricht
Treaty introduced changes that granted the full
freedom of capital movements both between Member
States and between Member States and third
countries 226 . At that point the cross-border flow of
capital was made easier, representing the first step
towards the creation of a single capital market.
The Investment Services Directive (ISD), as described
below, was adopted in 1993, establishing the most
important legal framework for investment services
and financial markets. The Directive introduced a
number of novelties that enabled investment service
providers to engage in cross-border activities, but
there were still difficulties that had to be resolved.
A revised ISD was adopted in 2004 under the name
of the Markets in Financial Instruments Directive
(MiFID), forming a part of the European Commission’s
Financial Services Action Plan (FSAP) which has an
objective to accelerate the completion of the internal
market for financial services 227 . The MiFID aims to
provide a “single passport” for investment firms
operating across the EU, to encourage competition
between regulated markets and investment firms
as regards trading of securities as well as to increase
market transparency and investor protection.
The deadline for Member States to transpose the
MiFID into national laws is 31 January 2007 and
the effective application of the rules is scheduled for
1 November 2007.
In 1957 the European Community Treaty laid the
foundations of the European Union, though its
original version did not contain any direct legal
requirement to integrate the capital markets of
Member States. A significant step was made almost
thirty years later with the Single European Act, when
capital movement was given equal legal status and
treatment as the movements of goods and services,
requiring Member States to abolish restrictions on
movements of capital taking place between persons
resident in different Member States 224 . Despite this
requirement, the European Court of Justice soon
after ruled that the relevant Treaty provisions did not
have direct effect and the scope of those provisions
did not appear to be particularly broad 225 .
4.3.3.2 Applicable legislation
4.3.3.2.1 Investment Services Directive (ISD)
The conditions under which investment firms can
provide specified services in the European Union
were first established by the Investment Services
Directive (ISD) in 1993 228 . This regulatory framework
created comprehensive rules for financial services and
instruments. One of the main benefits introduced by
the ISD is a ‘single passport’ for investment firms,
enabling them to provide services throughout the EU
without a separate authorisation from the one
obtained in their home Member State.
223 By “Member States” we consider all 25 current EU Member States, despite the fact that some of them joined the EU as late as in May 2004.
224 The provision came into force in directive referred to above is Directive 88/361/EEC with effect from 1 July 1990 (following the Directive 86/566/E0EC which
was repealed on 1 July 1990).
225 Leo Flynn, «Coming of age: The free movement of capital case law 1993–2002», Common Market Law Review, Kluwer Law International, 2002.
226 The Treaty of Amsterdam renumbered the EU and EC Treaties in 1999. Article 56 (free movement of capital) was originally Article 73 in the Maastricht Treaty.
227 See the chapter on the Lamfalussy process.
228 Council Directive 93/22/EEC on investment services in the securities field, 10 May 1993.
70

The ISD set a basis for the development of modern
EU capital markets regulation, but it soon became
clear that the ISD rules did not apply equally to all
markets and all market participants and as such
could not facilitate the creation of a single European
capital market.
One example of diverging national practices derived
from the fact that the ISD allowed the use of the
concentration rule (which makes it obligatory to
trade all shares through one centralised regulated
market at the national level). Some Member States
made use of the concentration rule (e.g. France),
some did not (e.g. Germany), whereas others have a
completely different market structure where the
concentration rule is by definition not applicable (e.g.
the UK). The opportunity to use the concentration
rule enabled Member States to organise capital
markets differently at the national level, which in fact
hindered the main objective of ISD to create a single
European capital market.
Moreover, some of the biggest difficulties arose due
to the fact that the ISD only prescribed minimum
standards, which left an option for Member States
to impose stricter obligations at the national level.
In practical terms this diminished the attraction of
making use of the ‘single passport’, as the firms that
provided services across Member Sates still had to
comply with different additional regulatory requirements
in each of the host States. For investment firms this
difference in the implementation of the ISD at the
national level implied significant regulatory analysis
and high compliance costs when approaching
another market.
Finally, the ISD scope did not cover some significant
types of investment services (e.g. investment advice)
or certain financial instruments (e.g. commodity
derivatives).
4.3.3.2.2 Markets in Financial Instruments
Directive (MiFID)
In 2004, the ISD was upgraded with the MiFID, a
Directive with a similar core rationale but with a
wider scope and more profound provisions that can
accommodate complex services and products that
evolved since the beginning of 1990’s. The MiFID
introduces stricter and more equal rules for all
financial instruments and all trading venues, which
should in turn influence conduct of business for
investment service providers and strengthen the
investor protection. Moreover, MiFID reaffirms the
‘single passport’ assigned to investment firms by ISD
and extended it to regulated markets.
One of the most important changes brought in by
the MiFID is that it does not allow Member States to
continue using the concentration rule. In practice
this implies that transactions can be executed not
only on regulated markets, where securities were
traditionally traded, but also via multilateral trading
facilities (MTFs) and through investment firms by
internalisation of orders 229 . There is a risk that some
national exchanges might lose their advantageous
position in a newly created competitive environment,
but the introduction of common rules for all the
market actors should form a level playing field and
provide more choice for investors.
■
Investor protection
The MiFID enforces high standards of investor
protection which are specifically adjusted to three
categories of investors: retail clients, professional
clients and eligible counterparties. This classification
is based on the knowledge, expertise and resources
that each category is expected to have to be able to
make an informed decision about the nature and the
risks of particular investment instrument. Depending
on the type of service provided to investors, the
MiFID also introduced the rules which require
investment firms to obtain relevant information
about their clients and assess which products and
services are suitable to be offered, or alternatively
asses whether the investors have appropriate
knowledge to understand the risks associated with
the offered product or service.
229 Article 4(1)(14) of the MiFID defines regulated market as “a multilateral system operated and/or managed by a market operator, which brings together or
facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in a way that results in a contract”;
Article 4(1)(15) of the MiFID defines a MTF as “a multilateral system, operated by an investment firm or a market operator, which brings together multiple
third-party buying and selling interests in financial instruments”; and
Article 4(1)(7) of the MiFID defines a systematic internaliser as an “investment firm which, on an organised, frequent and systematic basis, deals on its own
account by executing client orders outside a regulated market or an MTF”.
71

■ Best execution
Investor protection is further upheld by the rules on
best execution. This concept represents a major
change, especially in those Member States that
previously used the concentration rule, where best
execution in practical terms meant simply
transmitting the order to the national exchange.
Now, the best execution rule obliges Member States
to “require that investment firms take all reasonable
steps to obtain, when executing orders, the best
possible result for their clients taking into account
price, costs, speed, likelihood of execution and
settlement, size, nature or any other consideration
relevant to the execution of the order” 230 .
Investment firms must analyse the importance of
these factors according to their clients needs and on
that basis seek the execution venue that offers the
best execution conditions. A list of venues which the
investment firm has access to and the factors
affecting such choice must be pre-defined in the
order execution policies of each investment firm
and pre-approved by the clients. As stated above,
MiFID acknowledges that not all clients have equal
knowledge about investment services and products.
To this end, best execution requirements are even
more stringent when orders are executed on behalf
of a retail client. In such cases, investment firms are
obliged to consider both the price of the financial
instrument and all the costs associated with the
execution 231 .
■
Transparency
The MiFID introduced new requirements on systematic
internalisers, MTFs and regulated markets to increase
pre-trade transparency as well as requirements on all
trading venues to increase post-trade transparency.
These provisions currently apply only to trading
of shares, but there is a possibility that the rules
would be extended to other financial instruments at
a later stage.
Pre-trade transparency requirements oblige regulated
markets, MTFs and systematic internalisers to publish
prices at which they are willing to trade and keep
them up to date during working hours 232 . This is a
complete novelty as regards the systematic
internalisers, which were not subject to any similar
rules prior to the introduction of the MiFID. The end
of the concentration rule implies that the stock
exchanges will face increasing competition from
MTFs and systematic internalisers and it is therefore
necessary to impose similar rules on all execution
venues and thereby create a level playing field
between them. The widened scope of pre-trade
transparency is also expected to contribute to price
discovery as investors will have a better overview of
the market liquidity.
All trading venues (regulated markets, MTF and all
investment firms) became also subject to post-trade
transparency requirements of the MiFID. Under this
concept, they must make public the volume and
price of those transactions and the time at which
they were concluded, as close to real-time as
possible 233 . In principle, a maximum limit to disclose
this information is three minutes, but certain
exceptions will be allowed for block-size trades
which require longer periods in order to avoid
market disruption.
4.3.4 Comparison
Significant regulatory changes in the securities markets field
are currently being implemented in both in the US and the
EU. The US is preparing to modernise its National Market
System, while the EU is preparing to implement the MiFID.
The main objectives of both the Regulation NMS and the
MiFID are rather similar: to improve the functioning of the
financial markets and to increase the protection of investors.
The respective authorities have already adopted both the
Regulation NMS and the MiFID, the former entering into
force in autumn 2006 and the latter in autumn 2007.
Neither of the two legislative frameworks is a complete
novelty (the Regulation NMS is based on the main ideas of
National Market System that has been developing since
1975, whereas the MiFID is in fact a revision of the 1993
ISD), but both introduced a number of key rules that are
expected to have a significant influence on the industry.
230 Article 21(1) of the MiFID.
231 Associated costs that could occur could be various commissions, fees, taxes, exchange fees, etc, charged by various intermediaries involves in the transaction,
but not the firm’s internal charges (as envisaged by the Commission’s background note of the draft Commission implementing Directive).
232 Articles 27, 29 and 44 of the MiFID.
233 Articles 28, 30 and 45 of the MiFID.
72

Best execution rules exist in both the US and the EU now,
obliging investment firms to execute transactions on the
conditions most favourable to their clients. However, neither
the Regulation NMS nor the MiFID defines precise
requirements that must be met to satisfy the obligation.
They both suggest a number of indicators that should be
taken into account while determining what best execution is
(such as price, cost, speed, likelihood of execution, etc.), but
the final decision is left to investment firms. Both in the US
and in the EU investment firms are obliged to define their
execution policy and present it to investors at the beginning
of their business relationship.
As an extension of the best execution rule, the US legislation
obliges trading centres to publish monthly statistics that
include uniform measures of order execution quality.
Investment firms must also disclose quarterly statistics on
where the orders were routed. The European legislation
does not require such consolidated statistical reports (with
the exception of systematic internalisers which make use of
a post-trade transparency waiver that allows them not to
disclose their identity when publishing the data in a real time
and as a result they will most likely be obliged to publish a
quarterly summary of the volumes they traded).
The national best bid and offer (NBBO) connects the markets
in a way that it requires information on best quotations
throughout the day to be continuously gathered and
disseminated to the public, so that investors always know
the best prices for NMS stocks and are able to compare
them against the prices at which their orders were executed.
Neither the MiFID nor any other EU legislation requires that
best quotes be gathered and disseminated.
Pre-trade rules in the MiFID require systematic internalisers
to publish their quotes in those shares admitted to trading
on a regulated market for which they are systematic
internalisers and for which there is a liquid market.
Regulated markets and MTFs are also covered by a pre-trade
transparency requirement. Pre-trade transparency also exists
in the US legislation. Namely, the quote rule requires OTC
market makers to publish firm quotations for any listed
security when these market participants represent more
than 1% of the aggregate trading volume for that security.
Europe is also getting new post-trade transparency rules, as
the MIFID obliges all three types of markets (regulated
markets, MTF and all investment firms) to make public the
volume and price of executed transactions and the time at
which they were concluded. The US recently introduced
post-trade transparency rules for corporate bonds, although
no evidence of post-trade requirements was found in relation
to equity securities.
The changes in the regulatory framework in both the EU
and the US have facilitated the linkage of traditionally
segregated markets in recent years. An increased number of
securities listed on one market started to be traded on
others, causing stock exchanges to significantly widen the
basis of their operations.
In order to better respond to the challenge of facilitating
increased trading and to widen their market access, stock
exchanges became interested in mergers/takeovers, both
between organisations that provide similar services and
between organisations that deal with different activities in
the securities transaction process. Nevertheless, one has to
note that such mergers and takeovers have so far been
carried out within the EU or within the US, whereas
transatlantic mergers have not yet been that numerous,
although showing good signs of a future increase.
It is acknowledged that the US as well as the European
Member States have highly competitive domestic capital
markets, but enhanced convergence of the two legal systems
is expected to contribute to even further opportunities for all
market participants. A study predicted that full transatlantic
financial market integration may lead to a reduction in costs
of equity capital by almost 9%, which would be a result of
a reduction in transaction costs by 60% and an increase in
trading volume by almost 50% 234 .
The dialogues between the European Commission and the
US Securities Exchange Commission have highlighted the
fact that both the US and the EU share the same vision
of sound financial markets, though the ways of achieving
it often differ. The underlying objective however is not
to create one set of rules for the two jurisdictions; instead
the challenge is to converge some of the regulatory
practices, avoid frictions and identify similarities which could
finally increase cooperation and possibly lead to mutual
recognition in certain areas.
234 “Transatlantic financial market integration: Ambition needed”, Deutsche Bank Research, 29 November 2005.
73

5. ECONOMIC COMPARISON
5.1 Section introduction
The aim of this section is to provide an economic comparison
of the retail banking markets in the US and the EU, firstly at
the macro, or market, level, and secondly at the level of the
institutions present in both markets.
Thus in the first part, we compare the size of banking
markets, first in terms of asset size, then in terms of the
number of credit institutions and branches. We go on to
look at the size of credit institutions in both markets, and
then complete this first part of the chapter by looking at the
nature and pace of banking consolidation and concentration
in the US and the EU.
In the second part of the chapter, which focuses on the
characteristics of credit institutions, we provide further detail
on the similarities and differences between institutions in
the US and the EU. We first report on their typical balance
sheet structures by looking at their main liabilities and assets
and by looking at loan composition. In the last section of the
chapter, we compare the performance of credit institutions
in the US and the EU by looking at certain key indicators
traditionally used to evaluate bank efficiency: net interest
margin, return on equity and cost-income ratio. We consider
aggregated data for the banking industry in each market,
and compare them with each other.
5.2 Banking markets
5.2.1 Size of banking market
5.2.1.1 United States
5.2.1.1.1 Total assets
At end 2003, the American bank market totalled
$9,685 billion (€8,138 billion) in assets, including all
FDIC insured credit institutions and credit unions.
5.2.1.1.2 Number of institutions
The number of institutions has decreased significantly
in the US in the last couple of decades, a result
mainly of geographic deregulation (see regulation
and supervision comparison for more detail on that).
As can be seen from table 1, by 2003 the US had
18,533 depository institutions, consisting of 7,752
commercial banks, 1,412 savings institutions, and
9,369 credit unions.
The number of depositary institutions in the US fell
by 44% between 1985 and 2003, with a very steady
decline in numbers of around 3% a year every year
for that period. The decline in the number of
commercial banks over the same period was similar
to that of the sector as a whole, with a 46% fall.
Table 1:
Evolution of the number of depository institutions in the US
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 14,402 12,329 9,921 9,510 9,124 8,756 8,563 8,297 8,062 7,870 7,752
Savings institutions 3,612 2,802 2,025 1,919 1,776 1,687 1,639 1,587 1,533 1,466 1,412
Credit unions (CU) 15,045 12,860 11,687 11,392 11,238 10,995 10,628 10,316 9,984 9,688 9,369
Total excl. CU 18,014 15,131 11,946 11,429 10,900 10,443 10,202 9,884 9,595 9,336 9,164
Grand Total 33,059 27,991 23,633 22,821 22,138 21,438 20,830 20,200 19,579 19,024 18,533
Sources: Federal Deposit Insurance Corporation (FDIC): Historical statistics on banking (HSOB);
NCUA (National Credit Union Administration): End of year statistics for federally insured credit unions.
75

The decline of savings institutions over the same
period was more abrupt, registering a fall of 61%.
This was the direct result of the savings and loans
crisis of the early 1980s, when around half of all US
savings and loans institutions became insolvent.
The decline in the number of credit unions has been
less marked for the period 1985-2003 than the two
other types of institutions, with a fall of 38%.
Graph 1: Evolution of the number
of depository institutions
per 1,000,000 inhabitants in the US
160
140
120
100
80
60
40
20
0
1985
1990
1995
1996
■ Commercial banks
■ Savings institutions
■ Credit unions (CU)
1997
1998
1999
2000
Source: ESBG calculations based on data from FDIC,
NCUA and the US Census Bureau.
2001
2002
2003
As graph 1 above reveals, on a per capita basis, while
in 1985 the US had 139 institutions per 1 million
inhabitants, by 2003 that number had more than
halved to 64 credit institutions per 1 million heads of
population (see table A in table annex for figures
relating to graph).
400
350
300
250
200
150
100
50
0
The number of branches of credit institutions in the
US has grown from 89,509 branches in 1995 to
99,807 in 2003, an increase of 12%. The increase in
the number of branches was twice as strong in the
first half of that period (+7.5%) as compared to
the latter half.
Graph 2: Evolution of the number
of branches of depository institutions
per 1,000,000 inhabitants in the US
1995
1996
1997
■ Commercial banks
■ Savings institutions
■ Credit unions (CU)
1998
1999
2000
2001
2002
Source: ESBG calculation on the basis of information from FDIC,
CUNA and the Census Bureau.
2003
On a per capita basis, the picture is quite different as
the total number of branches per 1 million heads of
population has remained rather stable over the
period, as can be seen in graph 2 above, with 336
branches recorded in 1995, and 343 in 2003 (see
table B in table annex for figures relating to the graph).
5.2.1.1.2 Number of branches
Table 2:
Evolution of the number of branches of depository institutions in the US
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 42,970 50,017 56,028 57,258 59,773 61,394 63,101 63,487 64,965 65,584 66,766
Savings institutions 20,966 18,708 13,424 13,826 13,030 12,831 12,882 12,478 12,549 12,313 12,361
Credit unions (CU) n.a. n.a. 20,057 20,921 21,453 20,620 20,262 20,399 20,192 20,383 20,680
Total excl. CU 63,936 68,725 69,452 71,084 72,803 74,225 75,983 75,965 77,514 77,897 79,127
Grand Total n.a. n.a. 89,509 92,005 94,256 94,845 96,245 96,364 97,706 98,280 99,807
Sources: Federal Deposit Insurance Corporation (FDIC): Historical statistics on banking (HSOB); CUNA (Credit Union National Association) estimates.
76

5.2.1.2 European Union
5.2.1.2.1 Total assets
At end 2003, the EU 15 banking sector totalled
€22,098 ($26,297) billion in assets.
5.2.1.2.2 Number of institutions
Graph 3: Evolution of the number of credit
institutions in the EU, per Member State
14,000
12,000
10,000
8,000
Between 1985 and 2003, the total number of credit
institutions operating in the European Union declined
by 41%, from representing 12,679 institutions in 1985
to 7,444 in 2003. Sweden, France and Germany
experienced the biggest declines in that period, of
59%, 55% and 53% respectively. The largest
banking sectors in 2003 in terms of the number of
credit institutions were Germany (decrease from
4,740 in 1985 to 2,225 credit institutions in 2003)
and France (from 2,109 in 1985 to 939 institutions
in 2003) while Italy, the UK and Spain had,
respectively, 801, 426 and 348 credit institutions in
2003 (see graph 3 below and table C in table annex
for figures relating to graph).
6,000
4,000
2,000
0
1985
1990
1995
1996
■ Germany
■ France
■ Austria
■ Italy
■ United Kingdom
■ Netherlands
■ Finland
■ Spain
1997
1998
1999
2000
2001
■ Portugal
■ Denmark
■ Sweden
■ Luxembourg
■ Belgium
■ Ireland
■ Greece
2002
2003
Source: ECB; From 1985 until 1996: "Mergers and acquisitions
involving the EU banking industry", December 2000; From 1997
until 2003: "Report on EU Banking Structure", November 2004.
Table 3:
Evolution of the number of credit institutions per 1,000,000 inhabitants in the EU, per Member State
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 17 16 14 14 13 12 11 11 11 11 10
Denmark 32 24 23 24 40 40 39 39 38 33 38
Germany 61 59 46 45 42 39 36 33 31 29 27
Greece 4 4 5 5 5 5 5 5 6 6 5
Spain 18 18 12 11 11 10 10 9 9 9 8
France 38 36 25 24 22 21 20 19 18 17 16
Ireland 16 14 15 17 19 21 21 21 23 21 20
Italy 21 20 17 16 16 16 16 15 15 14 14
Luxembourg 321 460 534 530 509 496 487 460 437 410 381
Netherlands 6 7 7 6 41 40 39 37 35 33 30
Austria 164 157 131 128 116 112 109 106 104 102 100
Portugal 22 26 23 23 24 22 22 21 21 19 19
Finland 133 106 74 73 68 67 67 66 71 71 70
Sweden 65 58 13 14 27 25 24 24 24 24 25
United Kingdom 12 11 10 9 9 9 8 8 7 7 7
EU 35 34 26 25 26 25 24 22 21 20 19
Source: ESBG calculations on the basis of data from the ECB (see Graph 3 above) and Eurostat (for the population).
77

Relative to population, the European Union had 19
institutions for each 1 million heads of population in
2003. However, this figure varies significantly from
country to country, ranging from 5 in Greece to 381
institutions per 1 million inhabitants in Luxembourg.
Countries that have below EU average number of
institutions relative to population include the UK (7),
Spain (8), Belgium (10), Italy (14) and France (16).
5.2.1.2.3 Number of branches
The number of branches in Europe has increased
from 173,152 branches in 1985 to 186,009 in 2003,
an increase of 7.4% (see table 4 below).
For the EU as a whole, on a per capita basis, there
were 495 branches per 1 million inhabitants in 1995
and 485 in 2003 (see table D in table annex for
figures for each Member State).
Graph 4: Evolution of the number of branches
per 1,000,000 inhabitants in the EU
600
575
550
525
500
475
450
425
400
1985
1990
1995
1996
1997
1998
1999
2000
2001
2002
Source: ESBG calculations on the basis of data from the ECB
(see previous table) and Eurostat (for the population).
2003
Table 4:
Evolution of the number of branches of credit institutions in the EU, per Member State
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 8,577 8,988 7,709 7,526 7,358 7,129 6,982 6,616 6,168 5,550 4,989
Denmark 3,684 2,985 2,310 2,321 2,283 2,291 2,294 2,365 2,376 2,128 2,118
Germany 47,373 50,245 48,272 47,567 63,186 59,929 58,546 56,936 53,931 50,867 47,351
Greece 1,691 1,937 2,455 2,471 2,510 2,779 2,850 3,004 3,134 3,263 3,300
Spain 29,248 32,266 36,626 37,494 38,039 39,039 39,376 39,311 39,024 39,021 39,762
France 26,043 25,578 25,492 25,571 25,464 25,428 25,501 25,657 26,049 26,162 25,789
Ireland 848 951 1,050 1,096 942 1,026 977 880 970 926 924
Italy 13,017 17,591 23,307 24,458 25,601 26,748 27,134 28,177 29,270 29,926 30,502
Luxembourg 323 300 424 417 318 324 345 335 274 271 269
Netherlands 8,572 8,106 6,817 6,850 6,800 6,787 6,258 5,983 5,207 4,610 3,671
Austria 4,086 4,472 4,613 4,620 4,691 4,587 4,589 4,570 4,561 4,466 4,395
Portugal 1,505 1,994 3,515 3,828 4,746 4,947 5,401 5,662 5,534 5,390 5,440
Finland 3,585 2,899 1,996 1,745 1,289 1,254 1,193 1,202 1,257 1,267 1,252
Sweden 3,594 3,264 2,651 2,476 2,521 2,197 2,140 2,059 2,040 2,040 2,061
United Kingdom 21,004 20,190 17,024 15,904 16,344 15,854 15,387 14,756 14,554 14,392 14,186
EU 173,152 181,765 184,261 184,345 202,092 200,319 198,973 197,513 194,349 190,279 186,009
Note: The break in the German series is due to the inclusion of post ofices from 1997.
Source: ESBG calculations on the basis of data from the ECB and Eurostat for the years 1985 until 1996.
From 1997 onwards: "Report on EU Banking Structure", ECB, November 2004.
78

5.2.1.3 Comparison
The EU 15’s banking sector is more than twice as big
as the US banking sector in terms of assets (€22,098
compared to €8,139 billion). This is explicable in terms
of the continuing importance of bank intermediation
in Europe in contrast to the US, where the trend for
a number of years has been for investors and credit
institutions alike to obtain financing via the capital
markets. We say more on that later in the chapter
(in the section which looks at balance sheet
structures (5.3.1)).
Looking at the evolution of the banking industry in
terms of the number of credit institutions, both the
EU and the US experienced large falls in the number
of credit institutions in the last two decades, and of
the same order of magnitude. Note however the
great disparities between various countries in the EU,
with a number of the smaller European countries
actually experiencing an increase in the number of
credit institutions. Note also that the decline in the
number of credit institutions was significantly
greater in two of Europe’s biggest economies:
Germany (53%) and France (55%), than for either
the whole of Europe (41%), or the US (44%) for the
period 1985-2003.
In terms of the number of credit institutions, the US
has considerably more credit institutions (18,533) 235
than the EU 15 (7,444) in spite of the former having
a great deal less people than the latter (288 million
compared to 381 million). This means therefore that
the US has many more credit institutions relative to its
population than the EU, with 64 credit institutions per
1 million inhabitants compared to 19 credit institutions
per 1 million inhabitants for the EU. Although this
figure varies substantially across Europe, France, Italy,
Spain, the UK and even Germany (which has the largest
banking sector in the EU in terms of the number of
credit institutions) all have less than 30 institutions
per 1 million inhabitants.
In terms of the number of branches, in spite of
significant decreases in the number of institutions,
both the EU and the US have experienced an increase
in the number of branches. The increase in the US
between 1985 and 2003 of 12% is however more
important than that experienced in the EU for that
same period (7%), very possibly a result of the
increase in branch banking and interstate branching
following the Riegle-Neal Act of 1994 that did away
with federal restrictions on interstate branching.
It is interesting to note, however, that the number of
branches had already increased by 7% over the 5
year period between 1985 and 1990, and therefore
before the enactment of the Act.
The increases in the number of branches of credit
institutions experienced in the US and the EU in spite
of the large decline in the number of credit
institutions in both those markets suggests that in
the age of globalisation, local market representation
and proximity to customers is deemed essential by
both American and European banks.
In spite of the EU having a great deal less credit
institutions than the US, it has twice the number of
branches (186,009 in the EU compared to 99,807 in
the US for the year 2003). This translates to a larger
number of branches relative to population of the
order of 485 branches per 1 million inhabitants in
the EU compared to 343 for the US.
235 And even if one excludes credit unions, which make up half of the number of credit institutions in the US, the US still has more credit institutions than the EU
(9,164 compared to 7, 444).
79

5.2.2 Size of credit institutions
5.2.2.1 United States
In the United States, the Federal Deposit Insurance
Corporation (FDIC) has established three categories
for banks: small, medium and large. A large bank is
defined as one with assets of more than $1 billion.
A medium-sized bank is one with assets between $100
million and $1 billion. A small bank is considered to
be one with less than $100 million in assets.
Medium banks, which represent 46% of all banks,
only hold 13% of assets. Large banks, however,
though representing only 6% of FDIC insured
institutions, hold 85% of total bank assets.
This pattern is repeated across different types of banks:
only 5% of commercial banks are classified as being
large, and these hold 85% of all commercial banks
assets, while 11% of savings banks are large banks
which hold 81% of the assets of all savings banks.
Table 5 below gives us a break-down of the US banking
market in terms of the asset sizes of different types
of (FDIC-insured, i.e.: excluding credit unions) credit
institutions for three separate years. It reveals that in
2003, while half of all such banks are small banks, they
account for only 2% of total FDIC insured assets.
Table 5: Asset size distribution of the FDIC-insured institutions, 2001-2003
2001 2002 2003
Number of commercial banks 8,079 7,887 7,770
Of which large (more than $ 1 billion in assets) 399 (5%) 405 (5%) 424 (5%)
Of which medium (between $ 100 million and $ 1 billion) 3,195 (40%) 3,314 (42%) 3,434 (44%)
Of which small (less than $ 100 million) 4,485 (56%) 4,168 (53%) 3,912 (50%)
Assets of the commercial banks (in $ million) 6,552,244 7,076,943 7,601,142
Of which large 5,511,157 (84%) 5,995,775 (85%) 6,490,344 (85%)
Of which medium 819,439 (13%) 869,830 (12%) 909,981 (12%)
Of which small 221,649 (3%) 211,338 (3%) 200,816 (3%)
Number of savings institutions 1,535 1,467 1,411
Of which large (more than $ 1 billion in assets) 146 (10%) 151 (10%) 157 (11%)
Of which medium (between $ 100 million and $ 1 billion) 811 (53%) 803 (55%) 776 (55%)
Of which small (less than $ 100 million) 578 (38%) 513 (35%) 478 (34%)
Assets of the savings institutions (in $ million) 1,316,777 1,358,961 1,474,109
Of which large 1,036,030 (79%) 1,077,458 (79%) 1,198,777 (81%)
Of which medium 251,247 (19%) 254,956 (19%) 250,444 (17%)
Of which small 29,500 (2%) 26,547 (2%) 24,888 (2%)
Number of total FDIC-insured institutions 9,614 9,354 9,181
Of which large (more than $ 1 billion in assets) 545 (6%) 556 (6%) 581 (6%)
Of which medium (between $ 100 million and $ 1 billion) 4,006 (42%) 4,117 (44%) 4,210 (46%)
Of which small (less than $ 100 million) 5,063 (53%) 4,681 (50%) 4,390 (48%)
Assets of the total FDIC-insured institutions (in $ million) 7,869,021 8,435,904 9,075,251
Of which large 6,547,186 (83%) 7,073,233 (84%) 7,689,122 (85%)
Of which medium 1,070,686 (14%) 1,124,785 (13%) 1,160,425 (13%)
Of which small 251,149 (3%) 237,885 (3%) 225,704 (2%)
Note: The small discrepancy with Table 1 in terms of number of FDIC-insured institutions is due to the fact that Table 1 is limited to the national territory.
Source: FDIC, Statistics on depository institutions.
80

For credit unions, as the figures in table 6 below
reveal, 2% of the institutions are classified as large,
and these hold 45% of all credit union assets.
Table 6: Asset size distribution of the Credit Unions, 2002-2003
2002 2003
Number of credit unions 10,041 9,709
Of which large (more than $ 500 million in assets) 206 (2%) 235 (2%)
Of which medium (between $ 100 million and $ 500 million) 878 (9%) 930 (10%)
Of which small (less than $ 100 million) 8,957 (89%) 8,544 (88%)
Assets of the credit unions (in $ million) 574,687 629,134
Of which large 243,507 (42%) 284,933 (45%)
Of which medium 185,164 (32%) 197,485 (31%)
Of which small 146,016 (25%) 146,716 (23%)
Source: CUNA.
In terms of the average size (in terms of assets) of a
credit institution in the US, it can be seen in table 7
that in 2003 the average size of a FDIC insured bank
was $988 million, while the average size of a credit
institution (including credit unions) for that same
year was $514 million. Credit unions are much
smaller in size, on average, than either savings or
commercial banks.
Table 7: Average size of US depository institutions, 2002-2003
2002 2003
in $ million in € million in $ million in € million
FDIC-insured institutions 902 908 988 831
Of which Commercial banks 897 903 978 822
Of which Savings institutions 926 933 1045 878
Credit Unions 57 58 65 54
Total depository institutions 465 468 514 432
Source: ESBG calculations based on data from FDIC and CUNA.
81

5.2.2.2 European Union
In Europe, the ECB also divides EU credit institutions
into three groups: large, medium and small
institutions. A large bank is defined as a bank with
more than 0.5% of the total consolidated assets of
the European banking sector, which corresponds to
approximately €100 billion in assets. The threshold
between small and medium-sized banks is set at
0.005% of total consolidated assets, which corresponds
to €1 billion 236 .
According to figures in table 9 below, the average
size of a bank in Europe was €3,494 million in 2003.
The smallest banks in terms of average asset size
are the Finnish (€452 million) and Austrian banks
(€686 million), whereas Belgian and Irish banks are
the largest on average, with average asset size of
€6,940 million and €6,044 million respectively 238 .
Looking at table 8 below, which gives the asset size
distributions of EU credit institutions, we can see
that for 2002, 87% of EU credit institutions fall into
the ‘small credit institution’ category, while 12% are
medium sized and 1% of institutions would be
considered large. However in terms of the total
assets held by EU credit institutions, 65% are held by
large institutions, 31% are held by medium-sized
institutions, while small institutions hold only 5% of
total assets 237 .
Table 8: Asset size distribution of EU credit institutions, 2001-2003
2001 2002 2003
Number of credit institutions in the sample 4,625 5,083 4,258
Of which large (more than € 100 billion in assets) 57 (1%) 51 (1%) n.a. n.a.
Of which medium (between 1 and € 100 billion in assets) 968 (12%) 933 (12%) n.a. n.a.
Of which small (less than € 1 billion in assets) 3,600 (87%) 4,099 (87%) n.a. n.a.
Assets of the credit institutions in the sample (in € million) 24,173,643 24,409,351 22,553,000
Of which large 16,042,622 (66%) 15,753,752 (65%) 15,787,100 (70%)
Of which medium 7,217,943 (30%) 7,459,721 (31%) 5,863,780 (26%)
Of which small 913,078 (4%) 1,195,878 (5%) 902,120 (4%)
% of total number of all EU credit institutions 57.2% 65.6% 57.2%
% of total assets of all EU credit institutions 98.8% 99.5% n.a.
Notes: It should be emphasized that the percentages given for the number of credit institutions (i.e. 1%, 12% and 87%) refer to the total number of
EU institutions, and not only the ECB samples. These samples take into account 99% of the total assets of the EU credit institutions, but in terms
of number, these samples represent 57% to 66% of the total number of EU credit institutions. For the year 2003, the data refer to domestic credit
institutions only (i.e. excluding foreign controlled subsidiaries and branches).
Sources: "EU banking sector stability", ECB, February 2003; "EU banking sector stability", ECB, November 2003. "EU banking sector stability",
ECB, November 2004.
Table 9: Average size of EU credit institutions, 2002-2003
2002 2003
in $ million in € million in $ million in € million
Total EU credit institutions 3,149 3,128 3,494 4,159
Source: ESBG calculations based on data from the ECB.
236 “EU Banking Sector Stability”, February 2003, ECB.
237 “EU Banking Sector Stability”, February 2003, ECB.
238 ESBG calculations based on ECB data for the Euro zone, and national bank data for Denmark, Sweden and UK.
82

5.2.2.3 Comparison
It is difficult to make average size comparisons of
credit institutions in the US and the EU given that
different definitions of bank sizes, in terms of assets
held, are used. In general terms however, it can be
said that the banking industries of both areas are
dominated by small to medium-sized (depending on
definition) institutions (94% of US banks i.e. excluding
credit unions, have less than $1 billion in assets,
while 87% of EU banks have less than €1 billion in
assets), but that the majority of the industry’s assets
are concentrated among a few large institutions.
Comparing the average size of credit institutions for
the year 2003, the average size of a FDIC insured
bank in the US is €831 million, compared to Europe’s
€3,494 million. The average US bank is therefore
considerably smaller than the average EU bank, in
spite of the fact that credit unions, which are
considerably smaller than other banks, are excluded
from that number (as they are not FDIC insured).
It is interesting to note that under US definitions, the
average (FDIC insured) US bank is a medium-sized
bank, while the average EU bank is a large bank.
Under EU definitions, however, the average US bank
would be considered a small bank, while the average
EU bank would be considered a (small) mediumsized
bank.
This is quite revealing, for it highlights that if we
were to regard the size of average institutions as one
indicator of the concentration of a banking market
we would conclude that the US banking market is in
fact more ‘fragmented’. This is reinforced if we take
note of the previously revealed fact that the US has
many more credit institutions (whether or not one
includes credit unions) than the EU. All this suggests
in fact that banking in the US is rather a small scale,
local affair, and that although the US is known for
producing many of the world’s ‘mega-banks’, this
model of banking is in fact not representative of the
majority of the industry.
83

5.2.3 Concentration and consolidation
5.2.3.1 United States
FDIC figures reveal a decline in the number of credit
institutions in the US of the order of 10,327 individual
bank and thrift organisations due mainly to
unassisted mergers 239 for the period 1985 to 2002
(see table E in table annex as well as graph 5 below).
800
Graph 5: Change in the number of FDIC-insured institutions, 1985 - 2002
600
400
200
0
-200
-400
-600
-800
-1,000
-1,200
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
■ De Novos
■ Other additions
■ Failures
■ Unassisted mergers
■ Other changes
■■ Net change
Source: FDIC
Parallel to the number of credit institutions
decreasing, industry assets have been increasing.
Over the period 1984 to 2003, industry assets more
than doubled in nominal terms to $9.1 trillion 240 .
From beginning to end of that period, the share of
banking assets held by groups of different sizes
changed dramatically.
While in 1984, credit institutions with more than $10
billion in assets held 42% of the banking industry
assets, this share grew to 73% by 2003. Institutions
with assets between $1 billion to $10 billion had a
30% share of banking assets in 1984, and only 13%
by 2003. Similarly, institutions with assets of $1 billion
and less went from holding 28% of industry assets
in 1984 to holding only 14% in 2003.
239 Unassisted mergers refer to cases of mergers that occurred in the context of thrift failures. An unassisted merger was a merger encouraged by supervisory
authorities between a weak thrift and a healthier thrift but without the financial assistance of the Federal Savings and Loan Insurance Corporation (FSLIC), in
contrast to an assisted merger which received the financial assistance of the FSLIC.
240 “The Declining Number of US Banking Organisations: Will the Trend Continue”, January 2004, Federal Deposit Insurance Corporation.
84

Graph 6: Share of US banking industry assets by size group, 1984 and 2003
1984 2003
42%
8%
30%
14%
6%
2%
8%
4%
13%
73%
■ Less than $100
■ $100 million to $500 million
■ $500 million to $1 billion
■ $1 billion to $10 billion
■ Greater than $10 billion
Source: “The declining number of US banking organisations: Will the trend continue”, FDIC study, February 2004.
80%
70%
60%
50%
40%
30%
20%
10%
0%
Graph 7 below shows the evolution of asset
concentration in the US at the level of the number of
institutions for various years between 1980 and
1998. A table from a different source (table H in the
table annex) provides asset concentrations for the
year 2003. Looking at the asset concentration of the
top ten credit institutions by size of assets reveals
that they went from holding 18.6% in 1980 to
36.7% of the industry’s assets in 1998 (the numbers
associated with graph 7 can be seen in table G in the
table annex). Table H in the table annex reveals that
the US’s top ten credit institutions by asset size held
46.8% of the industry’s assets in 2003. The top 5
credit institutions by size of assets held 37.6% of the
industry’s assets in 2003, while they held 28.6% of
domestic deposits.
Graph 7: Evolution of the concentration
in the US, 1980-1998 (percent of assets)
1980 1985 1990 1995 1998
■ Top 10
■ Top 25
■ Top 50
■ Top 100
As pointed out above, the decline of the number of
credit institutions in the US, as well as the parallel
increase in the sector’s concentration, occurred
mainly due to M&A activity. The nature of banking
consolidation in the US has been both intra-state
(within individual states) and inter-state (between
states). The Riegle-Neal Act (see regulatory and
supervisory comparison chapter of study for more
detail on that) is said in particular to have brought
about a jump in the number of inter-state mergers,
which represented less than five percent of total
mergers before the Act, while they represented thirty
percent on average in the 1997-2002 period 241 .
Note however that the majority of bank M&As in the
US are still intra-state.
Inter-state expansion has primarily occurred via interstate
branching rather than inter-state mergers, as
there are still few bank holding companies and/or
independent depository institutions with offices in
two or more states in the US (so-called multi-state
organisations). By 2004 there were 552 multi-state
organisations, representing less than 3% of total US
credit institutions 242 . In fact, no US institution has
major retail operations in all regions of the US 243 .
The picture is somewhat different if one looks at the
number of inter-state branches (of multi-state credit
institutions), as these numbered 28,615 branches 244
in 2004, representing 29% of all branches in the US.
This reveals that multi-state credit institutions hold a
much high number of branches per credit institution
than single-state credit institutions.
Source: “Bank Mergers and Banking Structure in the US,
1980-98”, Stephen A. Rhoades, August 2000 - NIC database,
Federal Reserve Board.
241 Walter N. (ed), “US vs EU banking market: the more integrated, the more profitable”, November 2003, Deutsche Bank Research.
242 National bank and thrift office data book, Summary of deposits, FDIC, June 2004.
243 Walter N. (ed), “US vs EU banking market: the more integrated, the more profitable”, November 2003, Deutsche Bank Research.
244 This is the number of inter-state branches operated by commercial and savings banks insured by the FDIC.
85

5.2.3.2 European Union
Average CR5 (market share of the 5 largest credit
institutions ranked by total assets) in terms of assets in
individual Member States in the EU15 in 2003 ranged
from 22% to 84% (see table 10 below). The five
largest institutions hold the highest proportion of
banking assets relative to the rest of the domestic
banking industry in countries such as the Netherlands,
Finland and Belgium. These countries all have CR5
around the 80% mark, which denotes very high
concentration. We can then observe three other
groups in terms of levels of concentration in the EU:
the ‘sixty percenters’: comprising of Greece, Denmark,
Sweden and Portugal, the ‘forty percenters’: which
includes France, Ireland, Italy, and Austria, and
the ‘thirty percent and below’, including Italy,
Luxembourg, the UK, and Germany.
An estimate of asset based CR5 for the whole of the
EU15 (i.e.: a calculation of the asset concentration of
the five biggest European banks, by assets) reveals
that at year end 2003 these held 14.5% of total
EU15 bank assets 245 .
Not only concentration ratios themselves, but also
the pace of concentration has varied widely between
individual Member States over the period 1990-2003.
The largest increases over the period 1990 to 2003
have occurred in Belgium (73%) and Germany
(57%), although the latter still has relatively low
levels of concentration, while the former has among
the highest in Europe.
Table 10: Evolution of the share of the 5 largest credit institutions in total assets in the European Union (%)
1990 1995 1997 1998 1999 2000 2001 2002 2003 Growth 1990-2003
Belgium 48 54 54 63 76 75 78 82 83 73%
Denmark 76 74 70 71 71 60 68 68 67 -12%
Germany 14 17 17 19 19 20 20 20 22 57%
Greece 83 76 56 63 67 65 67 67 67 -19%
Spain 35 46 32 35 41 46 45 44 44 26%
France 42 41 40 41 43 47 47 45 47 12%
Ireland 44 44 41 40 41 41 43 46 44 0%
Italy 19 26 25 25 25 23 29 31 27 42%
Luxembourg n.a. 21 23 25 26 26 28 30 32 52%
Netherlands 73 76 79 82 82 81 83 83 84 15%
Austria 35 39 44 42 41 43 45 46 44 26%
Portugal 58 74 46 45 44 59 60 60 63 9%
Finland 53 69 88 86 86 87 80 79 81 53%
Sweden n.a. n.a. 58 56 56 57 55 56 54 -7%
United Kingdom n.a. 25 24 25 28 28 29 30 33 32%
EU average n.a. n.a. 30 33 35 36 38 35 40 33%
Notes: EU averages have been weighted by the assets size of the banking sector.
The growth rates have been calculated according to the years for which data are available.
For Finland, the change in 2001 is due to a reclassification (see Table C in Annex).
Source: 1990, 1995 figures: ECB (1999a); 1997 to 2003 figures: ECB," Report on EU Banking Structure", November 2004.
245 ESBG calculations.
86

Measuring banking market concentration solely by
looking at asset concentration is however limiting,
yet the only comparable data for the EU Member
States (which comes from the European Central
Bank) is on asset concentration. Concentration ratios
for deposits or loans would be more useful as such
information is more revealing about market power.
Our own calculation of the concentration of non-bank
deposits in the EU 15 reveals that Europe’s top 5
banks (in terms of non-bank deposits) held 17.6% of
European non-bank deposits in 2003. This compares
to the CR5 reported above, of 14.5%, calculated in
terms of assets. While the two figures do not reveal
significant differences in concentration, there are
instances of great discrepancies between concentration
ratios for individual Member States, of which the UK
is a prime example. While the UK has a low asset
concentration ratio compared to other EU Member
States (see table 10 above, which reveals a CR5 of
33% for the UK in 2003), already in 2000 the five
biggest banks there held 79% of current accounts,
37% of loans and 67% of the credit card market,
while the ‘big four’ owned 60% of all branches 246 .
At least part of the explanation for the relatively low
asset concentration of banks (compared to other
measures of concentration) in the UK could be due to
the many non-retail banks active in Europe’s biggest
financial centre being included in the calculation of
total asset concentration of the UK market.
In terms of the nature of increasing levels of
concentration in Europe’s banking markets, much of
it has been due to banking consolidation. The nature
of consolidation itself has been mainly domestic. To
give an idea of the proportion of domestic to crossborder
M&A, domestic deals constituted 87% in
number and 90% in total value of banking M&A
activity in Europe in the 90’s 247 .
Activity has however picked up since the 90’s, with
20% of the value of all banking consolidation deals
being cross-border deals for the period 1999 to 2004,
with the Abbey/SCH deal ($16.8 billion in value)
pushing this proportion to 40% in 2004 248 . The Abbey/
SCH deal was then the largest cross-border M&A
deal ever executed in Europe.
A rough estimate of the proportion of cross-border
activities to total M&A deals in Europe in terms of
value for 2005 is 70% 249 . Two big cross-border deals
occurred that year, as HVB Group and UniCredit
merged for a $22.3 billion deal value (an even bigger
deal, therefore, than the Abbey/ SCH merger) and as
ABN Amro acquired Banca Antonveneta for $7.2 billion.
Activity for 2006 so far includes the acquisition of
the Italian bank BNL by BNP Paribas for $11 billion.
In all, these deals mean that four of the ten biggest
European cross-border bank mergers and acquisitions
since 1995 have occurred in the last two years 250 .
5.2.3.3 Comparison
Similarly to the US, the last couple of decades have
been periods of high levels of consolidation for the
EU banking industry. Data on market concentration
may not lead us to make straight-forward
comparisons as recent data comes from different
sources and is limited to asset concentration (and
then, data on the asset concentration of the five
largest credit institutions by asset size in each
individual European Member State is largely the only
publicly available information on bank concentration
in the EU). Also, while asset concentration figures are
relatively easy to come by for both the US and the
EU, concentration ratios for products, more revealing
about market power, are not. Yet looking at such
information can give a much different picture for an
individual country, as we explain above for the UK.
Keeping that in mind, CR5 in terms of asset
concentration for the EU 15 was 14.5% in 2003, while
2003 US CR5 was 37.6%. While the asset based CR5
for Europe’s top five banks may seem small compared
to US CR5, looking at the CR5 of individual EU
Member States reveals that in a number of European
Member States, levels of concentration are in fact
much higher than in the US (i.e.: The Netherlands
(84%), Belgium (83%), Finland (81%), Denmark
(67%), Greece (67%), Portugal (63%)). Consider also
that, of the EU15, only 4 Member States have CR5s
lower than the US (2003 figures).
246 “The Future of Retail Banking in Europe: A view from the top”, 2002, Oonagh McDonald and Kevin Keasey, Unisys.
247 “Banking Consolidation in the EU: Overviews and Prospects”, May 2004, R. Ayadi and G. Pujals, CEPS Research Report in Finance and Banking, No 34.
248 “Cross-border consolidation in the EU financial sector”, Commission Staff Working Document, September 2005
249 ESBG calculation from figures in The Economist survey of international banking, May 20th 2006.
250 The Economist survey of international banking, May 20th 2006.
87

In terms of the nature of consolidation in the US and
the EU, it has been similar, with the great majority of
it being intra-state. As for inter-state mergers, they
were encouraged by the adoption of the Riegle-Neal
Act. It is however important noting that inter-state
expansion in the US has occurred mainly via interstate
branching, rather than via multi-state banking.
Indeed, multi-state branches make up nearly 29% of
total US branches, while multi-state banks represent
less than 3% of total US credit institutions.
In Europe, until recently the value of cross-border
M&A as a proportion of total M&A was low, but a
few large deals in the last couple of years have
significantly increased that proportion.
It is interesting that inter-state expansion has been
relatively low in the US even though regulatory, cultural
and linguistic differences, which are mentioned as
key obstacles to such deals in Europe, are not issues
in the US (or at least not in a comparable way).
This may however be explicable in terms of other
comparable factors that render difficult the
achievement of cost and revenue synergies for banks
wanting to operate across US or EU (Member) states.
Cost savings can more easily be achieved by inmarket
rather than out-of-state bidders, given the
former’s ability to cut overlapping facilities such as
branches. Also, the reward of higher profits via
higher prices due to increase in market power is not
available in a cross-border/ state context.
5.3 Credit institutions
5.3.1 Balance sheet structures
5.3.1.1 United States
5.3.1.1.1 Bank liabilities
Non-bank deposits make up the greater part of FDIC
insured 251 bank liabilities. The proportion of non-bank
deposits to total liabilities has however been falling
over the years, as can be seen in graph 8 opposite
(see associated figures in table I of the table annex).
While in 1992, non-bank deposits represented 80.7%
of total liabilities, by 2003 it had fallen to represent
69.1% of total liabilities. It should be noted however
that non-bank deposits at FDIC insured institutions
have actually been growing during the same period
(at an average of 5% a year), just that they have
not grown as fast as other types of liabilities such as
‘other borrowed funds’ (which includes mortgage
indebtedness and obligations under capitalised
leases) which have grown by 14% a year or ‘federal
funds purchased and repurchase agreements’ (8% a
year), which together make up a significant proportion
of total liabilities excluding non-bank deposits.
It would seem therefore that deposits are representing
a decreasing source of funding for US credit
institutions, with the consequence that credit
institutions in the US have had to diversify away from
the traditional business of deposit taking (into more
fee-based income sources). The fall in the attraction
of savings accounts and certificates of deposits as
consumer investment vehicles in the US has been
explained in the literature as a direct consequence of,
for instance, the increased efficiency in the payments
system, diminishing the need for transactions
accounts, and also as a result of the proliferation of
investment options in the last three decades 252 .
Looking at the proportion of deposits (of commercial
and savings banks combined) to GDP, table 11 opposite
reveals that while in 1980, bank deposits in the US
represented 54% of GDP, by 2000 that proportion
had fallen to 38%.
251 Therefore excluding credit unions.
252 “The Past, Present, and Probable Future for Community Banks”, 2004, De Young, William Hunter and Gregory Udell.
88

100%
Graph 8: Structure of the liabilities in the US, 1992 – 2003 (in %) – FDIC insured institutions
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
■ Non-bank deposits
■ Interbank deposits
■ Federal funds purchased & repurchase agreements
■ Trading liabilities
■ Other borrowed funds
■ Subordinated debt
■ All other liabilities
Source: ESBG calculations based on FDIC data
Table 11: Different indicators of financial development in 1980 and 2000
1980 2000
Bank loan Stock Number Bank loan Stock Number
private market Equity of private market Equity of
sector Deposits capital issues companies sector Deposits capital issues companies
Average Continental Europe 0.601 0.647 0.078 0.020 34.422 0.937 0.930 1.046 0.322 27.530
United Kingdom 0.276 0.280 0.380 0.040 47.220 1.320 1.069 1.840 0.149 32.370
United States 0.354 0.540 0.460 0.040 23.110 0.493 0.379 1.549 0.207 25.847
Average Anglo-American 0.315 0.410 0.420 0.040 35.165 0.907 0.724 1.694 0.178 29.109
Notes: Bank loan to the private sector is the ratio of claims on private sector of deposit money banks and GDP.
Deposits to GDP is the ratio of commercial and savings bank deposits and GDP.
Stock market capital to GDP is the aggregate market value of equity of domestic companies divided by GDP.
Number of companies to population is the ratio of number of domestic companies whose equity is publicly traded in a domestic stock exchange
and the country’s population in millions.
Equity issues to GFCF is the ratio of funds raised through public equity offerings (both initial public offerings and seasoned equity issues)
by domestic companies to gross fixed capital formation.
Source: "The transformation of the European financial system", ECB, October 2002 (IMF and Rajan and Zingales (2003a)).
89

100%
Graph 9: Structure of the assets in the US, 1992 – 2003 (in %) – FDIC insured institutions
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
■ Cash and due from depository institutions
■ Securities
■ Federal funds sold & reverse repurchase agreements
■ Net loans and leases
■ Bank premises and fixed assets
■ Other assets
Source: ESBG calculations based on FDIC data
100%
Graph 10: Lending to the private sector in the US and the Euro area, 2004
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Austria
Belgium
Germany
Spain
Greece
France
Finland
Italy
Ireland
Luxembourg
Netherlands
Portugal
Euro area
US
■ Consumer loans
■ Housing loans
■ Other loans to households
■ Business loans
Source: for US data: Flow of Funds Accounts of the Unites States, Board of Governors of the Federal Reserve System;
for EU data: Aggregated balance sheet of euro area monetary financial institutions, excluding the Eurosystem, National Bank of Belgium.
90

5.3.1.1.2 Bank assets
Looking at graph 9, it can be seen that loans and
leases have consistently represented more than half
of the assets of FDIC-insured credit institutions over
the years, and this proportion has remained steady
throughout. Apart from ‘other assets’, no significant
change in proportion of total assets can be observed
for any of the different asset classes (figures for
graph 9 can be found in table J of the table annex).
In terms of bank loans to the private sector as a
proportion of GDP, it can be seen in Table 11 that
in 1980, these represented 35% of GDP, while the
equivalent proportion in 2000 was of the order of 49%.
5.3.1.1.3 Loan composition
As can be seen in graph 10 opposite, lending to
households in 2004 represented more than
two/thirds of all lending to the private sector, while
the remainder of lending to the private sector was
loans to business. Of lending to households, 88%
was home lending (representing 62% of total
lending to the private sector), and 9% was consumer
lending (representing 6% of total lending to the
private sector). Note that these figures include all
private sector lending, and therefore not just lending
by credit institutions (figures relating to graph 10 can
be found in the table annex in table K).
100%
Graph 11: Structure of the liabilities in the EU, 1992 – 2003 (in %)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
■ Borrowing from Central bank
■ Interbank deposits
■ Non-bank deposits
■ Bonds
■ Other liabilities
Source: ESBG calculation based on OECD data:
“Bank Profitability”, 2002 & 2004.
5.3.1.2 Europe
5.3.1.2.1 Bank liabilities
Aggregate data for the EU 15 reveals that non-bank
deposits have remained by far the main single source of
funds for European banks over the period 1992-2003.
Such deposits have also represented a relatively
steady source of total bank liabilities, representing
45.7% of total bank liabilities in 1992 and 42.6% in
2003. This is in spite of the fact that market based
funding has grown significantly in Europe in the last
two or so decades, as can be evidenced by looking
at the rising ratios of stock market funding and
equity issues to GDP between the years 1980 and
2000 in table 11 (find figures for the structure of
liabilities in the EU in table L of the table annex).
91

In terms of growth of the volume of deposits, for the
period 1992 to 2003, non-bank deposits in the EU
grew on average by 7% a year, equivalent to growth
in interbank deposits (the next biggest form of
liability), though smaller than bonds (10% average
growth over the same period).
Regarding other liabilities, interbank deposits have
similarly remained a relatively constant source of
total bank funds, while bonds and other liabilities
(which include borrowings other than deposits and
bills of exchange) have grown slightly.
Looking at the proportion of deposits (of commercial
and savings banks combined) to GDP, Table 11 shows
that in 1980, the proportion of bank deposits to
total GDP for Continental Europe’s banks amounted
to 65% of GDP, while in 2000 that proportion was
of the order of 93%. In comparison, the equivalent
figures for the UK were 28% and 100%.
5.3.1.2.2 Bank assets
On the asset side, the main and by far most
significant balance sheet items for banks in Europe
were and remained loans for the period 1992-2003.
In 1992, loans made up 48% of total assets,
while in 2003 they represented 47% of total assets.
After loans, interbank deposits represent the largest
assets, though these have been falling as a proportion
of total bank assets over time (see also table M in the
table annex for the figures to graph 12).
Over the period, securities as a proportion of total
bank assets grew from representing 15% to 21%.
Looking at country-specific data reveals that though
loans are indeed the main asset in the great majority
of European bank balance-sheets, the proportion of
securities to total assets is a great deal higher than
the European average in Sweden, Greece, Denmark
and Belgium.
100%
Graph 12: Structure of the assets in the EU, 1992 – 2003 (in %)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
■ Cash and balance with Central Bank
■ Interbank deposits
■ Loans
■ Securities
■ Other assets
Source: ESBG calculation based on OECD data: “Bank
Profitability”, 2002 & 2004.
In terms of bank loans to the private sector as a
proportion of GDP, the average in 1980 for continental
Europe was 60%, and for the UK it was 27.6%.
In 2000, this proportion had grown to represent an
average across continental Europe of 93.7%, while
for the UK it represented 132% (see table 11).
92

5.3.1.2.3 Loan composition
For most of the countries of the Eurozone represented
in graph 10, loans to households represented the
greater proportion of lending to the private sector in
2004, with the exception of Austria, Greece, Italy
and Luxembourg, where more lending was done to
businesses than private households. Housing loans
represents the bulk of outstanding credit to households
in Europe. For the Eurozone as a whole in 2004,
55% of all private lending was household lending,
while the rest was lending to business. Of household
lending in 2004, 68% was home lending, while
14% was consumer credit. However, the share of
housing lending to total household lending varies
from country to country in the Eurozone, representing
between 40% and close to 90% in 2004 (See table
K in table annex for figures). Note that these figures
include all private sector lending, and therefore not
just lending by credit institutions.
5.3.1.3 Comparison
In the US non-bank deposits have grown significantly
less fast (5% a year on average) than other types of
liabilities which make up important proportions of
total liabilities such as ‘other borrowed funds’ (14%
a year average growth) or other types of deposits
(8% a year). In the EU, growth of non-bank deposits
of 7% a year has been equivalent to growth in the
next biggest form of liability, interbank deposits.
One could conclude that bank intermediation is
consistently stronger in the EU than the US, as
evidenced too by the higher proportions of deposits
to GDP in the EU (93%) compared to the US (38%).
Also, if we compare the proportion of stock capital
market to GDP for both the EU and the US, we see
that it is indeed much more important in the US
(155%) than the EU (100%).
On the asset side, loans have continued to represent
by far the main assets to credit institutions in both
the US and the EU, remaining a stable use of funds
in both markets over the years. In Europe, the ratio
of bank loans to the private sector to GDP is larger
(94%) than in the US (49%). For both the EU and
the US, the ratio of bank loans to the private sector
to GDP has grown quite significantly between 1980
and 2000 (increasing from 60% to 93.7% in the EU
and from 35% to 49% in the US).
In terms of loan compositions, home loans represent
much the greater proportion of total loans of both
US and EU financial institutions 253 . There are some
exceptions in several countries in Europe, where loans
to businesses exceed home loans. In comparison in
2004, 88% of all lending to households in the US
was home lending while 9% was consumer lending.
The equivalent average figures for Europe are 68%
and 14%, though with the share of housing lending
to total household lending varying from country to
country between 40% and close to 90% in 2004.
Assessing the evolution of non-bank deposits over
time in proportion to total assets reveals that deposits
in the US have become a less important source of
funds for US credit institutions. In Europe, non-bank
deposits have also contributed less of the funding,
but the decrease over the same period has not been
as significant as in the US. This in spite of the fact
that market based funding has grown significantly
in Europe in the last two or so decades, as can be
evidenced by the significant increases in the proportion
of stock market funding and equity issues to GDP
(especially) for continental Europe between 1980
and 1990.
253 Comparable US and EU data on lending to the private sector by credit institutions only is unfortunately not available.
93

5.3.2 Efficiency of credit institutions
5.3.2.1 United States
5.3.2.1.1 Net interest margins
Figures in table 12 on the following page which
show the evolution of net interest margins in the US
between 1992 and 2003 reveal that interest margins
of credit institutions in the US have decreased to a
degree, whether looking at aggregate data for the
whole industry or at data by type of credit institution.
The decrease in net interest margin is commonly
explained by two main factors: increased competition
in the sector, which reduces the banks’ margins both
on the asset side and on the liability side, and the
downward trend as regards interest rates during the
considered period. In particular, in the environment
of low interest rates experienced during the years
2001 – 2003, banks seem to have been reluctant
to reduce their rates on some of their funding
instruments, such as core deposits, in the same
proportion as the decrease in interest rate. This has
in turn affected their margins.
5.3.2.1.2 Return on equity
Table 13 below shows that aggregate ROE for all
types of US credit institutions for the period 1994-
2003 has remained relatively stable given that it
amounted to 19.2% in 1994 and 20.7% in 2003.
The trend has however been different for the
different types of institutions: whereas the ROE has
remained relatively stable for commercial banks, it
has experienced an upward trend in the case of
savings institutions and a decrease in the case of
credit unions.
There are also marked differences between categories
of institutions in relation to their level of ROE.
This contrasts with the situation as regards interest
margins, where the levels were pretty similar for the
different types of institutions. More concretely, while
the average ROE of commercial banks and savings
institutions is high, amounting to around 20%,
the average ROE of credit unions lies at a much
lower level, having been consistently lower than
10% since 1996.
It should be noted here that despite the decrease
observed between 1992 and 2003, the net interest
margin of US banks remains quite high as compared
to international standards.
Table 12: Evolution of net interest margins in the US, 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 3.89% 3.89% 3.78% 3.71% 3.70% 3.64% 3.51% 3.50% 3.40% 3.35% 3.50% 3.27%
Savings institutions 3.13% 3.26% 3.12% 2.89% 3.01% 3.03% 2.89% 2.88% 2.74% 2.94% 3.05% 2.97%
Credit unions (CU) n.a. n.a. n.a. n.a. 3.96% 3.98% 3.82% 3.73% 3.77% 3.59% 3.63% 3.42%
Total excl. CU 3.72% 3.76% 3.65% 3.55% 3.58% 3.54% 3.41% 3.40% 3.30% 3.28% 3.43% 3.22%
US Average n.a. n.a. n.a. n.a. 15.37% 15.02% 12.73% 12.41% 10.99% 10.47% 9.42% 9.22%
Sources: ESBG calculations based on FDIC and NCUA data.
Table 13: Evolution of the Return on Equity (before taxes) in the US, 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 17.6% 21.2% 21.5% 21.4% 21.4% 21.8% 20.3% 23.1% 20.5% 18.6% 20.6% 21.9%
Savings institutions 14.1% 13.6% 12.7% 13.7% 11.7% 15.3% 16.3% 17.9% 16.0% 18.2% 18.1% 19.9%
Credit unions (CU) n.a. n.a. 12.4% 10.7% 10.0% 9.0% 8.3% 8.3% 8.6% 8.2% 9.4% 8.8%
Total excl. CU 16.8% 19.6% 19.7% 19.9% 19.6% 20.6% 19.6% 22.3% 19.8% 18.5% 20.2% 21.6%
US Average n.a. n.a. 19.2% 19.3% 18.9% 19.8% 18.8% 21.2% 18.9% 17.8% 19.4% 20.7%
Sources: ESBG calculations based on FDIC and NCUA data.
94

5.3.2.1.3 Cost-income ratio
The average cost to income ratio for US credit
institutions for the period 1994-2003 has generally
followed a downward trend, achieving a peak in
1994 of 65.2%, and a low in 2002 of 58.6% (see
table 14 below). Note that the cost/ income ratios of
US commercial and savings banks are comparable,
and quite a lot smaller than those of credit unions.
Part of the difference can be explained by the bigger
weight of staff costs as a proportion of the general
expenses in the case of credit unions.
5.3.2.2 Europe
5.3.2.2.1 Net interest margins
As can be seen in table 15, since 1995 the trend has
been downwards for the average EU net interest
margin, with a fall every year bar one for the period
1995 to 2003. At the start of the period the European
average net interest margin was 1.93%, while in
2003 it was 1.44%. Note that this downward trend
is prevalent throughout the EU for the period 1992
to 2003, excepting for Greece, which has experienced
a generally upward trend.
Table 14: Evolution of the cost to income ratio in the US , 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 65.8% 65.2% 64.7% 63.2% 62.7% 60.9% 63.3% 60.7% 60.6% 59.9% 57.1% 57.7%
Savings institutions 66.2% 65.5% 64.2% 61.4% 68.4% 59.1% 61.4% 58.4% 59.1% 59.5% 59.0% 58.0%
Credit unions (CU) n.a. n.a. 76.2% 78.4% 81.0% 84.9% 86.2% 84.9% 82.8% 84.4% 81.9% 83.4%
Total excl. CU 65.9% 65.2% 64.6% 63.0% 63.4% 60.7% 63.1% 60.5% 60.4% 59.9% 57.3% 57.7%
US Average n.a. n.a. 65.2% 63.7% 64.3% 61.9% 64.2% 61.6% 61.5% 61.1% 58.6% 59.0%
Sources: ESBG calculations based on FDIC and NCUA data.
Table 15: Evolution of the net interest margin in the EU, 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 1.51% 1.35% 1.27% 1.23% 1.22% 1.07% 1.12% 1.09% 1.01% 1.00% 0.99% 0.99%
Denmark 3.56% 3.93% 3.94% 3.17% 2.70% 2.33% 2.07% 1.86% 1.81% 1.95% 1.70% 1.62%
Germany 2.07% 2.12% 2.18% 2.02% 1.89% 1.73% 1.56% 1.48% 1.31% 1.28% 1.39% 1.34%
Greece 1.60% 1.57% 1.36% 2.09% 1.98% 2.25% 2.42% 2.70% 2.69% 2.67% 2.42% 2.72%
Spain 3.63% 3.29% 3.06% 2.76% 2.61% 2.52% 2.40% 2.23% 2.18% 2.45% 2.24% 2.11%
France 1.56% 1.33% 1.28% 1.17% 1.01% 0.85% 0.74% 0.80% 0.99% 0.80% 0.88% 0.90%
Ireland n.a. n.a. n.a. 2.97% 2.53% 2.18% 1.88% 1.84% 1.58% 1.53% 1.45% 1.15%
Italy 3.30% 3.05% 2.74% 2.93% 2.78% 2.45% 2.32% 2.25% 2.36% 2.59% 2.42% 2.24%
Luxembourg 0.84% 0.77% 0.75% 0.70% 0.68% 0.63% 0.57% 0.60% 0.59% 0.65% 0.65% 0.63%
Netherlands 1.83% 1.82% 1.90% 1.87% 1.88% 1.82% 1.73% 1.70% 1.56% 1.47% 1.51% 1.51%
Austria 1.85% 2.11% 1.90% 1.72% 1.66% 1.52% 1.36% 1.23% 1.20% 1.24% 1.20% 1.17%
Portugal n.a. 3.19% 2.63% 2.28% 2.30% 2.22% 2.10% 2.06% 1.84% 1.87% 1.77% 1.64%
Finland 1.20% 1.65% 1.64% 1.78% 1.73% 1.78% 1.87% 1.75% 1.91% 1.73% 1.41% 1.39%
Sweden 2.59% n.a. 2.68% 2.79% 2.20% 1.75% 1.40% 1.33% 1.23% 1.20% 1.29% 1.29%
United Kingdom 2.62% 2.45% 2.35% 2.33% 2.15% 2.10% 2.06% 2.10% 1.95% 1.77% 1.73% 1.66%
EU Average n.a. n.a. n.a. 1.93% 1.80% 1.66% 1.55% 1.52% 1.50% 1.47% 1.49% 1.44%
Notes: The figures for Denmark refer to commercial banks and savings banks.
The figures for Greece refer to commercial banks (which represent more than 80% of the total Greek assets).
The figures for Luxembourg refer to commercial banks (which represent 88% of the total Luxembourg assets in 2001).
The figures for Portugal refer to commercial banks (which represent 81% of the total Portuguese assets in 2001).
The figures for Sweden refer to commercial banks and savings banks (which represent 67% of the total Swedish assets in 2001).
The figures for the UK refer to commercial banks (which represent 52% of the total British assets in 2001).
Source: OECD ("Bank Profitability", 2002 & 2004).
95

Table 16: Evolution of the Return on equity (before taxes) in the EU, 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 5.7% 14.1% 13.2% 12.9% 15.3% 15.1% 14.8% 14.7% 20.5% 15.4% 11.3% 15.7%
Denmark -21.0% 10.6% 0.1% 18.5% 16.1% 15.1% 14.6% 14.2% 15.2% 16.5% 15.7% 17.0%
Germany 13.2% 13.6% 11.8% 12.6% 12.3% 10.9% 17.4% 9.2% 7.9% 5.1% 8.1% -0.2%
Greece 23.1% 21.6% 25.9% 24.4% 16.5% 17.9% 19.3% 27.6% 19.2% 14.3% 9.8% 12.3%
Spain 10.7% 3.8% 8.2% 9.2% 9.7% 10.6% 11.1% 11.4% 10.4% 9.3% 8.8% 9.5%
France 6.9% 2.9% 0.5% 3.6% 4.8% 7.7% 9.9% 10.8% 12.1% 12.7% 11.3% 11.0%
Ireland n.a. n.a. n.a. 20.2% 20.1% 19.0% 21.6% 18.1% 17.9% 12.3% 15.6% 15.2%
Italy 9.8% 12.0% 4.3% 5.9% 8.0% 5.5% 13.2% 13.9% 17.6% 14.0% 10.9% 10.0%
Luxembourg 11.2% 18.9% 20.9% 19.9% 22.3% 22.8% 24.7% 19.6% 20.5% 18.5% 12.4% 12.8%
Netherlands 13.9% 15.9% 15.2% 15.8% 16.0% 15.6% 14.3% 17.9% 17.2% 15.2% 11.5% 16.0%
Austria 6.9% 8.7% 7.9% 8.9% 9.6% 9.4% 9.5% 9.3% 11.3% 11.3% 6.9% 8.0%
Portugal 8.8% 9.2% 7.4% 7.7% 7.7% 9.1% 7.6% 6.9% 8.8% 6.3% 5.4% 5.6%
Finland -48.9% -28.4% -25.2% -7.9% 8.0% 15.2% 9.9% 15.2% 22.1% 67.4% 8.8% 14.5%
Sweden 18.4% 4.5% 19.3% 21.5% 24.3% 11.6% 16.4% 15.0% 18.7% 18.7% 10.0% 12.7%
United Kingdom 7.3% 19.3% 27.4% 28.6% 26.1% 26.2% 28.3% 30.2% 21.5% 20.1% 17.5% 21.7%
EU Average n.a. n.a. n.a. 10.6% 11.8% 11.9% 15.2% 14.0% 14.1% 12.5% 11.0% 10.1%
Notes: The figures for Denmark refer to commercial banks and savings banks.
The figures for Greece refer to commercial banks (which represent more than 80% of the total Greek assets).
The figures for Luxembourg refer to commercial banks (which represent 88% of the total Luxembourg assets in 2001).
The figures for Portugal refer to commercial banks (which represent 81% of the total Portuguese assets in 2001).
The figures for Sweden refer to commercial banks and savings banks (which represent 67% of the total Swedish assets in 2001).
The figures for the UK refer to commercial banks (which represent 52% of the total British assets in 2001).
Source: ESBG calculations based on information from the OECD (Bank profitability, 2002 & 2004).
Table 17: Evolution of the cost to income ratio in the EU, 1992-2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 68.3% 67.9% 71.7% 67.6% 65.7% 63.9% 63.5% 66.5% 59.9% 62.9% 67.8% 62.1%
Denmark 81.4% 51.1% 72.5% 54.0% 56.9% 59.2% 59.8% 62.1% 59.5% 53.1% 54.3% 51.5%
Germany 64.5% 62.4% 60.8% 63.8% 63.8% 64.1% 57.6% 67.8% 68.7% 69.9% 63.8% 72.6%
Greece 61.0% 62.7% 59.5% 64.3% 68.2% 63.2% 59.3% 41.6% 53.3% 58.4% 68.2% 62.7%
Spain 60.3% 59.7% 59.7% 63.2% 62.2% 61.4% 60.6% 63.1% 61.0% 55.5% 56.7% 54.3%
France 66.8% 64.8% 71.3% 65.6% 69.9% 68.8% 67.7% 67.6% 66.0% 62.1% 64.7% 64.0%
Ireland n.a. n.a. n.a. 59.3% 57.6% 58.3% 52.0% 51.7% 50.1% 55.7% 51.2% 50.7%
Italy 65.6% 60.8% 68.4% 67.6% 66.7% 68.7% 61.0% 60.7% 56.0% 55.4% 59.9% 60.9%
Luxembourg 39.4% 38.0% 45.0% 46.5% 46.5% 43.9% 39.3% 46.0% 45.1% 46.7% 39.8% 41.2%
Netherlands 67.2% 66.6% 67.1% 67.3% 67.3% 69.2% 70.8% 67.9% 70.5% 69.6% 70.9% 67.2%
Austria 64.0% 63.5% 65.1% 69.4% 69.1% 69.4% 67.9% 69.0% 66.9% 67.6% 70.0% 68.8%
Portugal 53.5% 56.2% 61.8% 64.9% 64.3% 60.0% 55.4% 58.5% 59.1% 57.1% 61.5% 53.9%
Finland 190.4% 136.4% 139.9% 112.2% 88.6% 73.4% 86.3% 70.7% 56.9% 37.7% 61.1% 50.1%
Sweden 121.3% 108.0% 80.1% 71.1% 63.7% 77.2% 68.7% 73.6% 67.1% 64.9% 71.2% 64.5%
United Kingdom 65.9% 63.2% 64.1% 63.7% 62.1% 60.9% 56.5% 54.6% 55.5% 57.4% 60.8% 56.8%
EU Average 68.6% 64.7% 66.4% 65.4% 65.2% 65.2% 61.4% 63.3% 62.4% 61.6% 62.5% 62.5%
Notes: The figures for Denmark refer to commercial banks and savings banks.
The figures for Greece refer to commercial banks (which represent more than 80% of the total Greek assets).
The figures for Luxembourg refer to commercial banks (which represent 88% of the total Luxembourg assets in 2001).
The figures for Portugal refer to commercial banks (which represent 81% of the total Portuguese assets in 2001).
The figures for Sweden refer to commercial banks and savings banks (which represent 67% of the total Swedish assets in 2001).
The figures for the UK refer to commercial banks (which represent 52% of the total British assets in 2001).
Sources: ESBG calculations on the basis of information from OECD (Bank profitability, 2002 & 2004).
96

5.3.2.2.2 Return on equity
Average ROE in the EU increased from 10.6% in 1995
to 14.1% in 2000 (hitting a peak of 15.2% in 1998)
and then fell every year since to 10.1% in 2003
(see table 16 opposite). Note that ROEs are
considerably higher than the European average in a
number of countries, especially in the UK.
5.3.2.2.3 Cost-income ratio
The average cost to income ratio for EU banks has
also generally followed a downward trend since
1992, as can be seen from table 17 opposite, with a
high in 1992 of 68.6% and a low in 1998 of 61.4%.
With regard to return on equity, the US has
consistently exceeded the average ROE of the
EU 15 by a significant margin, as graph 14 below
demonstrates. However, the range of ROEs across
Member States is wide and a number of countries,
namely the UK and Luxembourg have achieved
consistently higher ROEs than the US.
Looking at the evolution of ROEs in the US and the EU,
ROE has been relatively stable in the US since 1995,
hovering around the 20% mark, while in the EU a
positive trend in ROEs since 1995 turned into a
downward trend from 1998 right up to 2003 (see
graph 15 below). It would however be futile to attempt
making sense of this evolution, given the volatility of
ROEs at the level of individual Member States.
5.3.2.3 Comparison
As can be seen from graph 13 below, net interest
margins in the EU are significantly below those for the
US. Note too that for both markets, interest margins
have followed a downward trend over the years.
25%
20%
Graph 14: Comparison of the RoE (before
taxes) in the EU and the US, 1995-2003
Looking at the level of individual Member States,
few countries in the EU have achieved net interest
margins comparable to the US (3% or over) excepting
for Italy in 1992 and 1993, Portugal in 1993, Denmark
(over a 4 year period between 1992 and 1995, over
which it achieved a top margin of 3.94%), and Spain
in 1992, 1993 and 1994. None have achieved margins
anywhere as high as the US in recent years.
15%
10%
5%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Graph 13: Comparison of net interest margins
in the US and the EU, 1997 – 2003
1997 1998 1999 2000 2001 2002 2003
■ EU Average
■ US Average
Source: ESBG calculations based on data from OECD for the EU
and FDIC & NCUA for the US.
■ EU Average
■ US Average
Source: ESBG calculations based on data from OECD for the EU
and FDIC & NCUA for the US.
97

Finally, looking at cost-income ratios for credit
institutions in the US and the EU (graph 15), we can
see that in both markets these were comparable and
followed a downward trend until 2001, when the US
industry cost/ income ratio came down significantly
while the opposite happened in the EU.
A number of EU countries such as Denmark, Spain,
Ireland, Luxembourg, Portugal and the United
Kingdom have achieved ratios lower than both the
EU and US average for most of the years under
comparison. Luxembourg has achieved by far the
lowest cost to income ratio consistently throughout
the period.
Graph 15: Comparison of the cost to income
ratio in the EU and the US, 1994-2003
70.0%
67.5%
65.0%
62.5%
60.0%
57.5%
55.0%
52.5%
50.0%
1994
1995
1996
■ EU Average
■ US Average
1997
1998
1999
2000
2001
2002
Source: ESBG calculations based on data from OECD for the EU
and FDIC & NCUA for the US.
2003
A number of possible explanations exist which could
explain the divergence in performance between US
and EU credit institutions, as measured by the above
indicators.
No unique explanation exists concerning the important
difference between US and EU banks as regards
interest margins. One possible way to explain the
difference refers to a possible lower level of
competition in the intermediation business in the US
as compared to the EU. Reference is also made to
the composition of the portfolios of assets of US and
EU banks, with US banks having a stronger focus on
assets which bring higher yields. In this context, the
interest margins of US banks can have been favoured
by the dynamism of the US consumer credit market,
as compared to the European one.
The fact that banking institutions in the US are
generally highly capitalised could also explain part
of the difference observed with regard to interest
margin between the US and in the EU. Indeed, the
interest rate margin of a bank is influenced by the
proportion of own funds held by the bank, given
that the remuneration of own funds is not included
in the calculation of the interest rate margins.
With regard specifically to the fall in net interest
margins experienced in the EU, part of the decline
has been due to the convergence of interest rates
towards the common levels for European Monetary
Union, followed by the adoption of a single interest
rate for the eurozone. The creation of a monetary
union has also increased the level of competition
among financial institutions in the eurozone, which
has in turn put pressure on banks’ interest margins.
Bank margins in both the US and the EU have
also likely been affected by low inflation and the
consequent fall in nominal interest rates, especially in
the years 2001 – 2003. Very low interest rates are in
general more difficult to pass on to customers on their
deposits, with a resulting pressure on bank margins.
As mentioned above, a possible reason for the
decline in bank margins has been the reported
increase in competition from new entrants. In actual
facts, increasing competition in the EU banking
markets could explain why both margins and ROEs
have been falling, possibly reflecting downward
pressure on profits. But, as we explain in the product
and distribution chapter of this study, competition to
banks from non-banks has been more significant in
the US than the EU, especially due to the growing
commoditisation of the US mortgage and consumer
lending markets. Yet the ROEs of credit institutions
there are not only larger than that for most EU
Member States, they have been growing in the last
few years while ROEs in the EU have been falling.
Perhaps, higher ROEs in the US could be the result of
generally higher risk taking by banking institutions
(with the result of higher pay-offs) there than the EU.
The discrepancy could also be explained in terms of
factors external to the banking sector, such as for
instance flexible labour market laws and the more
favourable economic climate enjoyed by credit
institutions present in the US, who benefited from an
average annual growth in US real GDP between
1993 and 2003 of 3.3% compared to 2.1% for the
Eurozone for the same period 254 .
254 The Economist statistics.
98

Some have attempted to explain the generally superior
profitability of the US banking market in terms of the
high level of consolidation that has occurred there
driving the sector to higher levels of efficiency. This is
however not borne out by our numbers, which
suggest that the pace of consolidation in the US has
not been significantly greater than in the EU (the
number of credit institutions fell by 44% between
1985 and 2003 in the US, while the number of credit
institutions in the EU fell by 41% for that same period).
Nor is there conclusive evidence that banking
consolidation in the US has driven profitability 255 .
In addition, empirical evidence suggests that banking
M&As do not significantly improve cost and profit
efficiency and, on average, do not create significant
shareholder value 256 .
5.4 Section Conclusion
1. Both the EU and the US experienced large falls in the
number of credit institutions in the last two decades.
Looking at the level of EU Member States however
reveals that the decline was most strongly experienced
among the larger Member States of the EU, while a
number of small EU countries actually experienced
an increase in the number of credit institutions over
the period studied.
2. In terms of actual size of banking sectors, the EU 15’s
banking sector is more than twice as large as the
US banking sector in terms of assets (€22,098
compared to €8,139 billion). In terms of numbers of
credit institutions the US has considerably more
credit institutions (18,533) than the EU 15 (7,444)
(even excluding credit unions, the US has 9,164 credit
institutions) in spite of the former having significantly
less inhabitants than the latter (384 million inhabitants
in the US, 291 million in the EU15). This means that
the US has many more credit institutions relative to
its population than the EU (64 per 1 million inhabitants
in the US compared to 19 credit institutions per
1 million inhabitants in the EU).
3. In terms of the number of branches, in spite of
significant decreases in the number of institutions,
both the EU and the US have experienced an
increase in the number of branches in the last two
decades. The increase in the US has however been
more significant than that experienced in the EU for
the same period.
4. In spite of the EU having a great deal less credit
institutions than the US, it has twice the number of
branches (186,009 in the EU compared to 99,807 in
the US for the year 2003), and thus a significantly
larger number of branches relative to population.
5. The number of branches of credit institutions has
therefore increased in both the US and the EU in
spite of the large decline in the number of credit
institutions in both markets. The resulting increase in
the number of branches per credit institution is a
sign that in the age of globalisation, local market
representation and proximity to customers is deemed
essential by both American and European banks.
6. In general terms, it can be said that the banking
industries in both the EU and the US are dominated by
small to medium-sized institutions but that the majority
of the industry’s assets are concentrated among a
few large institutions. Though the average US credit
institution – even excluding credit unions – is considerably
smaller than the average EU credit institution.
7. Differences in official bank size categorisation in the
US and the EU illustrate well the margin of difference
between average bank sizes in each economic area:
under US definitions, the average (FDIC insured) US
credit institution is medium-sized, while the average
EU credit institution under US definitions is a large
bank. Under EU definitions, however, the average
US bank would be considered a small bank, while
the average EU bank would be considered a (small)
medium-sized bank.
8. This is quite revealing, for it highlights that if we were
to regard the size of average institutions as a partial
indicator of the concentration of a banking market
we would conclude that the US banking market is in
fact more ‘fragmented’. This is reinforced if we take
note of the fact that the US has many more credit
institutions (whether or not one includes credit
unions) than the EU. All this suggests in fact that
banking in the US is rather a small scale, local affair,
and that although the US is known for producing
many of the world’s ‘mega-banks’, this model of
banking is in fact not at all representative of the
majority of the industry.
255 See the conclusions of Walter N. (ed), “US vs EU banking market: the more integrated, the more profitable”, November 2003, Deutsche Bank Research.
256 “Banking Consolidation in the EU: Overviews and Prospects”, May 2004, R. Ayadi and G. Pujals, CEPS Research Report in Finance and Banking, No 34.
99

9. The last couple of decades have been periods of high
levels of consolidation for both the US and the
EU banking industry. Asset concentration measures
reveal that EU 15 CR5 was 14.5% in 2003, while
2003 US CR5 was 37.6%. While the asset based
CR5 for Europe’s top five banks may seem small
compared to US CR5, looking at CR5 of individual
EU Member States reveals that in a number of
European Member States, levels of concentration are in
fact much higher than in the US (i.e.: The Netherlands
(84%), Belgium (83%), Finland (81%), Denmark (67%),
Greece (67%), Portugal (63%)). Consider also that,
of the EU15, only 4 Member States have CR5s lower
than the US (2003 figures).
10. While asset concentration figures are relatively easy to
come by for both the US and the EU, concentration
ratios for products, more revealing about market
power, are not. Yet looking at such information can
give a much different picture for an individual country,
as we show above for the UK.
11. The nature of consolidation in the US and the EU
has been similar, with the great majority of it being
intra-state. As for inter-state mergers, they have
been encouraged by the adoption of the Riegle-Neal
Act. It is however important noting that inter-state
expansion has occurred mainly via inter-state
branching, rather than via multi-state banking.
Indeed, multi-state branches make up nearly 29% of
total US branches, while multi-state banks represent
less than 3% of total US credit institutions.
12. In Europe, until recently the value of cross-border
M&A as a proportion of total M&A was relatively
low, but a few large deals in the last couple of years
have significantly increased that proportion. In any
case in terms of the number of institutions that
engage in cross-border M&A (and become multistate
institutions), the number is low.
13. It is interesting to note that few US bank holding
companies and/or independent depository institutions
have offices in two or more states, even though
regulatory, cultural and linguistic differences, which
are mentioned as key obstacles to such deals in
Europe, are not issues in the US (or at least not in a
comparable way). This may however be explicable in
terms of other comparable factors that render difficult
the achievement of cost and revenue synergies for
banks wanting to operate across US or EU (Member)
states. Cost savings can more easily be achieved by
in-market rather than out-of-state bidders, given the
former’s ability to cut overlapping facilities such as
branches. Also, the reward of higher profits via
higher prices due to increase in market power is not
available in a cross-border/ state context.
14. The fact that, as with the EU, few banks have offices
across several states of the US further emphasises the
local aspect of US retail banking, and suggests that
further deregulation in Europe may not necessarily
lead to significant increases in the presence of crossborder
retail banks.
15. Assessing the evolution of non-bank deposits over
time in proportion to total liabilities reveals that
deposits in the US have become a less important
source of funds for US credit institutions. In Europe,
non-bank deposits have also contributed less of the
funding, but the decrease over the same period has
not been as significant as in the US.
16. That bank intermediation is more important in the
EU than the US can be seen from the fact that the
proportions of deposits to GDP were much larger for
the EU (93%) than for the US (38%). Also, if we
compare the proportion of stock market capital to
GDP for both the EU and the US, we see that it is
indeed much more important in the US (155%) than
the EU (100%).
17. On the asset side, loans have continued to represent
by far the main assets to credit institutions in both
the US and the EU, remaining a stable use of funds
in both markets over the years. In Europe, the ratio
of bank loans to the private sector to GDP is larger
(94%) than in the US (49%). For both the EU and
the US, the ratio of bank loans to the private sector
to GDP has grown quite significantly between 1980
and 2000.
100

18. In terms of loan compositions, home loans represent
much the greater proportion of total loans of both
US and EU financial institutions 257 . There are some
exceptions in several countries in Europe, where loans
to businesses exceed home loans. In comparison in
2004, 88% of all lending to households in the US
was home lending while 9% was consumer lending.
The equivalent average figures for Europe are 68%
and 14%, though with the share of housing lending
to total household lending varying from country to
country between 40% and close to 90% in 2004.
24. The pace of consolidation of the US banking industry
is however not likely to explain superior returns by
US banks: firstly, it has not been significantly greater
than the EU (the number of credit institutions fell by
44% between 1985 and 2003 in the US, while the
number of credit institutions in the EU fell by 41%
for that same period); secondly, there is no conclusive
evidence that banking consolidation in the US has
driven profitability.
19. Few countries in the EU have achieved net interest
margins comparable to the US, none have achieved
margins anywhere as high as the US in recent years.
20. While the US has consistently exceeded the average
return on equity (ROE) of the EU 15, the range of
ROEs across Member States is wide and a number of
countries, namely the UK and Luxembourg have
achieved consistently higher ROEs than the US.
The important weight of both countries in the world
financial markets may help explaining their high ROEs.
21. A number of EU countries such as Denmark, Spain,
Ireland, Luxembourg, Portugal and the United
Kingdom have achieved cost income ratios lower
than both the EU and US average for most of the
years under comparison.
22. A number of possible explanations exist for the
difference in performance between credit institutions
in the US and the EU, among which a more
favourable economic climate, higher risk-taking by
US credit institutions as well as better performing
stock markets and more flexible labour market laws.
23. Higher ROEs and higher net interest margins in the
US could also be explicable in terms of lower levels
of competition in the US (in spite of the growing
presence of non-banks in the US market) compared
to the EU. Other factors such as the lack of usury
caps in the US compared to many Member States in
the EU and the strength of the consumer credit
market in the US could also help to explain the
discrepancy in net interest margins between the US
and the EU.
257 Comparable US and EU data on lending to the private sector by credit institutions only is unfortunately not available.
101

102

6. PRODUCT AND DISTRIBUTION COMPARISON
6.1 Section introduction
The aim of this chapter is to focus on certain key aspects of
retail banking product and distribution. In the first instance,
we provide a comparison of activity in the two most important
areas of retail banking: lending and payments. We then
draw a comparison on the channels of distribution in use in
the US and the EU, and then in the final section of the
chapter we contrast key issues of competition faced by retail
banks in both markets.
The lending section focuses on three specific areas of
non-bank retail lending: consumer lending, home lending
and lending to small businesses/ SMEs. In the consumer
lending section, the focus is on regulatory aspects of the
US and EU systems. Specifically we make a comparison of
two main features of consumer credit, which are topical in the
EU debates on the new Consumer Credit Directive: information
obligations – an indicator of the level of consumer
protection – and assessment of credit worthiness via credit
databases and credit bureaus. In the case of mortgage credit
we look at how it is funded in both the EU and the US, and
in particular at the importance of securitisation as current
and possible means of funding mortgage credit. Lastly, the
issue of the access to finance of SMEs, and the role that
banks play in funding them, is looked at.
The payments section presents an overview of the US and
EU payment systems. It discusses market participants, the
types and evolution of retail and commercial payment
instruments, as well as high value and retail and commercial
clearing and settlement systems in operation. It concludes
with a few remarks on the potential comparative evolution of
retail and commercial payment systems, and their implications.
The third part of the chapter focuses on issues of
distribution, and looks in more detail at the reasons for the
continued growth of bank branches in both the EU and the
US, in spite of the decline in the number of banking
institutions (as revealed previously in the economic section
of this paper). We then look briefly at various secondary
channels of distribution, focussing on ATMs and internet
banking, and examine their importance in both the US and
EU retail banking markets.
The remaining part of the chapter then looks at key aspects
of the competition that US and EU credit institutions face in
their respective retail banking markets, what form this
competition is taking, how it has evolved through the years,
and how it is likely to evolve in the future.
6.2 Retail lending
6.2.1 Consumer lending
6.2.1.1 United States
6.2.1.1.1 Size of the consumer credit market
In 2004, the size of the consumer credit market in
the US amounted to $2,141 billion, which represents
17% of the US GDP (see table 18 on the following
page). During the time period considered for this
analysis (between 1995 and 2004) consumer credit
grew at an annual growth rate of 7%. A significant
increase is shown between 1995 and 2001 ($1,168
billion in 1995 to $1,870 billion in 2001). A more
moderate growth of consumer lending followed
after 2001, in a way reflecting the cyclical slowdown
of the US economy which started in mid-2000
and further accelerated with the burst of the
technology boom and its negative consequences in
the stock market. Consumer confidence was also
considerably undermined following the September
11 terrorist attacks.
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Furthermore, the average outstanding credit per capita
in 2004 was equivalent to $7,290. Some sources
reveal that within the wide range of products
developed in the consumer credit market, credit cards
are one of the most common forms of consumer
credit in the US. In 2004 there were more than 4,000
credit cards per 1,000 inhabitants 258 , which translates
to an average of four credit cards per person.
Table 18: Evolution of consumer credit in the US, 1995-2004
Annual
growth rate
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 (2000-2004)
Overall outstanding volume
(in billions of US $) 1,168 1,272 1,342 1,439 1,553 1,731 1,871 1,954 2,047 2,141 5%
Overall outstanding volume
as a % of US GDP 16% 16% 16% 16% 18% 19% 19% 18% 18% 17% -2%
Outstanding volume
per capita (in US $) 4,388 4,723 4,921 5,217 5,566 6,135 6,562 6,787 7,039 7,290 4%
Source: ESBG calculations based on data from the Board of Governors of the Federal Reserve System: "Flow of Funds Accounts of the United States,
1995-2004", June 9, 2005, the US Census Bureau for the population and Eurostat for the GDP.
6.2.1.1.2 Regulatory framework overview
In the US consumer credit is regulated at both federal
and state level. Unless a state law conflicts with a
particular federal law, the state law usually applies 259 .
At federal level, a large number of laws apply to
consumer credit transactions in general (leasing,
mortgage credit, credit cards, personal loans, etc).
Federal laws which regulate consumer credit include
the following laws 260 : Consumer Leasing Act (1976),
Equal Credit Opportunity Act (1974), Fair Credit and
Charge Card Disclosure Act (1988), Fair Credit Billing
Act (1974), Fair Debt Collection Practices Act (1977),
Federal Trade Commission Credit Practice Rule (1985),
Home Equity Loan Consumer Protection Act (1988),
Truth in Lending Act (1968), Bankruptcy Reform Act
(1979), Right to Financial Privacy Act (1979). It should
be noted that some of the mentioned laws equally
apply to housing loans and that nearly all these laws
have been modified on several occasions.
There are also numerous laws regulating consumer
credit at state level and while there is considerable
variation among state laws governing consumer
credit, most of them are based on federal laws.
Various versions of state laws cover several standard
areas (e.g. information disclosure). To take the
example of the State of California, there have been
a large number of laws enacted such as Consumer
Finance Lenders Law, Consumer Contract Awareness
Act, Consumer Credit Contracts Law, Investigative
Consumer Reporting Agencies, Retail Instalment
Sales, Rental-Purchase Act, Credit Denial Disclosure
Act, Credit Card Disclosure Act, Credit Services Act,
Credit Card Act and Fair and Debt Collection
Practices Act 261 .
States are also entitled to introduce usury or ceiling
rate laws establishing the maximum rate that a
lender can charge for consumer credit. The
maximum interest rates vary from state to state and
depend upon the type of credit transaction involved.
For example, at the end of the 1970s, 37 states had
some kind of interest rate ceiling on credit cards with
Minnesota having the lowest interest ceiling at 8%
while two states had limits above 18% 262 .
258 Figure calculated by the ESBG based on figures from “The Future of Banking in America” by Neil B. Murphy (FDIC Banking Review, 2004).
259 See chapter on regulatory comparison, section on division of legislative powers in the US.
260 The list of laws is intended to be as complete as possible but it might not be exhaustive.
261 Information obtained from www.yourcredit.com.
262 FDIC Bank Trends, March 1998.
104

In that period, this became an issue for the industry
when inflation rates were very high, and in some
states the rate ceilings were less than banks’ cost
of funds 263 . Restrictive usury laws limited the volume
of credit card lending, thereby limiting the income
potential of lenders, and leading lenders to extend
credit only to higher quality borrowers, shutting
out lower quality borrowers from the market.
This situation resulted in less credit availability and
lower charge-offs 264 .
In a landmark court decision in 1978 265 , the US
Supreme Court ruled that the lender’s location
determined the operative state usury ceiling no
matter where the customer resided – even if the state
of residence of the consumer would have a lower
usury ceiling. This gave incentive to large card issuers
to find a lender-friendly state in which to establish
national operations. The Court ruling of 1978 brought
about liberalisation of interest rates which led to a
significant expansion of credit availability which
facilitated credit to higher-risk borrowers. According
to the FDIC, the liberalisation of interest rates also
resulted in higher credit prices for consumers.
Moreover, it had an important impact on US personal
bankruptcy rates which rose from less than one
per thousand heads of population in the early 1970s
to almost five per thousand heads of population
in 1997 266 .
Under the federal legislative framework, the US
Consumer Credit Protection Act of 1968, which is
part of the US Code (Title 15, Chapter 41), contains in
its Title I – Consumer Credit Disclosure – core provisions
on consumer credit, in particular regarding general
provisions, credit transactions, credit advertising,
credit billing and consumer leasing 267 . The Consumer
Credit Protection Act is considered to be landmark
legislation. For the first time, creditors had to state
the cost of borrowing in a common language so that
the consumer could understand what the charges
are, compare cost and shop for the best deal.
The Act protects consumers defined as natural
persons acting in a transaction for primarily personal,
family or households purposes 268 . A good number of
transactions are exempted from the Consumer
Credit Protection Act, for example credit transactions
of more than $25,000 269 .
6.2.1.1.2 Information disclosure and duty to advise
Among the numerous laws regulating consumer
credit in general, the main set of rules dealing
with information disclosure is the Truth in Lending
Act from 1969. This Act has been implemented by
Regulation Z (adopted by the Federal Reserve Board)
and integrated as Title 1 of the Consumer Credit
Protection Act. Regulation Z has been amended
in numerous occasions. The main purpose of the
Regulation is to prevent abuses in consumer credit cost
disclosure and to require uniformity in such disclosures.
Regulation Z provides two different information
disclosure regimes depending on whether the credit
is an open-end or close-end type of credit. An openend
credit is “when the creditor reasonably considers
repeated transactions, which prescribe the terms of
such transactions and which provide for a finance
charge which may be computed from time to time
on the outstanding unpaid balance” 270 , e.g. credit
cards and home equity release credit lines are openend
credits. Closed-end credit encompasses all
consumer credit not extended under an open-end
plan. Under closed-end credit plans, the consumer
receives a complete disclosure of the costs associated
with the credit transaction before the transaction is
actually consummated.
263 “The Future of Banking in America” by Neil B.Murphy (FDIC Banking Review, 2004), Page. 77.
264 FDIC Bank Trends, March 1998. See also studies by Canner and Fergus (1987) and Villegas (1989).
265 US Supreme Court case “Marquette National Bank of Minneapolis vs. First Omaha Services”
266 FDIC report on “The effect of Consumer Interest Rate Deregulation on Credit Card Volumes, Charge-offs, and the Personal Bankruptcy Rate”, March 1998.
267 Sections 101-181 of the US Code.
268 See definition under General Provisions of the Consumer Credit Disclosure Act – Consumer Credit Protection Act.
269 Exemptions listed under Section 104 of the Consumer Credit Protection Act – Title 1, also include transactions involving extensions of credit primarily for
business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities or to organisations; transactions in securities
or commodities accounts by a broker-dealer registered with the Securities and Exchange Commission; credit transactions, other than those in which a security
interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer, in which the
total amount financed exceeds $25,000; transactions under public utility tariffs, if the Board determines that a State regulatory body regulates the charges
for the public utility services involved, the charges for delayed payment, and any discount allowed for early payment; transactions for which the Board (the
Federal Reserve Board), by rule, determines that coverage under this title is not necessary to carry out the purposes of this title and loans made, insured, or
guaranteed pursuant to a program authorised by title IV of the Higher Education Act of 1965.
270 Definition provided by the Truth In Lending Act.
105

Under an open-end credit, the creditor has to provide
the appropriate information before the account is
actually used. When the account is used, the creditor
has to provide further information on each billing
statement. Each type of statement has its own
mandatory list of disclosures. Regulation Z provides
for special rules which apply to home equity lines of
credit (i.e. prohibitions against closing accounts, or
changing account terms). Also, certain provisions
only apply to credit card transactions (i.e. restrictions
on the right to offset a cardholder’s indebtedness).
When the credit is a closed-end credit, the consumer
receives a complete disclosure of the costs associated
with the credit transaction.
Also, Regulation Z requires creditors to inform carefully
on the terms of the finance charge and annual
percentage rate. The finance charge includes all
charges, payable directly or indirectly by the person
to whom the credit is extended, and imposed directly
or indirectly by the creditor as an incident to the
extension of the credit 271 . This information has to be
disclosed more conspicuously than other required
disclosures. The disclosure in general has to be made
clearly, conspicuously, in writing and in a form that
the consumer may keep and read prior to the loan
closing. If the disclosures are incorporated into the
loan agreement they must be separated from all
other loan details; for example, they may be placed
in a boxed section (often referred to as the SFederal
Boxy) 272 or separated by bold print dividing lines.
While Regulation Z entails a comprehensive set of
provisions regarding information duties, there seems
to be in the regulation no duty to advice, meaning a
compulsory duty for lenders to take responsibilities
and recommend one or the other credit product to
the consumer.
6.2.1.1.3 Credit databases and credit bureaus
Consumer credit bureaus in the US are private
organisations that compile and sell reports on the
creditworthiness of consumers. Firms that lend to
consumers provide the underlying data to the bureaus.
To date in the US, there is at least one credit bureau
file for every borrower in the country.
Over 2 billion items of information are added to
these files every month, and over 2 million credit
reports are issued every day 273 . Nationwide consumer
reporting companies sell the information to creditors,
insurers, employers and other businesses that use it
to evaluate the applications for credit, insurance,
employment or renting a home.
It is very difficult to know how many credit bureaus
operate across the US. According to the Consumer
Data Industry Association (CDIA 274 ), each of the main
consumer credit reporting systems in the country
(Equifax, Experian, and TransUnion) maintains 200
million credit files, which are used by independent
credit reporting agencies across the US.
At the federal level, the Fair Credit Reporting Act
(FCRA) from 1971, amended several times, regulates
the activities of the credit bureaus.
According to this law, creditors must notify consumers
of the name and address of credit reporting agencies
(credit bureaus) whose reports were used as a basis
for adverse credit decisions. The FCRA further imposes
burdensome requirements to credit reporting
agencies, e.g. to notify recent recipients of reports
about the corrections made to such credit reports.
Upon request by the interested consumer, the act
requires consumer reporting agencies to provide the
credit score along with a mandatory disclosure
statement and information relating to the key factors
that adversely affect the credit score. Consumer
reporting agencies are allowed to charge consumers
a “fair and reasonable fee” to be determined by the
Federal Trade Commission.
In 1999, as part of the Graham-Leach-Bliley Act,
the US Congress passed a financial privacy law which
among others include the following obligations for
financial institutions: disclosure of privacy protection
policy to customers; provide customers the ability
to prevent a financial institution from sharing his or
her non-public information with non-affiliated third
parties (with some exceptions); prohibition to disclose
account numbers or access codes to non-affiliated
third parties for marketing purposes.
271 Section 106 of the Consumer Credit Protection Act.
272 Regulation Z, General Disclosure Requirements, Section 226.17.
273 The development and regulation of consumer credit reporting in America”. Robert M. Hunt, Federal Reserve Bank of Philadelphia. October 2002.
274 Which represents 500 American credit reporting agencies, mortgage reporting companies, collection services companies, check services companies, tenant
screening companies and employment reporting companies.
106

The Fair and Accurate Credit Transaction Act of 2003
has amended the FCRA to improve the use of
information and consumer access to credit information.
One of the changes introduced by the 2003 Act is
the obligation for all consumer reporting agencies to
provide consumers with a free copy of their credit
report once every 12 months, upon request by the
consumer and free of charge. This obligation has
raised some concerns 275 .
The content of a typical consumer credit report is
usually quite large and can include, firstly: name, last
reported address, marital status, social security number,
date of birth, spouse's name, number of dependents,
previous address, and employment information.
Secondly: a list of the consumer's credit information
including credit account numbers, the creditor's name,
the amount of last payment, the credit limit of the
account and the timeliness of the credit payments.
Thirdly: some reports include a list of public record
information which includes tax liens, court judgments,
and bankruptcies. Finally, there is an inquiry section
that records all those creditors that have reviewed a
copy of the credit report.
Credit reporting agencies are required to provide
reports only to those who have a permissible
purpose for the information (permissible purpose is
restrictedly defined by the FCRA Act).
Privacy is an essential aspect of consumer credit
reporting. The Right to Financial Privacy Act from
1979 provides privacy protection to customers of
financial institutions when the Federal government is
seeking financial record information. This Act
prohibits government authorities from gaining
access to information contained in the financial
records of any customer of a financial institution or
card-issuer unless certain conditions are met (e.g.
prior authorisation by customer, existence of an
administrative penalty or search warrant).
6.2.1.2 European Union
6.2.1.2.1 Size of the consumer credit market
The outstanding volume of consumer credit market
in the EU 15 in 2004 reached €893 billion, which
corresponds to 9% of EU 15 GDP (see Tables
19 & 20).
The outstanding volume of consumer credit varies
greatly from one Member State to another, even
between countries of similar size and economies.
For example, in 2004 the UK consumer credit market
amounted to near €260 billion while in Italy (with
a population close to the UK), the consumer credit
market represented only €61 billion.
Consumer credit in the EU 15 has increased at an
annual growth rate of 5% since 2000 (see Table 19).
The table shows that although the levels of growth
vary considerably from one country to another
(e.g. Greece registered an increase of 33% while
the UK’s increase was in the range of 6%), the
evolution has been constantly positive in terms of
growth, except for Luxembourg where the
outstanding amount of consumer loans has been
slightly decreasing since 2000.
In terms of outstanding volume of credit per
inhabitant, in 2004 the average was about €2,300
for the EU. Here again, substantial differences are
observed among the EU Member States: while in the
UK the average credit reaches nearly €4,300, in
Portugal the average credit is €860 (see Table 21).
Looking into a common type of consumer credit like
credit cards, in 2003, the number of credit cards per
1,000 inhabitants was 580 276 , translating to 0.6 cards
per EU citizen.
275 For instance, America’s Community Bankers is particularly concerned about the cost of sending yearly privacy notices to customers. They are of the opinion
that institutions that do not make changes to their privacy policies should be exempted from the need to send annual privacy notes.
276 Source: ECB-Blue Book Addendum incorporating 2003 figures, August 2005.
107

Table 19: Evolution of outstanding volume of consumer loans, 1998-2004 (in € billion)
Annual
Growth rate growth rate
Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 (2000-2004) (2000-2004)
Germany 216.1 215.7 222.6 222.4 224.3 230.9 237.0 6% 2%
United Kingdom 146.1 183.0 209.5 225.4 244.6 239.1 260.0 24% 6%
Netherlands 12.3 12.8 13.8 13.9 18.6 20.4 22.5 63% 13%
France 80.8 90.7 97.8 103.0 105.7 110.7 115.5 18% 4%
Spain 36.7 43.3 48.5 48.7 53.7 55.5 62.3 28% 6%
Denmark 10.9 11.3 12.5 12.2 11.9 12.3 13.1 5% 1%
Italy 27.1 32.3 37.1 41.2 45.2 51.3 61.0 64% 13%
Sweden 22.1 26.3 29.8 29.1 31.8 32.3 34.5 15% 4%
Belgium 11.2 12.0 12.7 13.2 13.5 13.7 14.1 11% 3%
Austria 14.8 16.5 23.9 23.3 22.1 20.6 23.5 -2% 0%
Portugal 6.2 6.8 8.2 8.1 7.9 8.7 9.1 11% 3%
Ireland 5.0 6.8 7.8 9.3 10.5 11.3 14.7 90% 17%
Finland 3.3 3.0 3.1 6.4 6.7 7.3 8.0 158% 27%
Greece n.a. n.a. 5.5 7.9 9.8 12.0 17.1 209% 33%
Luxembourg 0.7 1.1 1.3 1.2 1.2 1.1 1.1 -17% -4%
EU-15 n.a. n.a. 734.2 765.3 807.6 827.4 893.3 22% 5%
Notes: The figures for Germany refer to other lending than housing loans to employees and other individuals.
The figures for the UK refer to outstanding amounts of total sterling net unsecured lending to individuals.
Data have been revised back to February 2003 following on from the previous inclusion of some additional 'other specialist lenders' and the removal of some
non-resident based securitisation vehicles. (31 Jan 1900 onward).
The figures for the Netherlands refer to total consumer credit to households.
Start of a new series as at December 2000 owing to the enlargement of the euro area with Greece.
Start of a new series as at December 2002 owing to a reclassification.
Start of a new series as at December 2003 owing to reclassifications.
The figures for France refer to loans granted to corporations and other resident agents by credit institutions on French national territory: Cash facilities
of private individuals.
The figures for Spain refer to Other MFIs loans to households in Spain sectors: consumer credit.
The figures for Denmark refer to banks' lending to domestic households: consumer credit.
The figures for Italy refer to consumer credit granted by banks and financial companies (excl. leasing and factoring).
The figures for Sweden refer to banks' lending to households.
The figures for Belgium refer to liabilities of households and non-fincial corporations: consumer credit (incl. hire-purchase, instalment-payment loans,
leasing and opening of credits).
The figures for Austria refer to total consumer credit to households.
The figures for Portugal refer to loans of other monetary financial institutions to private individuals - By purpose and maturity (total consumer credit).
The figures for Ireland refer to lending to households for personal use in the consumption of goods and services.
The figures for Finland refer to Finnish MFIs' euro-denominated consumer credit to euro area households.
In early 2001, the MFI sector was extended from deposit banks to all credit institutions.
The figures for Greece refer to domestic MFIs' consumer credit to domestic households.
The figures for Luxembourg refer to Luxembourg credit institutions' other lending than housing loans to euro area households and non-profitable institutions
serving households.
Source: ESBG calculations based on data from EU National Banks and the European Commission (DG BUDG) for the exchange rate.
108

Table 20: Evolution of onsumer credit in the EU, as a percentage of GDP, 1998-2004
Annual growth rate
1998 1999 2000 2001 2002 2003 2004 (2000-2004)
Germany 11% 11% 11% 11% 10% 11% 11% 0%
United Kingdom 12% 13% 13% 14% 15% 15% 15% 3%
Netherlands 3% 3% 3% 3% 4% 4% 5% 9%
France 6% 7% 7% 7% 7% 7% 7% 1%
Spain 7% 8% 8% 7% 7% 7% 7% -1%
Denmark 7% 7% 7% 7% 7% 7% 7% -2%
Italy 3% 3% 3% 3% 4% 4% 5% 9%
Sweden 10% 11% 11% 12% 12% 12% 12% 2%
Belgium 5% 5% 5% 5% 5% 5% 5% -1%
Austria 8% 8% 11% 11% 10% 9% 10% -3%
Portugal 6% 6% 7% 7% 6% 7% 7% -1%
Ireland 6% 8% 8% 8% 8% 8% 10% 8%
Finland 3% 3% 2% 5% 5% 5% 5% 22%
Greece n.a. n.a. 4% 6% 7% 8% 10% 23%
Luxembourg 4% 6% 6% 5% 5% 4% 4% -9%
EU-15 n.a. n.a. 8% 9% 9% 9% 9% 2%
Source: ESBG calculations based on data from EU National Banks, Eurostat (for the GDP) and DG BUDG (for the euro exchange rate).
Table 21: Evolution of average consumer credit per capita, 1998-2004 (in €)
Annual growth rate
1998 1999 2000 2001 2002 2003 2004 (2000-2004)
Germany 2,635 2,625 2,706 2,698 2,718 2,798 3,897 10%
United Kingdom 2,461 3,070 3,500 3,739 4,045 3,938 4,276 5%
Netherlands 778 810 865 863 1,152 1,257 1,381 12%
France 1,382 1,544 1,657 1,736 1,773 1,848 1,923 4%
Spain 923 1,084 1,201 1,193 1,293 1,316 1,467 5%
Denmark 2,043 2,122 2,336 2,281 2,206 2,286 2,418 1%
Italy 477 568 651 723 789 886 1,045 13%
Sweden 2,501 2,969 3,360 3,265 3,560 3,602 3,824 3%
Belgium 1,095 1,168 1,241 1,283 1,304 1,320 1,350 2%
Austria 1,855 2,065 2,983 2,890 2,733 2,532 2,883 -1%
Portugal 610 664 797 782 756 830 860 2%
Ireland 1,350 1,803 2,022 2,385 2,639 2,813 3,591 15%
Finland 635 583 603 1,229 1,288 1,403 1,538 26%
Greece n.a. n.a. 504 716 886 1,088 1,537 32%
Luxembourg 1,638 2,648 2,895 2,693 2,617 2,378 2,322 -5%
EU-15 n.a. n.a. 1,945 2,017 2,117 2,157 2,321 5%
Source: ESBG calculations based on information from National Banks (see Table 2) and Eurostat for the population.
109

6.2.1.2.2 Regulatory framework overview
Consumer credit is regulated at EU and Member
State level. At the EU level, the main body of rules
regulating consumer credit agreements is the
Directive 87/102/EEC 277 from 1986. This Directive,
amended in 1990 and 1998, aims at establishing a
common market in consumer credit while ensuring a
high level of protection for consumers.
Other EU laws also affect consumer credit agreements.
For example, the provisions of the door-step selling
Directive 278 must be respected in consumer credit
agreements sold outside the premises of the credit
institutions. Equally, the Directive on unfair commercial
practices 279 protects consumers, including borrowers,
from abusive and unfair commercial practices in general.
The Consumer Credit Directive lays down common
requirements which all Member States have to
implement to achieve minimum harmonisation
across the EU. The scope of the Directive covers
consumer credit contracts defined as: agreements
whereby a creditor grants or promises to grant to a
consumer a credit in the form of a deferred payment,
a loan or other similar financial accommodation
(Art. 1 par. 2 (c) of the Directive). Certain types of
credit are exempted from the scope of application of
the Directive, e.g. housing loans, hiring agreements
(with some conditions), and one time repayment
credits 280 . Consumer Credit agreements involving
amounts of less than €200 or more than €20,000
are excluded from the Directive.
The implementation of the EU Directive into national
law of Member States has been done differently and
although provisions on advertising, cost information
and other contractual clauses are included in all
national laws, substantial differences remain; for
example, the definition of consumer can vary from one
national law to another (i.e. Spain and UK legislation
on consumer credit includes certain legal persons,
e.g. sole traders, under the scope of protection) 281 .
Furthermore, national legislators are also entitled to
regulate issues not dealt with at EU level, for example
in Italy a law capping usury rates has been introduced.
In 2002 the European Commission launched a
proposal for a revision of the existing Directive 282 .
The planned revision of the Consumer Credit Directive
could mean a radical turn towards a new policy to
regulate in great detail all aspects related of consumer
credit and thus reduce considerably the legislative
autonomy of Member States in this area. According to
the first version of the proposal presented, the new
revised Directive would comprise new information
requirements, a duty to advise, advertisement rules,
provisions on credit databases and on credit intermediaries,
rules on linked credit agreements, etc.
6.2.1.2.3 Information disclosure and duty to advise
One of the key priorities set by EU consumer protection
policy in recent years has been the enhancement of
consumer information to ensure that consumers make
informed decisions 283 . In the EU Directive on Consumer
Credit, adequate information to consumers is ensured
by the obligation of the creditor to inform on the
following: Annual Percentage Rate of Charge (APRC),
conditions under which the APRC may be amended,
total cost of the credit (mandatory, if it is not possible
to calculate the APRC or it is not mandatory to disclose)
and other essential terms of the contract 284 . A “lighter”
regime of information disclosure is required for credit
in the form of advances on a current account other
than on a credit card account 285 .
When appropriate, consumer credit agreements
also have to comply with the relevant information
disclosure requirements set by other EU Directives
on consumer protection, e.g. misleading and
comparative advertisement, unfair contractual terms,
door-step selling.
277 Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States
concerning consumer credit. Official Journal L 042, 12/02/1987, P. 48-53.
278 Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premise. Official Journal
L 372, P.31-33.
279 Council and European Parliament Directive 2005/29/EC of 11 May 2005 on “Unfair Commercial Practices”. Official Journal L 0149, P. 22-39.
280 See Article 2, para. 1 of the 87/102/EEC Directive. Exemptions are 1) credits intended primarily for acquiring, retaining, renovating or improving property rights
in land or an existing or projected building; 2) hiring agreements except where these provide that the title will pass ultimately to the hirer; 3) credit granted
or made available without payment of interest or any other charge; 4) credit agreement under which no interest is charged and the consumer repays in a
single payment; 5) credit in the form of advances on a current account granted by a credit institution or financial institution other than on credit card account;
6) credit agreements involving amounts less than 200 euros or more than 20.000 euros; 7) credit agreements under which the consumer repays either within
a period not exceeding three months or by a maximum number of four payments within a period not exceeding 12 months.
281 See section on definition and notion of the consumer in the ESBG research study on “The Future of European Retail Banking Market”, June 2003. P. 153.
282 Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions of the Member States
concerning credit for consumers. COM(2002) 443 final. 11.9.2002.
283 Consumer Policy strategy 2002-2006 and Health and Consumer Protection Programme 2007-2013.
284 Articles 4 and 5 of the 87/102/EEC Directive.
285 Article 6 of the 87/102/EEC Directive.
110

The Commission’s proposal to revise the existing
Consumer Credit Directive (87/102/EEC Directive) 286
includes an obligation for creditors to seek to establish,
among the credit agreements they usually offer or
arrange, the most appropriate type and total amount
of credit taking into account the financial situation
of the consumer, the advantages and disadvantages
associated with the product proposed, and the purpose
of the credit (Article 6. par. 3 of the proposal) 287 .
This obligation has been maintained in the revised
version of the proposal adopted by the Commission
in October 2004 288 . The credit industry is of the view
that the obligation to seek to establish the most
appropriate credit would indeed lead to introducing
a general duty to advise. The industry is furthermore
unanimously opposed to such an obligation and argues
that information disclosure and duty to advise are
two distinct services the latter being an additional
one for which consumers should voluntarily opt for.
6.2.1.2.4 Credit databases and credit bureaus
Credit bureaus are generally defined as databases
of information on borrowers in a financial system.
The data is provided by lenders, courts, tax authorities
and is managed by central banks, private companies
or professional association 289 .
Credit bureaus and credit databases in Europe are
characterised by their heterogeneity. Across the EU,
there are private and public databases, as far as
ownership is concerned, and positive and negative
databases, as far as the content of the database is
concerned. In positive databases, all financial behaviour
information from a particular consumer is reported
while in a negative database only defaulted credit
information is reported. National central banks usually
hold a public database which contains either extensive
credit worthiness information (such as the positive
databases which are in operation in Spain) or just
information on defaulted payments (as in Denmark and
France). Financial institutions are required to provide
central banks with the relevant credit information.
The information collected is normally available, on a
reciprocal basis, to institutions reporting to the database.
The existing databases are organised at national level.
There are however recent initiatives among credit
bureaus to foster closer cooperation and to serve
mutual interests within the EU but also in third
countries. A Memorandum of Understanding to
exchange credit information was signed in February
2002 by the national central credit registers (a central
banks) from: Germany, Austria, Netherlands, Italy,
Portugal, Spain and Belgium. Such initiatives should
allow lenders to access credit worthiness data in
different Member States. Examples of cooperation
among credit bureaus can also be found beyond the
EU. For example, the Association of Consumer Credit
Information Suppliers (ACCIS), which represents public
credit data holders such as the Belgium National
Bank and private ones such as Equifax UK 290 ,
is a partner of the Global Consumer Credit
Reporting Network, an international platform in
which the US Consumer Data Industry Association
(CDIA) is a participant.
There are no EU laws specifically dealing with
consumer credit information and the obligations of
credit bureaus. The EU Directive on Data Protection
from 1995 291 however regulates any commercial
activity involving the collection and management of
personal data. The Directive protects the fundamental
rights and freedoms of natural persons and in
particular their right to privacy with respect to the
processing of personal data. It also sets minimum
requirements for data collectors allowing Member
States to determine more precisely the conditions
under which the processing of personal data is
lawful 292 . Further, it provides a list of information to
be given to the individual object of the data which
includes the identity of the data controller, the
purposes of the data processing, the existence of the
right of access and the right to rectify personal data.
286 Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions of the Member States
concerning credit for consumers. COM(2002) 443 final. 11.9.2002
287 Proposal for a Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions of the
Member States concerning credit for consumers. COM(2002) 443 final, 11.9.2002.
288 Amended proposal for a Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions
of the Member States concerning credit for consumers repealing Directive 87/102/EC and modifying Directive 93/13/EC. COM(2004)747 final, 28.10.2004.
289 “Credit Bureaus in today’s credit markets” ECRI Research Report N°4 from Amparo San José Riestra.
290 Information obtained from www.accis.org.
291 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of
personal data and on the free movement of such data. OJ L. 281 P. 31, 23 November 1995.
292 Data should be collected for specific, explicit and legitimate purposes and no further processed in a way incompatible with those purposes; Article 6 of the
95/46/EC Directive.
111

6.2.1.3 Comparison
6.2.1.3.1 Size of the consumer credit markets
The increasing diversification and continuous innovation
of products in the consumer credit markets –
personal loans, credit cards from banks and large
retailers, leasing, equity release products, etc – adds
some complexity to the task of collecting the
relevant figures to compare the volume of
outstanding consumer credit in the US and in the EU.
Moreover, the definition of consumer credit differs
from one country to another (e.g. in Italy leasing and
factoring are not included in the consumer credit
statistics). The following figures are therefore
intended to provide a close estimation of consumer
credit markets which do not necessarily include
identical products.
The weight of consumer credit in the US economy
(17% of GDP) is nearly twice as big as the
corresponding figure for the EU 15 (9% of GDP).
In contrast, in the EU Member States with the highest
levels of consumer lending to GDP, it represents 15%
(UK) and 12% (Sweden) of those countries’
respective GDPs. In terms of volume of outstanding
consumer credit, the US figure for 2004 is nearly
double the EU figure for the same year (€1,616
billion for the US and €893 billion for the EU 15).
Despite these differences, it can be observed that
the pace of the annual growth rate in both credit
markets is the same (5%) between 2000 and 2005.
It is therefore possible to generally say that EU
consumers make much less use of this finance
instrument than US consumers. This can partially
be explained by a more generalised access to
credit facilities in the US and the higher amounts
borrowed by US consumers. While in average the
US outstanding credit per capita in 2004 was
€5,503, the corresponding figure in the EU is much
lower: €2,321.
These differences are also explained by the low savings
rate of US households compared to the relatively
high savings rate of EU households. In addition,
there are sociological reasons, in terms for instance
of spending behaviour, which explain this disparity
between the US and the EU. This is illustrated for
example in the average number of credit cards held
per capita: four cards per person in the US, while
only 6 out of 10 Europeans hold one credit card.
Regarding the evolution of the growth of outstanding
volume of, consumer lending the trend in the US
market has shown a positive and steady growth
between 1995 and 2004, with a more significant
increase between 1995 and 2001. In the EU, a
moderate and steady growth during the time period
examined is observed although the pace of growth
varies considerably from one country to another;
for example, in Greece and Finland the growth rate
(between 2000 and 2004) amounts to 209% and
158% respectively while in Germany and Denmark
it’s 6% and 5% respectively.
6.2.1.3.2 Regulatory framework overview
Consumer credit legislation was introduced earlier in
the US than in the EU, partly as a result of the fact
that mass marketing of consumer credit products,
notably credit cards, began in the US as early as in
the 60’s, and hence the need then to put in place a
regulatory framework to protect consumers from
unsolicited credit cards, unfair contracts and abusive
practices. Also the degree of complexity and range
of issues covered in the regulatory framework seems
to be much higher in the US compared to the EU.
The regulatory trend in the US system has been
towards an increased number of detailed rules at the
federal level aiming at improving the protection of
consumers in a wide range of areas such as credit
billing information, credit data reporting, debt
collection practices and equal opportunities to access
credit. The existing EU regulatory framework for
consumer credit aims to achieve different goals.
As such, the existing EU Directive on Consumer
Credit seeks greater convergence among national
laws of Member States, particularly in the area of
information disclosure, with the aim to achieve a
smoother functioning of the Single Market for
consumer credit in the EU. The Directive has been
modified on two occasions – in 1990 and in 1998 –
mainly to progressively introduce uniformity in the
calculation of Annual Percentage Rate of Charge
(APRC) in order to facilitate the comparison between
credit offers for consumers.
A new trend towards more ambitious goals than just
greater convergences and information comparability
is however initiated with the 2002 proposal to revise
the existing Consumer Credit Directive. A much more
ambitious degree of harmonisation is the objective of
the new proposal. This objective has resulted into one
of the more controversial aspects of the proposal.
112

As far as the scope of regulatory framework is
concerned, there are some similarities between the
two legal regimes; both the US Consumer Credit
Protection Act and the EU Directive on Consumer
Credit contain a number of exemptions, for example
consumer credits of an amount higher than a fixed
ceiling (€20,000 in the EU and $25,000 in the US)
and loans taken by consumers for (primarily)
professional purposes. Moreover, the US Act does
not apply the rules to credit granted to other than a
natural person (i.e. unions, trusts, partnerships) and
although this is also the case in the EU Directive,
some Member States have extended the protection to
some legal persons. Some exemptions are however
present in the US Act which are not present in the
EU Directive, notably credits extended by a brokerdealer
for transactions in securities or commodities
accounts if the broker is registered with the SEC or
the Commodities Futures Trading Commission.
Usury or ceiling interest rates are not regulated at the
EU level and in fact only few Member States have
introduced them. In the US on the other hand,
the deregulation of usury rates, as a result of the US
Supreme Court ruling, led to increased competition
and wider access to credit at different prices. In the
EU, in cases where the national law of a Member
State has introduced legal caps on usury rates,
lenders offering credits to consumers domiciled in
that Member State are obliged to adapt their interest
rate in accordance with such legal caps. This would
indicate that while in the EU, the principle of host
law applies (the applicable law is the one of the
Member States where the consumer resides), in the
US the principle of home law of the bank applies.
6.2.1.3.3 Information disclosure and duty to advise
Information disclosure is a cornerstone of consumer
protection in both the EU and US legal systems.
An important number of US laws applicable to
consumer credit focus on appropriate and transparent
information for consumers. The Truth in Lending Act
in particular regulates in great detail the list of
information lenders are required to provide depending
on the type of credit transaction. The EU policy on
consumer protection also considers essential the
provision to consumers with adequate information
to allow them to make an informed choice.
The information disclosure regime under the EU
Directive on consumer credit is less detailed than the
Truth in Lending Act. This might be explained by the
fact that the ultimate aim of the current Directive is
to set a number of common requirements – via a
minimum level of harmonisation – above which
Member States can (and indeed do) legislate further.
There are some similarities which can be found in
a general comparison between the US and EU
information disclosure regimes. For example, in both
regimes the provisions on credit cost disclosure (total
cost of credit, APRC, etc) are considered essential
to ensure appropriate consumer information.
The challenge remains to offer consumers the right
amount of information at the appropriate moment and
as clearly, concisely and transparently as possible.
It is worth noting that the use of a visible information
box to place key information (already introduced
in the US system under the name “SFederal” Boxy)
is a proposal submitted by the European Parliament
in its first reading on the Consumer Credit
Directive proposal.
Another proposal for the revision of the existing
EU Directive is the introduction of a duty to advise.
The Truth in Lending Act targets information
disclosure but it does not require lenders to advise
consumers on the most appropriate type of credit.
This approach seems to be coherent with a high level
of information policy which ensures that consumers
receive all the necessary information in order that
they can make the best choice. In contrast, the EU
legislator has proposed to introduce a duty to advise
even if the overall policy is to encourage consumers
to make informed decisions by providing them with
adequate information.
6.2.1.3.4 Credit databases and credit bureaus
The size of the US credit data market, in terms of
market players and number of transactions, seems to
be much larger than the EU market. The fact that
credit data is sold not only to financial institutions
but also to employers, landlords of rental property,
etc, illustrates the large use of credit bureaus services
in the US. This also explains the fairly detailed and
sensitive information (e.g. fiscal, judicial information)
contained in a typical US credit data report.
113

In terms of market competition, the high concentration
of market players in the US (there are currently three
main credit bureaus dominating the market: Equifax,
Experian and TransUnion) is unlikely to be replicated in
the EU (at least in the short-term). The heterogeneity
of the categories of databases (content and ownership
wise) and the different levels of personal data
protection in existence in the Member States
characterise the EU market. Global credit data firms
such as Experian or Equifax already operate on both
sides of the Atlantic through a large number of
subsidiaries. In spite of this, EU public central
databases held by central banks continue to play an
essential role in collecting and making available to
lenders (under certain conditions) credit data which
is then also used for statistical information purposes.
Bilateral and multilateral agreements among owners
of central credit databases are likely to increase if
there is a larger demand from lenders to access
credit databases from different Member States.
As far as privacy is concerned, there are substantial
differences in the approaches taken in the US and
the EU. The large number of consumer credit reports
put into circulation in the US market increases
considerably the risk of data errors and abuses with
important (negative) consequences for consumers.
The US Fair Credit Reporting Act therefore sets a
mechanism to reinforce the information regularly
provided to consumers on their credit reports.
The EU Directive on personal data protection regulates
the minimum conditions which data collectors have
to respect when processing, storing and handling
personal data. This means that Member States,
when implementing the Directive into national law,
have added further provisions and this has led to
substantial differences in the levels of privacy in place
in the EU Member States.
6.2.2. Home lending
6.2.2.1 United States
6.2.2.1.1 Mortgage credit in the US economy
In the US, mortgage credit represents the bulk of
outstanding credit to households. In 2004, mortgage
credit represented 88% of total household credit,
while consumer credit only represented 9% 293 .
In terms of the size of the US mortgage market, $7.3
trillion (€6.1 trillion) of residential mortgage loans
were outstanding in 2003. In 2003, mortgage debt
relative to GDP in the US was of the order of 63% of
GDP 294 (see Table 22 on the following page).
6.2.2.1.2 Mortgage lenders and the funding
of mortgage loans in the US
In the immediate post-war period, the US housing
market was largely financed by the Savings and Loan
associations (or thrifts) and by the 1970s, they funded
as much as 60% of all residential mortgage loans.
These institutions undertook the core activities of
originating loans, assessing and managing risk and
servicing mortgages.
As the debt capacity of the US economy expanded in
the 1980s, the share of non-financial sector debt that
was directly funded by banks declined. This decline
was associated with a dramatic increase in the extent
to which lending to both households and businesses
became securitised 295 .
Today, the secondary mortgage market is the dominant
funding source for US mortgages, with around 2/3rd
of US mortgages being securitised 296 .
The growth of the importance of the mortgage market
in the US can’t be explained without reference to the
savings and loans crisis of the 1980’s. Before the
crisis, US thrifts funded long-term fixed-rate
mortgages via variable rate deposits: a viable system
while interest rates remained stable, no longer so
from the beginning of the 1980’s when interest rates
increased significantly. Thrifts were then forced to
pay increased rates of interest on deposits while
holding a portfolio of fixed-rate loans, thereby
experiencing a squeeze on interest margins and
liquidity. Many thrifts went bankrupt altogether.
293 See economic comparison chapter of study and table AH in table annex.
294 ESBG data.
295 “The evolving role of commercial banks in US credit markets”, Future of banking study, FDIC, 2004.
296 “Housing Finance: best practices from around the world”, IUHF World Congress 2004.
114

Table 22: Evolution of outstanding housing loans in the US, 1995-2003 (in US $ billion)
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03
Total US Mortgage loans outstanding 3,478 3,720 3,978 4,363 4,787 5,205 5,739 6,463 7,283
Source: Mortgage Bankers Association (1- to 4-family).
For those thrifts that remained, the solution to
prevent future credit crunches was to shift from
holding fixed-rate loans on their balance-sheets to
selling them in the secondary markets.
The 1980’s crisis thus dramatically reduced the
proportion of home mortgage loans funded by
savings institutions. Today they only have around
10% of that market.
Whereas the market share of savings institutions in
residential loans has clearly changed significantly in
the last thirty years, that of the commercial banks
has remained steady throughout: being roughly
equal to 18% now, pretty much as it was then 297, 298 .
Loss of market share (to the mortgage banks) has
been made up for as commercial banks have
absorbed savings institutions.
The crisis also gave rise to a new type of mortgage
lender, the US mortgage banks. These originate and
package mortgage loans, holding them in their
balance sheet for a short period before reselling
them in the secondary market. Given the propensity
for securitisation as a result of the lack of capital that
followed the crisis, mortgage banks soon grew to
represent a significant portion of the residential
mortgage lending market. Mortgage banks today
fund about half of residential mortgages in the US,
being by far the biggest players in that market.
Mortgage banks are not the only key players in the
US mortgage markets. US central government
sponsored enterprises (GSEs) buy individual loan
packages from the mortgage banks which they
then securitise by selling them on the secondary
mortgage markets.
The two most important GSEs in the US are the
Federal National Mortgage Association (Fannie Mae)
and the Federal Home Loan Mortgage Corporation
(Freddie Mac) 299 . They are private firms with publicly
traded shares, but with particular federal charters
that confer on them a unique regulatory position
with a number of competitive advantages. First, both
companies are exempt from state and local income
taxes; second, the US Treasury has the authority to
loan them funds by purchasing their bonds, and
third their securities have the legal status of
‘government securities’.
In addition, Fannie Mae and Freddie Mac receive an
“implicit” government subsidy because investors treat
their debt as if it were backed by a guarantee of the
US government. A key public policy issue is whether
this government subsidy affects the competitive
structure of the residential mortgage market.
Evidence suggests that the market perception of a
government guarantee allows ‘Fannie’ and ‘Freddie’
to borrow at an interest rate 30 to 40 basis points
lower than if they had been independent firms 300 .
Another issue in the US mortgage market is the size
and influence of the GSEs. Together, Fannie Mae
and Freddie Mac have more than $2 trillion in debt
outstanding, and have guaranteed another $3 trillion
in mortgage-backed securities. In addition, they have
huge derivative positions to hedge their retained
portfolios. Concerns have been raised about possible
systemic risk to the financial system 301 .
297 “The evolving role of commercial banks in US credit markets”, Future of banking study, FDIC, 2004.
298 Note that the market share proportions reported above do take account of the investments of commercial banks and savings institutions in securities issued
in the context of secondary mortgage activity. These indirect holdings were netted off of the market share measures given to avoid overstating the flow of
credit to home-mortgage borrowers.
299 Fannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great
Depression discouraged private lenders from investing in home loans. Fannie Mae was established in order to provide local banks with federal money to
finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. For the first thirty years following its
inception, Fannie Mae held a veritable monopoly over the secondary mortgage market. In 1968, due to fiscal pressures created by the Vietnam War, Lyndon
B. Johnson privatised Fannie Mae in order to remove it from the national budget. At this point, Fannie Mae began operating as a GSE, generating profits for
stock holders while enjoying the benefits of exemption from taxation and oversight as well as implied government backing. In order to prevent any further
monopolisation of the market, a second GSE known as Freddie Mac was created in 1970.
300 “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005.
301 “Housing Finance: best practices from around the world”, IUHF World Congress 2004
115

The residential mortgage market in the US is a largely
securitised market in which government-sponsored
enterprises like Fannie Mae and Freddie Mac are the
driving force. While the GSEs had acquired only 5%
of all mortgage originations by the 1970s, when
mortgage securitisation began in the US, by the late
1990s they had acquired 40% of new originations 302 .
Though GSEs securitise loans on behalf of mortgage
banks, they also originate about 5% of home
mortgages in the US.
Credit to buy residential property represents the
bulk of outstanding credit to households in the EU.
On average, 68% of all credit granted to households
is credit to buy residential property, while 14% is
consumer credit 304 (see table K, table annex). However,
the share of home loans in outstanding credit to
households varied between 40% and close to 90%
in countries of the Eurozone in 2004. With the
exception of Italy, Luxembourg and Austria however,
housing loans represents at least 64% of all lending
to households in countries of the Eurozone.
6.2.2.2 European Union 303
6.2.2.2.1 Home loans in the EU economy
100%
Graph 16: Lending to the private sector in the US and the Euro area, 2004
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Austria
Belgium
Germany
Spain
Greece
France
Finland
Italy
Ireland
Luxembourg
Netherlands
Portugal
Euro area
US
■ Consumer loans
■ Housing loans
■ Other loans to households
■ Business loans
Source: for US data: Flow of Funds Accounts of the Unites States, Board of Governors of the Federal Reserve System;
for EU data: Aggregated balance sheet of euro area monetary financial institutions, excluding the Eurosystem, National Bank of Belgium.
302 “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005.
303 While some EU countries use mortgages, others use home loans that are similar in purpose but are not secured on property. A mortgage loan here is therefore
used in the sense of a loan that may or may not be secured on property.
304 2004 figures.
116

Table 23: Evolution of outstanding housing loans in the EU, 1995-2003 (in € billion)
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03
Germany 433.0 459.7 486.2 526.1 655.7 682.9 704.3 725.1 744.7
United Kingdom 456.5 543.9 644.2 657.0 784.6 882.7 946.8 1,054.5 1,113.2
Netherlands 98.0 115.6 135.7 161.1 190.6 232.3 259.8 282.9 302.4
France 238.2 244.6 251.7 260.9 282.2 301.9 321.1 346.8 381.3
Spain 75.7 85.6 104.3 123.3 145.2 176.7 205.8 235.1 276.0
Denmark 77.2 81.0 88.0 98.1 105.7 111.3 122.0 133.0 144.1
Italy n.a. n.a. n.a. 65.0 80.4 97.0 102.3 126.2 154.1
Sweden 54.6 57.9 58.5 57.2 67.8 70.1 70.9 82.2 93.6
Belgium 48.9 51.6 55.1 60.4 65.8 70.0 69.2 74.5 81.4
Austria 28.8 31.6 33.6 35.5 37.9 41.2 43.4 45.9 56.7
Portugal 15.0 18.9 24.1 32.4 42.2 50.7 57.4 64.8 66.4
Ireland 11.8 13.7 16.4 19.7 24.4 29.3 33.9 43.4 54.6
Finland 16.0 16.2 16.8 19.0 22.0 24.3 27.3 31.0 35.7
Greece n.a. n.a. n.a. n.a. n.a. 11.3 15.7 21.2 26.5
Luxembourg n.a. n.a. 4.2 4.6 4.8 5.9 6.6 7.1 8.3
EU-15 n.a. n.a. n.a. n.a. n.a. 2,787.5 2,986.4 3,273.9 3,539.1
Source: ESBG calculations based on data from EU National Banks, DG BUDG (for the euro exchange rate).
In terms of size, in the EU15 countries approximately
€3.5 trillion ($4.2 trillion) of residential home loans
were outstanding in 2003. These loans represented
38% of EU15 GDP. By way of comparison, total
government debt in the EU15 represents 64.3% of
EU15 GDP 305 .
Outstanding residential home loans as a proportion
of GDP however varies a lot between different EU
countries. In 2003, and for the following countries,
it was as follows: Denmark, 147%; UK, 70%; the
Netherlands, 67%; Spain, 35%; Germany, 34%;
France, 24%; Greece, 17% 306 .
6.2.2.1.3 Lenders of home loans in the EU
There are a number of key lenders in the EU markets
for home loans, including traditional retail banks
such as commercial, co-operative, savings, and
public banks, as well as specialised mortgage banks.
The latter are portfolio lenders, funding their
mortgage assets to a large extent through the issue
of mortgage bonds.
The European market for home loans is dominated by
retail banks. Commercial banks dominate in Italy, the
Netherlands and the UK (where they held respectively
75%, 73% and 70% of outstanding mortgage loan
assets in 2003). Savings and co-operative banks
dominate in France (where together they hold close
to half of all outstanding home loan assets) and
Germany (where they hold 60% of such assets).
Savings banks are the dominant mortgage loan
providers in Spain, holding 55% of home loan assets.
Specialised mortgage lenders issue almost all
mortgage loans in Denmark and Sweden.
6.2.2.1.4 The funding of home loans in the EU
Lenders in the EU fund home loans in either one of
three ways: retail bank deposits from individuals,
loans from banks and corporations through a variety
of debt instruments or funding on the secondary
markets via the issuance of mortgage bonds and
residential mortgage backed securities (RMBS) that
are covered by housing loans.
Lending from retail deposits represents the main source
of home loans in the EU, and make up upwards of
60% of such funding 307 . Meanwhile, mortgage
bonds and RMBS finance respectively 18% 308 and
just over 1% 309 of outstanding EU home loans.
305 ESBG data.
306 ESBG data.
307 “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004.
308 “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005.
309 “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005.
117

Funding by retail deposits represent upwards of 80%
of total residential outstanding stock of home loans
in the UK, France, the Netherlands and Italy 310 .
There are a number of possible explanations as to
why deposits continue to be the most common
funding instrument for home loans in Europe:
35%
30%
25%
20%
15%
10%
5%
0%
There are exceptions though. Germany, Denmark and
Sweden all have substantial mortgage bond markets.
And although RMBS activity in Europe is very low,
MBS markets are becoming quite active in the
Netherlands, Spain, Italy, the UK, Ireland and
Belgium (where new issues of MBS represented,
respectively, 21%, 17%, 15%, 14%, 13% and 13%
of new residential mortgage loans in 2003).
The growing popularity of MBS funding in Europe is
possibly due to customers increasingly seeking
alternative and more lucrative ways to invest their
savings. This growing trend can be seen in graph 17,
which also reveals however that the share of new
mortgages financed via mortgage bonds has declined
between 1998 and 2002. The result of these two
opposing trends for that period can also be seen in
the graph, which reveals that the proportion of
mortgage loans financed with retail and wholesale
funds relative to secondary funding has remained
stable (figures for graph 17 can be seen in table AD
in the table annex).
Graph 17: Share of new mortgages financed
in secondary markets in the EU
1996 1997 1998 1999 2000 2001 2002
1. The high savings rate in a majority of European
countries, providing a huge mortgage funding
source.
2. Retail deposits are a cheap source of funding.
3. Deposits are generally not sensitive to bank rating,
so the costs of deposits will not rise during a
downturn. Contrary to this, if a bank, or its
mortgage bonds, are downgraded or traded at
wider spreads, the returns on mortgage lending
can be severely affected if funding is via RMBS
or bonds.
4. Deposit maturities follow quite well changes in
maturities of home loans triggered by rate changes,
falling when prepayment is triggered by a rate fall,
and increasing as rates rise and maturities lengthen.
5. Covered bonds are only available in certain
European countries.
6. Residential mortgage backed securities are very well
developed in some European countries such as
the UK and Spain, but less so in others. Much of
this disparity derives from a lack of market
liquidity and sophistication on the part of lenders
and investors. This, in turn, is often a function of
the high costs of securitisation transactions in
some countries, which has deterred lenders from
entering this market 311 .
Nevertheless, there is an interest in Europe to look at
ways to further develop the use of capital markets to
fund mortgage loans. The European Commission’s
Forum Group on Mortgage Credit 312 , which brought
together a number of mortgage credit experts to
look at ways to improve the integration of European
mortgage markets, have for instance suggested
exploring the possibility of the development of a
‘liquid and dynamic’ pan-European secondary
mortgage market in Europe 313 .
■ Mortgage Bond Funding
■ MBS Funding
■ Total Secondary Market Funding
Source: “The costs and benefits of integration of EU mortgage
markets”, London Economics, August 2005
310 “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005.
311 Points 3, 4 and 6 from: “Risk and funding in European residential mortgages”, Mercer Oliver Wyman, April 2005.
312 The Forum Group was created by the internal market Directorate General of the European Commission in 2003. The Group included more than twenty experts
from eleven Member States. It was set up to advise the Commission on how to make progress towards a European market for home loans, which would
make it easier for home buyers to save money by choosing mortgage products from lenders anywhere in the EU. National consumers associations, the credit
and insurance sectors, and other stakeholders such as European notaries and chartered surveyors were all represented in the group.
313 See “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004.
118

In its report to the Commission, the Forum Group
acknowledges the existence of a number of
successful domestic funding vehicles 314 in several EU
countries and mentions too the idea of a European
Mortgage Finance Agency (EMFA), modelled on
the examples of the US Government Sponsored
Enterprises Freddie Mac and Fannie Mae, which has
been proposed as a way of replacing what EMFA
considers to be a fragmented European MBS market
with a more standardised pan-European one 315 .
Kreditanstalt für Wiederaufbau (KFW) is the (only) other
existing initiative in Europe which aims to further
develop the use of secondary mortgage markets by
providing a pan-European platform 316 . Like the EMFA,
it functions as the US system in that KFW is 80%
owned by the German government and 20% by one
of Germany’s Bundesländer.
The existence of state guarantees in both these
European initiatives is not a coincidence. These
guarantees mean that while investors take up the
prepayment risk, the credit risk is taken up by the
agencies that guarantee all payments to the
investors. Such a guarantee becomes all the more
important in the context of the pooling of mortgage
loans from different countries. This is because the
multi-origin characteristics of the loans would make
it more difficult for each participating investor to
assess the relative quality of the loans that make up
that pooled portfolio. The question then is whether
the lack of such a (state) guarantee wouldn’t deter
investors from engaging in cross-border lending
activities.
In its conclusions however, the Forum Group makes
clear that it is not in favour of seeing such a model
being replicated in Europe, stating explicitly that it is
opposed to any initiative aimed at introducing any
form of institutional guarantee and support (from
either the EU or national governments) that might
distort competition or create barriers within the
national and European markets.
6.2.1.3 Comparison
6.2.1.3.1 Home loans in the US and EU economies
Credit to buy residential property represents the main
type of credit to households in both the EU and the
US, though the share of home loans to total
outstanding credit does vary quite significantly from
country to country in the EU.
In terms of size, the US market for home loans is
quite a bit bigger than the EU’s, each representing
respectively, €6.1 trillion and €3.5 trillion. The EU
market is also much smaller relative to GDP (38%)
than that of the US (63%) (for comparative figures
from 2000 to 2003, see table AC in table annex).
Nevertheless, some EU countries of the Eurozone
have a similarly high ratio of home loans to GDP as
the US: this ratio is 88% in the Netherlands, 78%
in both Ireland and Portugal and 76% in Belgium.
Thus, arguably some EU countries have similarly
extensive home loan markets as the US.
6.2.1.3.2 Lenders of home loans in the US and
EU economies
While retail banks are the main lenders and players
in the European home loan market, this is not so in
the US, where specialised mortgage banks are the
main lenders, and GSEs the main sellers of mortgage
loans via the secondary mortgage markets.
6.2.1.3.3 The funding of home loans in the US
and EU economies
Retail bank deposits continue to be the largest source
of home loans in Europe. Further, recent trends
reveal that the proportion of outstanding home
loans that is funded via retail deposits has remained
constant in the last two decades.
There are a number of possible explanations (see
main text) why this is so, and why, in spite of very
successful secondary loans markets existing in
certain countries in Europe, funding via secondary
markets remains low, and in the case of MBS, very low.
Trends however also reveal that a growing proportion
of new mortgage loans are funded via MBS.
314 Such as facilities like the French CRH (Caisse de Refinancement de l’Habitat), the Spanish AyT (Ahoro y Titulización), mortgage banks such as Danish
Totalkredit, and the Italian Credit Circle.
315 “The integration of the EU mortgage credit markets”, Report by the Forum Group on Mortgage Credit, European Commission, 2004.
316 KFW has expanded beyond the German issuance that it was created to foster by securitising foreign bank mortgages via its Provide platform ( based in Dublin)
i.e.: for the UK’s egg bank and for the Netherland’s NIB Capital Bank (both in 2003).
119

In sharp contrast, the US mortgage market is largely
a securitised market, where the great majority of
mortgage funding originates from the capital markets.
There have however been some questions over
the future of the US mortgage market, given the
domination of state sponsored enterprises which
benefit from a number of competitive advantages
that distort market prices. It is widely said that the
regulation of the US secondary mortgage market
creates an undesirable government subsidy to
mortgage lending.
Another issue in the US mortgage market is the size
and influence of the GSEs. Together, Fannie Mae and
Freddie Mac have more than $2 trillion in debt
outstanding, and have guaranteed another $3 trillion
in mortgage-backed securities. In addition, they have
huge derivative positions to hedge their retained
portfolios. Concerns have been raised about possible
systemic risk to the financial system.
Looking at the US can give us a number of insights
with regard to the development of secondary mortgage
funding in Europe. If we consider for instance that
the rise of securitisation in the US came as a result of
the consequent lack of capital to finance mortgage
loans following the 1980’s thrift crisis, it could be
concluded, given that there continues to be no such
shortage of capital in Europe, that there isn’t the
same need in Europe for similar extensive securitisation.
In addition, we can consider that the interest rate
instability that triggered the US thrift crisis is not an
issue in Europe today, where low and stable interest
rates have become the norm.
This hasn’t stopped a number of initiatives being
established in Europe to attempt further developing
the use of secondary mortgage markets by providing
pan-European platforms. The two currently in existence
are that of the European Mortgage Finance Agency,
as mentioned above, and that of Kreditanstalt für
Wiederaufbau (KFW), which is currently securitising
retail mortgages of foreign banks via its Provide
Platform.
These two initiatives are in fact very much the
replication of the US GSE system as they both rely
on state backing. The EMFA would function with an
EU guarantee, and KFW is a German bank that is
80% owned by the German government and 20%
by one of Germany’s Bundesländer.
The question is whether any European platform could
exist without a state or state-backed entity to take
up the credit risk, given the difficulty for individual
investors to assess loan quality in multi-origin loan
portfolios.
Yet, as experts in the EU’s Forum Group have made
clear (as reported above) there is no appetite in
Europe either from the Commission, or from experts
in European mortgage credit markets, to have in
place a state-backed system such as exists in the US.
This means that mortgage loans in Europe will have
to continue being funded on the basis of the
financial strength of banks or the intrinsic quality of
the securities.
There is also the added dimension that state aid
in the form of guarantees is in fact outlawed in
the EU 317 .
But if the trend of mortgage funding via MBS is
anything to go by, it could be expected that a
demand lead push could in the future give rise to
increased securitisation of mortgage loans at least at
the level of individual Member States.
This trend could further be accentuated if securitisation
brings the promise of cheaper mortgage funding.
Looking to the US however reveals that in practice,
such results are far from assured. The growth of the
securitisation of mortgage loans in the US has not
narrowed the interest-rate spread between mortgage
loans and Treasury bonds over the years. One possible
explanation is that greater rates of mortgage
prepayment have increased the prepayment risk
inherent in mortgage backed securities contracts,
offsetting any reduction in the cost of financing
mortgage loans 318 .
317 Article 87 and 88 of the EC Treaty.
318 “The costs and benefits of integration of EU mortgage markets”, London Economics, August 2005.
120

6.2.3 Small business/ SME lending 319
6.2.3.1 United States
6.2.3.1.1 The main means of financing small
businesses in the US
Comprehensive and up to date data that directly
measures the financing activities of small businesses
in the US is hard to come by. Commentators on the
financing of small businesses in the US use as their
main data source the Survey of Small Business
Finances 320 (SSBF), which collects information on
businesses with fewer than 500 employees.
This survey, for which the most recent available results
date from 1998, provides the most comprehensive
information on small business finance available in
the US. Though the survey is not recent, its results
are used as the main source of data in a 2002 report
to Congress on the availability of credit to small
businesses 321 , and the report gives the explanation
that “past surveys suggest that the 1998 results should
still provide a good picture of current small business
behaviour because patterns in the use of credit by
small businesses change slowly”. The following
comments are also based on the 1998 SSBF.
Small businesses in the US rely substantially on insider
finance in the form of owner’s capital, owner’s loans,
and retained earnings 322 . Otherwise they roughly rely
equally on both equity and debt, the biggest equity
category being funds provided by the principal
owner (about two-thirds of total equity) 323 .
These are firms with very high growth potential,
often in knowledge-intensive high tech industries,
who principally access the private equity markets for
early-phase financing. External finance as represented
by ‘angel finance’ and venture capital, contributes
around 5% of small business finance in the US 324 .
Looking at private debt in more detail, the results of
the SSBF survey reveal that most small businesses in
the US use traditional types of credit, including loans
taken down under lines of credit, mortgages used for
business purposes, equipment loans, motor vehicle
loans, capital leases, and “other loans.” In 1998, 55%
of small businesses used at least one of these traditional
forms of credit.
Credit lines 325 were the most common traditional form
of credit used by small businesses in 1998. They were
used by 27.7% of all firms and accounted for 34.1%
of the total dollar value of credit outstanding. Motor
vehicle loans were the second most commonly used
type of traditional credit, with 20.5% of all firms
using them. These loans, however, accounted for
only 5.5% of the total amount of outstanding credit
because motor vehicle loans are small compared
with other types of credit.
Approximately 13.2% of all firms had mortgage
loans for business purposes, making this the third
most commonly used type of credit. In terms of
dollar amount, mortgage loans were the largest
form of credit, accounting for more than 35% of
outstanding credit.
For the vast majority of small businesses in the US,
their access to external finance is nearly entirely
limited to the private debt markets. For a relatively
small number of firms, however, the market of choice
for external finance is the private equity market.
319 While there is no single definition of a small business in the US, a broad guideline used by the US Small Business Administration (SBA) is a firm or enterprise
with fewer than 500 employees. In the European Union, SMEs are defined as having less than 250 employees. The analysis that follows therefore compares
small businesses in the US to SMEs in the EU.
320 The Survey of Small Business Finances (SSBF) is conducted by the Board of Governors of the Federal Reserve System. It collects information on small businesses
(fewer than 500 employees) in the United States. Owner characteristics, firm size, use of financial services, and the income and balance sheets of the firm are
just some examples of the types of information collected. Working papers and methodology reports, codebooks and other related documentation, and the
full public data sets are available for the 1998, 1993, and 1987 SSBFs. Results of the 2003 survey had still not been released at the time of writing this study.
321 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
322 “Use of equity capital by small firms – findings from the surveys of Small Business Finances (1993 & 1998)”, Dr Charles Ou, Office of Advocacy, US Small
Business Administration, May 2003.
323 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
324 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
325 Consists of an agreement between a borrower and a lender that permits an extension of credit, up to a certain limit, without having to complete a loan
application for each amount of money borrowed. The borrower may make as many purchases as desired as long as the limit of credit is not exceeded.
121

6.2.3.1.2 Lenders to small businesses in the US
In the US, community banks – which are largely small
to medium sized 326 locally or regionally based banks –
are recognised as being one of the main providers of
finance to small businesses in the US 327 . Community
banks are savings banks, savings and loan associations,
cooperative banks and commercial banks.
Researchers typically treat commercial and industrial
loans over $1 million in size as loans to large businesses
and loans of $1 million or less as loans to small
businesses. According to this definition, community
banks accounted for only 4% of large business loans
in June 2002 but 33% of small business loans –
much larger than their share of deposits (19%) or
their share of assets (15%). For very small business
loans, those of $100,000 or less, the share of
community banks was even higher, at 36% 328 .
Of the community banks that offer credit to small
businesses, it would appear that savings institutions,
defined as savings banks and savings and loan
associations, provide much less credit to small
businesses than commercial banks do 329 . Only 3.4%
of small businesses obtained credit from a savings bank
or a savings and loan association. Commercial banks
in the US are the leading providers of credit to small
businesses, supplying credit lines, loans, and leases
to slightly more than two-thirds of small firms that
obtained a traditional form of credit from any source 330 .
Among non-depositories, finance companies supplied
credit to 13.8% of small firms, leasing companies to
6.8%, and family or other individuals to 6.1% 331 .
6.2.3.1.3 The challenges to small businesses
seeking financing in the US
Lending to small businesses is generally considered
riskier and more costly than lending to larger firms.
Small businesses are much more affected by swings
in the economy and have a much higher failure rate
than larger operations. In addition, lenders historically
have had more difficulty determining the creditworthiness
of applicants for some small business loans.
Small firms are also vulnerable because of their
dependency on financial institutions for external
funding. These firms simply do not have access to
public capital markets. As a result, shocks to the
banking system can have a significant impact on the
supply of credit to small businesses 332 .
Another concern with regard to loan financing of a
number of small firms is their dependency on small
banks such as community banks to finance them.
This is due in part to the special abilities of the
community banks in that market. There are a
number of reasons that explain this, among which a
good knowledge of the local markets, and the
advantage that such banks have over larger, more
centralised, credit institutions in developing long
term relationship lending with borrowers. Such an
approach in banking is often important in the case of
SME loans, as it is frequently the case that SMEs have
little or no collateral or credit history. A bank that
has served a customer over a long period will have
the advantage however of already knowing the loan
applicant and his business, and may therefore be
better able to assess the risk in providing a loan to
such a borrower.
Part of the reason why certain small businesses are
dependent on community banks to finance them is
also because of the reluctance of large banks to do so.
Large banks may choose to avoid such ‘relationship
lending’ because these banks are more often
headquartered at a substantial distance from potential
relationship customers, aggravating the problems
associated with transmitting soft, locally-based
relationship information to senior bank management.
Consistent with this, a recent theoretical model
predicts that relationship lending diminishes with
“informational distance,” or the costs of generating
borrower-specific information, which is likely to be
associated with physical distance 333 .
326 Community banks share the following two key characteristics – they are small in size and do most of their business in the community in which they are located.
Because those characteristics tend to go together and size is easy to measure, common practice is to define community banks as those below a certain
threshold. One of the thresholds most used by banking analysts is $1 billion in total banking assets. Most community banks in the US have assets of less than
$1 billion (see www.acbankers.org).
327 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
328 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003.
329 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003.
330 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
331 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
332 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
333 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
122

Empirical evidence also exists which supports the view
that large banks are less likely to make relationship
loans. A number of studies have revealed the
following insights: 1. large banks tend to devote
lower proportions of their assets to lending to small
businesses 334 ; 2. small business loans that are made
by large banks tend to be to larger, older, more
financially secure businesses; 3. large banks tend
to base their small business loan approval decisions
more on financial ratios and less on the existence of
a prior relationship than small banks; 4. small business
loans made by large banks have lower interest rates
and lower collateral requirements than the small
business loans made by small banks, consistent with
transactions-based loans to relatively safe small
businesses by the large banks 335 .
The relationship between bank size and the extent to
which banks engage in small business lending may
therefore have implications for the availability of
credit to small firms. Substantial consolidation in the
banking industry over the past twenty years has
dramatically reduced the number of banks,
increasing the importance of large banks and the
concentration of industry assets. Given that large
banks tend to be proportionately less committed
than smaller banks to small business lending, these
changes to the structure of the industry have raised
concerns about possible reductions in the availability
of credit to small businesses in the US.
Indeed, when analysing the effect of mergers on the
small business lending activities of the banks directly
involved in those mergers, a number of studies have
found that deals involving at least one large bank
tend to reduce small business loans as a share of assets,
whereas deals between two small banks tend to
increase small business loans as a share of assets 336 .
And looking at a breakdown of commercial bank
mergers and acquisitions between 1985 and 1999
reveals that while 55% of all such deals involved two
community banks, 40% involved a large or mid-sized
bank as acquirer and a community bank as a target 337 .
As we know from the economic section of this study,
industry concentration has increased in the last two
decades, with the consequence that today, there are
fewer community banks in the US. The number of
banks (excluding credit unions) in the US with assets
of less than $1 billion has declined from 14,078
banks at the end of 1980 to just 7,631 banks at the
end of 2001, and the share of industry assets held by
these small banks fell from 33.4% to just 16% 338 . All
these findings highlight the fact that the lack of
funding to SMEs in the US is indeed an important
current issue.
Other studies have looked at the “external” effect of
mergers on financing to small businesses by looking
at what happens to small business lending at banks
that compete directly with recently merged institutions.
Findings have revealed that a growing amount of
credit may be supplied by banks that compete with
recently merged banks 339 . Though one might take
comfort from such results, it is likely that the overall
pool of credit to small businesses in the US has been
negatively impacted by mergers and acquisitions,
unless of course the “external” effects of these deals
somehow lead existing and de novo banks to supply
as much or more lending to SMEs than acquired
banks did.
6.2.3.1.4 Securitisation of small business loans
in the US
As noted already above, few small businesses in the
US currently have recourse to the capital markets for
funding. Though it is recognised that the securitisation
of small business loans is a development that could
substantially influence the availability of credit, such
securitisation has so far been modest, and recent
developments suggest that the volume of securitised
small business loans is unlikely to increase over the
next several years 340 .
334 The average banking organisation with $1 billion or less in total assets held almost 20% of its portfolio as small business loans in June 2001. In contrast,
organisations with assets between $1 billion and $10 billion held 13.6% of their assets as small business loans, and the largest organisations—those with
assets greater than $10 billion—held less than 8% of their assets as such loans (“Report to the Congress on the Availability of Credit to Small Businesses”,
Board of Governors of the Federal Reserve System, September 2002).
335 References to the studies leading to these conclusions can be found in "Small Business Credit Availability and Relationship Lending: The Importance of Bank
Organisational Structure", Berger and Udell, Economic Journal, 2002.
336 See for instance “Bank Consolidation and Small Business Lending within Local Communities”, K. Samolyk and C. A. Richardson, Working Paper 2002-02,
Federal Deposit Insurance Corporation; “Bank Consolidation and the Provision of Banking Services: The Case of Small Commercial Loans”, R.B. Avery, K.
Samolyk, Working Paper 2000-01, Federal Deposit Insurance Corporation, 2000.
337 “The challenges facing community banks: in their own words”, R. DeYoung and D. Duffy, 4Q 2002.
338 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004.
339 “Youth, Adolescence, and Maturity of Banks: Credit Availability to Small Business in an Era of Banking Consolidation,” R. DeYoung, L. G. Goldberg, and L. J.
White, Journal of Banking and Finance, February 1999.
340 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
123

The securitisation process requires a certain level
of standardisation so that the loans which are
packaged into a security can easily be analysed by
investors. The difficulty with securitising small credit
loans however is that loan terms and conditions are
not homogeneous, underwriting standards vary
across originators and information on historical loss
rates is typically limited.
The information problems associated with small
business loans can be overcome or offset to a degree
by some form of credit enhancement mechanism.
However, the more loss protection needed to sell the
securities, the smaller are both the net proceeds
from the sale of the securities and the incentive for
lenders to securitise their loans. Small business loans
are an asset for which the high transaction costs of
providing credit enhancements have made many
potential securitisations unprofitable.
Because relationship lending is based on soft
information that is difficult to observe, verify, or
transmit, it could be said that relationship lending is
in fact antithetical to securitisation 341 .
Most of the small business loans that have been
securitised to date in the US have involved
the guaranteed portion of loans made under the
Small Business Administration’s 7(a) Loan Guaranty
Program 342 . Between 1999 and 2001, roughly $3.2
billion of slightly less than $7 billion of such loans
was securitised.
These securitisations have been fairly common because
they do not involve the risk and information
impediments typically associated with the securitisation
of small business loans 343 . Securitisations of the
unguaranteed portion of SBA 7(a) loans have
been much less common, equalling roughly 10% of
such credit.
With regard to the market for securitisations of
conventional (non-SBA) loans, almost $4 billion in
such loans were securitised between 1994 and 2001.
However, these volumes are small relative to the
total amount of small business loans that could be
securitised.
As of June 2001, banks held roughly $450 billion of
small business loans outstanding, and the 1998 SSBF
suggests that this figure corresponds only to roughly
65% of all small business lending. Therefore, the
total amount of small business loans outstanding was
roughly $700 billion. A small portion of these were
SBA-guaranteed loans. Even though many of these
loans would probably be unsuitable for
securitisation, the relative magnitudes of all small
business loans made and those that have been
securitised indicate that securitisation of conventional
small business loans has been modest 344 .
While government subsidisation of a secondary
market for small business loans could reduce funding
costs to small businesses whose loans are securitised
and increase the total number of small business
loans granted, in some cases, such a policy would
encourage the securitisation of relationship loans
with a resulting loss of relationship benefits. Thus, in
considering such a policy, the social benefits would
have to be weighed against the possibility that many
relationship loans are likely not to be securitised, and
the ones that are securitised may lose many of the
benefits associated with relationship lending 345 .
6.2.3.2 European Union
6.2.3.2.1 The main means of financing SMEs 346
in the EU
No statistics exist in Europe giving details on the exact
proportions of total SME finance that is external
and internal finance or loan and equity finance.
However, it is generally recognised with regards to
SME financing – in spite of the fact that financing
systems in Europe vary between a bank-based
system, as in Germany and Austria, and a market
based financial system, as in the UK – that loan
financing remains very much the main source of
external finance across Europe. Indeed, according to
the European Commission, equity finance is not even
regarded as a financing option by the majority of
European small enterprises 347 .
341 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
342 The Small Business Administration helps secure financing for small businesses. The general SBA loan program is officially known as the 7(a) Loan Guarantee
Program. This means the SBA guarantees business loans rather than makes them.
343 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
344 “Report to the Congress on the Availability of Credit to Small Businesses”, Board of Governors of the Federal Reserve System, September 2002.
345 “Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure”, Berger and Udell, Economic Journal, 2002.
346 The European Commission defines SMEs, small and medium sized enterprises, as including all enterprises with 250 or less employees, €50 million or less in
turnover or €43 million or less on the balance sheet.
347 “Microcredit for small businesses and business creation: bridging a market gap”, European Commission, December 2003.
124

According to the Observatory of European SMEs 348 ,
while the importance of bank borrowing does vary
between different countries in Europe, the majority
of SMEs depend on bank financing and this state
of affairs is not expected to change in the near
future 349 . It adds further that there seems to be a lack
of alternative funding sources.
In terms of the proportion of SME funding in Europe
that is equity finance, this can be assessed by looking
at information on the equity ratio of smaller
enterprises included in the Bach database of the
European Commission 350 . The data reveals that
there is no clear link between the equity ratio and
firm size. In some countries (like Austria, Denmark,
Finland, Germany, and Spain) the equity ratio of
small enterprises is lower than in medium-sized
enterprises. In other countries it is higher (like
Belgium and France) 351 .
Regarding bank financing, the Grant Thornton
European Business Survey 352 gives an indication of
the different types of debt finance used by SMEs in
Europe (see table P in table annex). In the majority of
Member States these enterprises use mainly bank
loans. In terms specifically of bank financing, apart
from bank loans SMEs use overdrafts to finance their
activities. In general, overdrafts are more expensive,
but often preferred by enterprises because of
their higher flexibility 353 . Nevertheless, the use of
loans in European Member States usually exceeds
that of overdrafts.
Leasing is increasingly used in Europe. The average
penetration of leasing is estimated to be about 12%
in the European Union, and this form of financing
seems to be particularly important in Italy, Sweden,
Germany, United Kingdom and Portugal. In Spain,
France, Luxembourg, the Netherlands, and Portugal
leasing is used more often than overdrafts.
90%
Graph 18: Percentage of SMEs using debt financing in EU-15, by country
80%
70%
60%
50%
40%
30%
20%
10%
0%
Belgium
Denmark
■ Overdraft
■ Leasing
■ Factoring
■ Bank Loan
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finalnd
Sweden
United Kingdom
European Union
Source: Grant Thornton, The European Business Survey, London, 2001.
348 The Observatory of European SMEs was established by the Commission in December 1992 in order to improve the monitoring of the economic performance
of SMEs in Europe. Its task is to provide information on SMEs to policy-makers, researchers, economists and SMEs themselves.
349 “SMEs and Access to Finance”, 2003 Observatory of European SMEs, European Commission.
350 This database includes balance sheet details for enterprises in a large number of Member States.
351 This commentary comes from “SMEs and Access to Finance”, 2003 Observatory of European SMEs, European Commission.
352 The Grant Thornton European Business Survey reports on the business expectations and trends among small and medium sized enterprises in all 15 EU
countries plus Malta, Norway, Poland, Switzerland and Turkey. Conducted by Grant Thornton International and Business Strategies Ltd., it has been produced
annually since 1992.
353 “Enterprises’ access to finance”, Commission Staff Working Paper, European Commission, October 2001.
125

Factoring is also continuously gaining importance
in Europe. About 11% of SMEs in Europe use
factoring, but considerable differences can be
observed between countries.
6.2.3.2.2 Lenders to SMEs in the EU
In many parts of Europe, regional banks have played
a fundamental role in the growth of local economies.
The centralised structure of commercial banks makes
the cost of assessing and monitoring loans to small
firms too high in relation to the returns, thus leading
banks to ration credit to this category of potential
customers 354 .
In many Member States, such regional banks as the
savings banks are the key providers of banking loans
to small businesses.
Though no publicly available data exists to reveal the
differences in the proportion of bank lending which
is offered to SMEs between commercial and noncommercial
banks in Europe, both savings banks and
cooperative banks have a longstanding tradition in
serving the needs of such firms as SMEs have always
been considered an important customer segment by
these types of banks.
Savings banks in Europe provide not only loans to
SMEs, but also a number of services, such as support
to new enterprises by placing in-house start-up advisors
at their side, or via the provision of technical assistance.
Savings banks in Spain, France and Germany have
even gone as far as to set up special SME bank
branches to provide a quality comprehensive service
tailored to SMEs’ specific needs. They also operate
special centres that assist and inform SMEs about
markets, new business or tax-related promotions, and
run special programmes to promote the creation of
innovative local companies. Joint projects have also
been established to take advantage of technological
developments, leading to outcomes such as computer
programmes adapted to SME needs.
In Germany for example, 75% of SMEs have a banking
relationship with a savings bank or a Landesbank,
and for almost 60% of the enterprises savings banks
are their main banking partner or "Hausbank".
According to estimates, savings banks in Germany
account for nearly 43% of loans to SMEs (2005) and
this market share is as high as 70% for small
businesses with a turnover below €500,000.
In addition, in the last few years more than half of all
business start-ups in Germany were financed by the
institutions of the Sparkassen-Finanzgruppe. The group
provides support through its 90 private equity
companies, and also through regional development
and private equity/venture-capital companies as well
as via events which it sponsors such as “Going Public”
or the “StartUp” competition.
Taking another example, the Austrian savings banks
facilitate a number of credit actions for SMEs. In
particular, the focus is on the initial launch stage of
companies. One scheme put in place by Austrian
savings banks which has existed for a number of
years is the ‘Go! Gründeroffensive’ 355 which provides
assistance for the creation of companies and extends
support to newly created firms. Regular workshops
are also organised in all the Austrian regions in order
to provide training to entrepreneurs.
In Sweden, Swedbank, the European Savings Banks
Group’s Swedish member, is the country’s largest
business bank and works with a third of the
country’s small and medium size companies.
6.2.3.2.3 The challenges to small businesses
seeking financing in the EU
The future of funding to SMEs in the EU is an
ongoing concern. The European Commission has
itself looked into ways of improving access to
finance for European SMEs 356 , recognising the
importance of bank financing for SMEs, and
expressing fear that changes in the bank sector, such
as bank mergers and the closure of bank branches,
may affect SME funding 357 .
354 The importance of regional banks in funding small firms in Europe was recognised in a study funded by the UK’s Economic and Social Research Council,
entitled: “Europe's Advantage: Banks and Small Firms in Europe and Britain”, by Dr. Francesca Carnevali, September 2005.
355 See http://www.go-gruendercenter.net.
356 See http://europa.eu.int/comm/enterprise/entrepreneurship/financing/publications_documents.htm.
357 See page 9 of “Microcredit for small businesses and business creation: bridging a market gap”, Enterprise publications, European Commission, November 2003,
where it is said that “The banking sector is undergoing major adjustments due to the merger dynamics, the search for profitability and the economic
downturn, which might have an impact on their relationship with small entrepreneurs. The closure of local branches by many banks across Europe might also
have an impact on banks’ ability to get accurate information about local small businesses”.
126

Such fears have also been echoed elsewhere, for
instance by the European Investment Bank which
recognises that consolidation in national banking
markets may be detrimental to SME lending “since
there is evidence that large banks devote a lesser
proportion of their assets to small business loans
in comparison to small, often regional, banks” 358 .
The EIB also highlights the fear that SME lending
could be impacted by the evolution of capital
markets and institutional investors competing with
banks for savings in the economy, as they commit
less of their lending to SMEs than banks do 359 .
Anecdotal evidence of the fear that large commercial
banks in Europe could in fact be cutting down their
SME lending is highlighted by the European
Commission, citing the German financial press 360 .
It adds in the same paper that “even in those countries
where the banking sector is characterised by few
banks with limited networks, individual local banking
relationships remain important [in SME funding].
In the UK in 1999, 70% of small businesses visited a
branch at least weekly and 8% visited daily”.
Given the above, the existence of evidence
indicating that banking consolidation is likely to
affect access to banking services through branch
rationalisation and/or price increases, and also the
quality of such services through the reduction of
services and/or the loss of customer relationships 361 ,
is a particular concern with regards to the future
funding of European SMEs.
The loss of the customer relationships typical between
SMEs and the types of banks that cater for them, as
described above, has in fact been a significant concern
with regards to SMEs’ access to finance in Europe.
As highlighted above, many SMEs depend, for their
funding, on a close relationship with a bank, allowing
the latter to acquire the kind of expertise about the
firm’s credit-worthiness which it would be impossible
or too costly to obtain otherwise. This kind of
‘relationship lending’ is, according to commentators,
widespread in Europe, especially with SMEs 362 .
The European Central Bank has itself expressed
concern on a decrease of the availability of relationship
lending in Europe. The indicators which it highlights
include a rate of growth of real loans to the private
sector which is below that of output growth, a
phenomenon only observed recently. It adds too that
such a decline coincides with large commercial banks
reducing the scale of their retail banking because
competition from local savings banks has intensified.
Further, it points to evidence that the banks which
have been involved in mergers tend to limit the scale
of their relationship lending activities 363 .
The significance of these observations are further
put into perspective by the ECB, who recognises the
importance of relationship lending as a means of
insulating firms from the effects of changes in the
market interest rates, and hence contributing to a
smoother business cycle. It goes as far as to say that
“this may contribute to explain why business cycle
fluctuations have traditionally been larger in the US
and the UK, where relationship lending is limited, than
in continental Europe, where relationship lending is
thought to be prevalent” 364 .
The extent to which large commercial banks are
retreating from the lending business has been
assessed in Germany by the German savings banks,
which conducted a research among their loan officers
in the spring of 2001. 60% of respondents reported
an unusual increase in demand for new accounts by
SMEs in the preceding three months, giving evidence
of more than 1,800 requests from SMEs as a
consequence of private banks’ withdrawal (through
open refusal or reduced service quality). The research
also revealed that the withdrawal of commercial
banks is most noticeable in rural or structurally weak
areas, and affects especially smaller SMEs 365 .
358 See “SME Finance in Europe: introduction and overview”, EIB Papers, volume 8 n°2, 2003.
359 “SME Finance in Europe: introduction and overview”, EIB Papers, volume 8 n°2, 2003.
360 “Enterprises’ access to finance”, Commission Staff Working Paper, European Commission, October 2001.
361 “Banking Consolidation in the EU: Overviews and Prospects”, R. Ayadi and G. Pujals, CEPS Research Report in Finance and Banking No 34, May 2004.
362 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
363 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
364 See speech by Otmar Issing, Member of the Executive board of the European Central Bank, at the Second ECB Central Banking Conference “The Transformation
of the European Financial System”, 24-25 October 2002.
365 “The future of European retail banking markets”, ESBG research, June 2003.
127

6.2.3.2.4 Securitisation of small business loans
in the EU
An exhaustive study 366 on SME securitisation in
Europe commissioned by the European Commission
and recently published gives a very detailed and clear
insight on that area of SME financing. It reports that
total European SME asset-backed securities 367 (ABS)
issuance over the period 1999 to June 2004 was
€24.57 billion, representing approximately 10% of
the total ABS issuance in Europe in the same period.
Even making an allowance for some portion of the
collateralised debt obligations 368 (CDO) segment
being SME backed loans, the report adds that it
seems unlikely that ABS backed by SME claims
currently exceeds 5% of the new issuance market.
Taking into consideration the whole of the securitisation
market in Europe, the report states that the level of
SME securitisations is extremely low at current levels.
It further comments that the European securitisation
market is dominated by residential mortgage-backed
securities, which represented 74% of securitised
bank assets in 2003, while in comparison SME assetbacked
securities represented only 1% of total bank
assets securitised in 2003.
Referring to the proportion of SME loans in bank
balance sheets, the study estimates that only between
1 and 2% of such loans have been securitised 369 .
It can therefore be concluded that the SME
securitisation market in Europe at the moment
remains insignificant.
In addition, it would seem that the bulk of SME
securitisation in Europe has been via programmes
including state backing.
The two major markets for SME securitisation are
Germany and Spain, and the majority of activity to
date in European SME securitisation has been in
Germany via the KfW Promise programme, and in
Spain through the use of special purpose investment
companies known as FTPYMEs, which is the acronym in
Spanish for Securitisation Funds for Small and Mediumsized
Enterprises. The volume of new issues that have
been completed in those two markets since 1999
were €11.45 billion and €7.07 billion respectively.
KfW Bankengruppe is specialised in loan securitisation
(see section on home lending), and in 2000 it
created a dedicated SME loan securitisation platform
called Pomise. The FTPYME programme is supported
by the Spanish Government.
On a pan-European level, another public sector agency,
the European Investment Fund 370 (EIF), plays an active
credit enhancement role in SME securitisations.
The EIF manages the EU Commission resources under
the Multi-Annual Programme (MAP) programme,
which is a framework plan of activities which, among
other things, is focused on improving the financial
environment of European enterprises, especially
SMEs. The role of the EIF in this programme is to
manage a number of schemes that are geared
towards achieving this aim.
With regard to securitisation of SME loans, the EIF
provides credit enhancement of lower rated
securitisations by guaranteeing them. Total risk
assumed by the EIF is €1.5 billion 371 .
The majority of SME European securitisation has
occurred when cost saving enhancements were
available from public sector agencies. The view
expressed in the study on European SME securitisation
is that it would be reasonable to infer that these
interventions have stimulated SME securitisations,
which would not otherwise have occurred, or at least
not in the same volumes. The study adds: “yet these
cost savings, although offered by KfW and EIF
throughout the EU, have apparently not offered
sufficient inducement for originators in other major
EU markets to securitise SME portfolios”.
366 “Study on asset-backed securities: impact and use of ABS on SME finance”, GBRW Limited for the European Commission, November 2004.
367 Asset-backed securities are debt securities backed by the collateral (the security) of a pool of ring-fenced assets.
368 CDOs are securitised loans and debt securities (and therefore a type of ABS), typically pools of banks’ loans to larger companies, but they also include some
SME portfolios.
369 “Study on asset-backed securities: impact and use of ABS on SME finance”, GBRW Limited for the European Commission, November 2004.
370 The European Investment Fund (EIF), based in Luxembourg, was established in 1994 as an off- shoot of the European Investment Bank (EIB), which owns 60%
of EIF. 30% of EIF is owned by the European Commission, and the remaining 10% by a variety of banks. The EIF describes itself as “the EIB Group’s specialist
in SME finance.” The EIB is the financing institution of the European Union. The members and shareholders of the EIB are the Member States of the European
Union, who have all subscribed to the Bank's capital. The EIB enjoys its own legal personality and financial autonomy within the Community system. The EIB's
mission is to further the objectives of the European Union by providing long-term finance for specific capital projects in keeping with strict banking practice.
371 “Study on asset-backed securities: impact and use of ABS on SME finance”, GBRW Limited for the European Commission, November 2004.
128

Attempting to explain the absence of interest for
SME securitisation in both France and the UK,
the study comments that for the former, a report
concluded that the absence of interest in the SME
asset class by French banks was attributable at least
in part to the relative funding and capital strengths
of the French banking system. The authors then add
that the same would also hold true for the UK.
The study concludes that public sector activity in
aiding SME securitisation does provide incentives,
though adding that these are not at such a level that
they have noticeably affected market activity across
the EU as a whole, or attracted the attention of banks
that have a wide(r) range of securitisation options.
It adds too that “given the uneven development of
SME securitisation across the EU, it is considered
premature to commit, at this time, other than a
measured share of SME support resources for
securitisation investments. Consequently, flexibility in
the allocation of public resources between various
EU support programmes in SME finance (within a
budgeted total) should be sanctioned so that
resources could be switched to securitisation
investment should the take-up and leverage exceed
current expectations”.
6.2.3.3 Comparison
For SMEs in Europe (defined by the European
Commission as firms of 250 or less employees) and
small businesses in the US (defined by the Federal
Reserve as being firms of less than 500 employees),
banking finance is the most important type of
external finance, mainly in the form of loans, but
also in the form of overdrafts/credit lines. In contrast,
external equity financing represents a small part of
funding for small enterprises in both markets.
In terms of the types of banks which provide SME
loans, commercial community banks in the US and
savings as well as cooperative banks in the EU are
important providers of loans to SMEs, and regard
SME lending as a major area of activity.
There are a number of reasons that explain this,
among which a good knowledge of the local markets,
and the advantage that such banks have over larger,
more centralised, credit institutions in developing
long term relationship lending with borrowers.
Such an approach in banking is often important in
the case of SME loans, as it is frequently the case
that SMEs have little or no collateral or credit history.
A bank that has served a customer over a long period
will have the advantage of already knowing the loan
applicant and his business, and may therefore be
better able to assess the risk in providing a loan to
such a borrower.
Financing SMEs is not only a major activity, and
therefore of importance, for such banks, but it is also
a vital activity in the context of the economies of
both the US and the EU. In the US, small businesses
account for just over half of private sector output
and employment and provide two-thirds to threequarters
of net job growth 372 . In Europe, over
99 % of European enterprises are small and
medium-sized, and they are responsible for two
thirds of the total employment 373 .
The European Central Bank has also recognised
the importance of the type of lending typified by
banks that are important providers of SME loans,
‘relationship lending’, as a means of insulating firms
from the effects of changes in the market interest
rates, and thus important in maintaining a stable
economic cycle.
This explains why so much concern has been
expressed on the future of financing SMEs in the
EU and small businesses in the US. The challenges
to such enterprises are the same in both markets.
The growing concentration of the banking sectors
in both the EU and the US as consolidation has
intensified has led a number of commentators,
not least in Europe the European Central Bank and
the European Commission, to voice concern over the
possible disappearance of the types of banks that
fund enterprises or, indirectly, to express fear of the
loss of the relationship lending methods employed
by such banks to fund enterprises. Evidence of the
(growing) reluctance of large banks to finance
enterprises has also been reported in both markets.
372 “Small Business by the Numbers”, U.S. Small Business Administration, Office of Advocacy, 2002.
373 “Enterprises’ access to finance”, Commission Staff Working Paper, European Commission, October 2001.
129

The above fears can hardly be allayed by the
promises of securitisation of SME loans in either
region. In both the US and the EU, in spite of state
guarantee programs for SMEs being in operation in
both regions, SME securitisation issuance is very low.
The annual volumes of small business securitisations
in recent years in the US have amounted to much
less than $1 billion. Surprisingly, this is in fact much
smaller than SME securitisation volumes in Europe.
The total volume of new SME securitisation issues in
the period 1999-2002 was of the order of €17
billion for Europe, and equivalent to only €2.5 billion
for the US 374 .
Many reasons explain this state of affairs, among
which the fact that the characteristics of SME loans
make it difficult or even prohibitively expensive to
securitise them. In some countries of Europe, like the
UK and France, the belief is that the absence of
interest in securitising SME assets is a result of the
funding and capital strengths of the banking system.
In any case, if government subsidisation of a secondary
market for such loans encourages the securitisation
of relationship loans, with a corresponding loss in
relationship benefits, the securitisation of SME loans
may add to the problem of SME/small business
access to finance, rather than help resolve it.
6.3 Payments comparison
6.3.1 Payments in the US
6.3.1.1 Market participants
6.3.1.1.1 The Federal Reserve Bank
As a consequence of the Federal Reserve Act of 1913
(FRA), the Federal Reserve Bank has responsibilities in
conducting monetary policy and providing payment
services to deposit taking institutions. The payment
services of the Federal Reserve Bank include:
Under the Monetary Control Act of 1980 the Federal
Reserve Bank is required to charge for certain payment
services provided to deposit taking institutions (such
services include cheque collection, ACH processing,
Fedwire, the National Settlement Service). The Federal
Reserve Bank charges must be set in such a way
that the long term costs of providing such payment
services are fully covered (also taking into
consideration the impact of de-facto cost of capital
and relevant taxation).
Monetary policy is formulated and implemented through
the Federal Open Market Committee. The Federal
Reserve Bank of New York, on behalf of the Federal
System, executes the relevant open market operations.
6.3.1.1.2 Financial intermediaries (other than
the Federal Reserve System)
In total over 10,000 depository institutions provide
payment services in the US. Since the late 1970s the
former regulatory restrictions as to the type of services
that thrift institutions could provide have been
largely repelled. Payment services are now also
provided by “non-bank banks” also called “limited
service banks”, such as bank card companies or the
United States Postal Service.
The presence of these relatively new actors represents
a challenge on the legal front, according to the
Federal Reserve Bank, who acknowledges that
“Our retail payments laws are antiquated, difficult to
interpret and hard to change. Both technical
innovation and the role of non-bank participants in
US retail payment systems have evolved much more
quickly than the law has changed” 375 . Indeed, for the
time being, non-bank payment service providers tend
to be subject to State law rather than Federal law,
which may lead to differences in requirements and
levels of customer protection in case of problems.
- the distribution of currency and coins,
- the collection and return of cheques,
- the electronic transfer of funds and securities,
- including the processing of ACH payments,
- the provision of a national settlement service.
374 “Study on asset-backed securities: impact and use of ABS on SME finance”, GBRW Limited for the European Commission, November 2004.
375 Speech by Pat Barron, First Vice President and Chief Operating Officer, Federal Reserve Bank of Atlanta, 19th June 2005, Santiago, Chile.
130

6.3.1.2 Retail and commercial payments
The table below summarises the evolution of the
volumes of cashless retail and commercial payment
transactions in the US, by type of payment instrument
or channel:
Table 24: Annual volume of non-cash payment transactions in the US (billion transactions - estimates)
2000 2004 Av. % change p.a.
Credit transfers (1) (2) 4.3 5.1 6.0%
Direct debits (1) 2.4 5.8 25.0%
Cheques 41.9 34.8 -5.0%
Debit card transactions 8.3 19.4 24.0%
Credit card transactions 15.6 19.1 5.0%
ATM cash withdrawals n.a. 5.9 n.a.
Total cashless transactions n.a. 90.1 n.a.
Excluding ATM cash withdrawals 72.5 84.2 4%
Excluding cheques and ATM cash withdrawals 30.6 49.4 12.5%
Sources: 2004 Federal Reserve Bank Payments Study; March 2006 BIS-CPSS "Statistics on payment and settlement systems in selected countries".
(1): Credits and debits processed according to ACH rules.
(2): "EBT" (Electronic Benefits Transfers) transactions have here been added to credit transfer transactions.
Overall, the volume of US retail and commercial
cashless payment transactions grew by about 4%
p.a. between 2000 and 2004 (on a like for like
comparison, i.e. excluding ATM cash withdrawals).
This moderate growth rate – somewhat higher than
the growth in real Gross Domestic Product, yet lower
than the growth in real personal consumption
expenditure – hides significant differences between
the various payment instruments:
- Cheques: once the US payment instrument of
choice. In 2004 they still accounted for nearly 41%
of cashless payment instruments (excluding ATM
cash withdrawals), compared with a 58% share in
2000. Although the average rate of decline was
5% p.a., the much higher than anticipated actual
decline which had been accelerating year on year
seems to have reached a plateau in 2003 and
2004. Experts conjecture whether this is a trend
likely to continue. These figures however refer to
cheques paid (by depository financial institutions),
not to the sum of cheques written. Indeed
consumer cheques are increasingly converted – at
the point of sale by agreement between the
merchant and the customer – into electronic
debits through the Automated Clearing House
(ACH) network.
This conversion fuels to some extent the growth
in ACH debit transactions, although the total
volume of debits is still smaller than the overall
decline in cheque volumes, which points to a
genuine migration to other types of payment
instruments. It is estimated that currently consumers
migrate more rapidly to other instruments than
business does.
- Cards: the US was also once touted as the
country of the credit card. This image will need
revision in the very near future, as debit card
transactions grew strongly between 2000 and 2004
at 6 times the average growth rate for all cashless
payment instruments, and now outperform credit
card transactions (not taking into consideration
proprietary store cards).
With more US issuers constantly deploying chip and
PIN-based debit card solutions, this is a trend which
is likely to continue. It should be noted however that
up to now most of the growth has been in off-line
debit. With so far a very limited deployment of the
EMV security protocol, this area looks like a tempting
target for fraudsters.
131

- ACH credits and debits: the statistics from the
Federal Reserve Bank merely consolidate credit
and debit transfer transactions processed
according to the rules of the ACH network
(actually by NACHA, the National Automated
Clearing House Association). In this category too,
one will notice that debits enjoy a far more rapid
growth than credits, admittedly fuelled by a
certain volume of cheque conversion applications.
This rapid overview clearly shows that the US retail
and commercial payments market is undergoing
profound change, with greater structural shifts in the
position of payment instruments than had been
observed for decades. It is interesting to note that
none of these “newly favored” payment instruments
(be it debit transfers or debit cards) builds on any
new technology (if we exclude here the development
of contactless cards, a promising advance yet still
marginal in terms of total transactions). On the
contrary the technology underpinning these payment
instruments has also been around for decades.
That they now find rapidly greater acceptance is due
to a change in customer preferences, induced on
one side by a growing reliance on home and
electronic banking channels (in 2004 89% of
households used an electronic method as one of
their main ways of conducting banking business), on
the other by concerted efforts of the banking
regulator and the banking industry to dematerialise
payments in order to decrease payment systems
costs, contribute to fraud reduction, and increase
overall economic efficiency.
The biggest driver for change of course could be
provided by the “Check Clearing for the 21st
Century Act” (or “Check 21”) enacted in 2003 and
which became effective in 2004. This law facilitates
the move to electronic exchange by allowing cheque
collecting banks to discontinue the paper flow and
exchange electronic images of the cheque instead. If
required by the account owner this cheque image
can be converted back to a paper document called a
substitute cheque which then enjoys the same legal
status as the original cheque. While Check 21 beyond
doubt contributes to cost reductions, as today the
end customer product is often still paper-based,
some believe that bigger changes (including the
discontinuation of cheque usage altogether) are yet
to come.
These preliminary considerations would have
benefited from the availability of more statistical
data, in particular as regards on one side the number
of cash transactions (compared to non-cash
transactions), and the local or regional patterns that
exist within the US as regards the use of the various
payment instruments and channels. Regarding cash,
as an indication, there were at the end of 2004
banknotes and coins in circulation (i.e. issued by the
Federal Reserve and Treasury) for a total value of USD
754 billion (of which USD 35 billion were coins) – or
USD 245 per capita. This compares with €550 billion
banknotes in circulation in the eurozone – or €176
per capita. These figures only provide a relative
indication, due to the varying amounts of cash which
are hoarded, and not circulating from an economic
perspective. However, given ceteris paribus the
similarity of these figures, this would allow the
assumption that for the purpose of this comparison
the influence of cash can be ignored.
6.3.1.3 Settlements of high value transactions
in the US
6.3.1.3.1 Real time gross settlement system
The Federal Reserve System owns and operates
“Fedwire”, a real time gross settlement system
which allows participants in the system to settle with
finality in Central Bank money. Payments to the
receiving participant are final and irrevocable.
In 2004 there were some 125 million Fedwire
payments effected by 9,500 participants for a total
value of USD 470 trillion. Fedwire pricing conforms
to the cost recovery principles laid down in the
Monetary Control Act.
6.3.1.3.2 The National Settlement Service
The Federal Reserve System also allows participants in
private clearing arrangements (in 2002 over 70 cheque
clearing houses, the ACH network with two operators
as well as bank card processors) to settle with finality
transactions on a net basis using accounts held at
the Federal Reserve. During 2004 the netted value
settled topped USD 20 trillion for over 15 billion
transactions processed.
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6.3.1.3.3 CHIPS
The privately owned and operated CHIPS (Clearing
House Interbank Payment Systems) combines
functionalities of real time final settlement (during
the operating day, for payments queued and
matched, using participants’ pre-funded positions
deposited via Fedwire) with an end of day
multilateral net settlement process for remaining
payment orders. In 2004 there were over 68 million
CHIPS payments effected by 63 direct participants
for a total value of USD 346 trillion.
6.3.1.4 Clearing of retail and commercial
transactions in the US
Three types of clearing mechanisms are in operation:
- Cheque clearing: approximately 70% of cheques
paid in the US are “not on us” and are cleared
either through direct exchange, through some 66
local cheque clearing houses, through corresponding
bank networks, or through one of the Federal
Reserve Bank’s 45 cheque clearing centres (to be
consolidated into 22 centres this year).
- The Automated Clearing House: it clears batches
of electronic credit and debit transfers instructions
according to the rules set by NACHA. There are
two operators: the Federal Reserve, and the
privately owned EPN. In 2004 the ACH network
processed over 12 billion transactions, a 21.4%
increase compared to 2003.
- Card networks: there are some 40 credit card,
ATM or POS associations providing transaction
authorisation and interbank financial settlement
to their members.
It is worth noting at this point that in most cases
in the US there appears to be, at industry association
or scheme level, a de-facto separation between rulemaking
activities and actual operational functions
(supported by market operators complying with
set rules, yet in competition with each other as
regards the provision of relevant services to
market participants).
6.3.2 Payments in the European Union
6.3.2.1 Market participants
6.3.2.1.1 National Central Banks and
the Eurosystem
In the European Union, conducting monetary policy
operations and overseeing payment systems is the
responsibility of National Central Banks (NCBs) at
national level and of the Eurosystem, led by the
European Central Bank, at eurozone level. As regards
payment systems, eurozone policies are coordinated,
as far as practically possible, between the Eurosystem
and the National Central Banks from non-eurozone
countries, all represented within the European
System of Central Banks (ESCB).
As recently as early August 2005 the Eurosystem
issued a policy statement (to which the National
Central Banks of the European System of Central
Banks that are not members of the Eurosystem also
subscribe) in which it spells out its position as regards
the “provision of retail payment services in euro to
credit institutions”, as follows:
- It confirms that one of the main tasks of the
Eurosystem is “to promote the smooth operation
of payment systems…” and that it may “provide
facilities to ensure efficient and sound clearing of
payment systems”.
- It states that “Individual national central banks
may provide processing facilities for retail
payments in euro for credit institutions, either via
participation in private retail payment systems or
acting as operators of their own retail payment
systems”…”they may also facilitate access to
payment systems for all credit institutions”.
- It also states that “…in order to avoid competitive
distortions or a crowding-out of market initiatives,
NCBs which offer retail payment services to credit
institutions take due account of the requirements
and competitive environment of the market place
concerned, including cost recovery”.
133

6.3.2.1.2 Financial intermediaries (other than
National Central Banks)
Under current regulatory and legislative dispositions,
payment services can usually be provided either by
financial institutions which fall under the dispositions
of the Second EC Banking Directive, or those regulated
by the e-money Directive. Transposition of these
Directives into the national legislation of EU Member
States may however at times cause differences of
interpretation, meaning that depending on the country
of supervision a range of institutions may or may not
act as a financial intermediary.
Under a legislative proposal prepared by the
European Commission and currently under review by
the European Parliament and Council (for enactment
into national legislation provisionally by 2008 at the
latest), many other institutions than those covered by
the Second Banking Directive could in the future be
allowed to provide payment services, provided they do
not take deposits. However, the proposed legislation
still requires a great deal of clarification, notably
as regards the distinction between deposit taking
activities, the acceptance of funds in transit when
making or receiving payments on behalf of endcustomers,
and the protection of such funds in case
of payment service provider bankruptcy, or otherwise).
Equally a process to review the e-money Directive was
launched by the European Commission in July 2005.
6.3.2.2 Retail and commercial payments
in the European Union
Note that in this section we are referring exclusively to
the pre 2004 enlargement EU, composed of 15, as
opposed to the current 25, Member States. The reasons
for this limitation are twofold: first, the cashless
payment instruments used in the new Member States
show an (even more) extreme level of diversity,
second, overall the 10 new Members States only
account for 4% of the total volume of non-cash
payment transactions.
The table below summarises the evolution of the
volumes of cashless retail and commercial payment
transactions in the EU, by type of payment instrument
or channel:
It should be noted that the exchange of payment
instructions between customers of different European
Union Member States (up to now referred to as
“cross border” payments with the EU) represents a
mere fraction of overall EU payment instructions.
According to the latest research conducted in this
field (McKinsey 2002), intra-EU payment instructions
represent 1.3% of total EU payment instructions.
In addition, cards account for 83% of these “cross
border” payment transactions, and are used at point
of sale in 90% of these situations.
Table 25: Annual volume of non-cash payment transactions in the EU (billion transactions)
2000 2004 Av. % change p.a.
Credit transfers 15 18 5%
Direct debits 12 16 8%
Cheques 9 7 -6%
Debit card transactions * 10 16 13%
Credit card transactions 3 4 9%
ATM cash withdrawals 8 10 6%
Total cashless transactions 57 71 6%
Excluding ATM cash withdrawals 49 61 6%
Excluding cheques and ATM cash withdrawals 40 54 8%
Source: European Central Bank Blue Books
(*): E-money transactions included - overall volumes of the latter are very small though.
134

It should also be observed that the euro was
introduced on 1st of January 2002 as the single
currency for 12 out of 15 of the pre enlargement
Member States of the European Union (the Members
not having converted their currency are Denmark,
Sweden, and the United Kingdom – although Sweden
has “opted in”). Therefore such “cross border”
transactions will not be subject to any specific
consideration in this rubric.
The following remarks can be made as to the overall
evolution of the usage of various payment instruments
in the European Union:
- Overall cashless payment transactions have been
growing at an average annual rate well outpacing
both growth in real Gross Domestic Product and
growth in real personal consumption expenditure.
- Cheques: it is probably a mere coincidence that
the average decrease rate for cheques is fairly
similar (5% vs 6%) in the US as in the EU over the
period under consideration. Indeed cheques are
far less used in Europe (10% of market share of
total cashless payment instruments) than they are
in the US (39%), and such usage is pretty much
concentrated in three large or relatively large
payment countries (France, Spain, United Kingdom).
At any rate, the usage of cheques is expected to
continue its decline, as cheques are substituted by
other payment instruments, both for face-to-face
and remote transactions (although due to
regulatory arrangements in a country such as
France banks have currently little option but to
continue and issue cheques).
- Cards: in Europe many national debit card
schemes have been built on the foundations of
ATM schemes, and debit cards continue to enjoy
growing acceptance, at twice the average growth
rate for non-cash transactions (ATM withdrawals
excluded). Credit cards grow at one and a half
time that rate, and many experts consider this
instrument ripe for far higher growth rates in the
future, as many European countries today are
mostly debit card countries.
- Electronic credits and debits: direct debit
transactions are growing at one and a half time
the annual rate for credit transfers. As significant
growth for direct debits can also be witnessed in
countries which have no cheque tradition, (most of)
this growth is genuine and not fuelled by migration.
For the time being, all direct debit transactions are
“national”, as no “cross-border” direct debit
scheme is yet in operation (in the absence of
commonly accepted and enforceable rules).
Beyond the above consolidated figures there are some
very distinct national situations and usage patterns.
Countries where cheque usage has fully or virtually
disappeared (Austria, Belgium, Denmark, Finland,
Germany, Greece, Luxembourg, Netherlands, Spain,
Sweden) can be presented in two groups:
Countries where cheque usage
has fully or virtually disappeared
and where card usage (either credit or debit)
is high (over 50% of all non cash transactions,
ATM withdrawals excluded)
Denmark
Greece
Luxembourg
Sweden
Countries where cheque usage
has fully or virtually disappeared
and where credit and/or debit transfer usage
is high (over 50% of all non cash transactions,
ATM withdrawals excluded)
Austria
Belgium
Germany
Spain
Italy
Netherlands
135

It should be noted that two of the largest countries
in terms of payment transactions i.e. France and the
United Kingdom (which respectively represent 21.2%
and 21.5%, or together nearly half of all EU cashless
payment transactions) do not appear in either category,
because they still boost a significant number of
cheques transactions, as well as credit or debit card
transactions, and electronic credits or debits (each
representing close to one third of each respective
country’s total national payment transaction volume).
It is clear that there are rather different patterns of
payment instrument usage across the various EU
countries. These patterns are caused by a number of
reasons, including legislation, habits, history and culture.
One may however query whether and how these
patterns would evolve, if the principle of payments
instruments (including cash) competing for customer
acceptance on the basis of transparent pricing, and
in a context of similar rules and consequences, was
generally accepted and implemented.
6.3.2.3 Settlement of high value transactions
in the European Union
6.3.2.3.1 Real time gross settlement systems
Currently in every Member State the National
Central Bank owns and operates a real time gross
settlement system which provides settlement finality
to banking institutions supervised by that Central
Bank. These independent systems are interlinked (for
eurozone and non-eurozone countries as well) by
the TARGET system, which allows the provision of –
almost – real time settlement for participants operating
within two national Real Time Gross Settlement (RTGS)
systems. There are over 10,000 direct participants in the
initial 15 Member State RTGS systems. During 2004
these national RTGS systems together processed
over 69 million payment instructions (an increase of
3,9% over 2003) for a combined value of €444 trillion
(an increase of 6,4% over 2003).
Plans for migration in the last quarter of 2007 and
the first quarter of 2008 to a “Single Shared Platform”
(also called TARGET2) have been published by the
Eurosystem. As stated by its name, TARGET2 would
replace the current individual national systems, yet
still allow a level of flexibility for how National
Central Banks organise their relationship with banks
under their jurisdiction (the details of that flexibility
are currently being finalised).
Furthermore the non-eurozone countries (Denmark,
Sweden, the United Kingdom, as well as the 10 new
Member States) each operate a real time gross
settlement system to settle their own national
currencies. Each new Member State is committed
under the Adhesion Agreement to introduce the
euro and consequently the relevant national Central
Banks will join the TARGET system (the first one to
do so will be Slovenia on 1 January 2007).
6.3.2.3.2 Net settlement systems
In addition three countries (Finland, France, and Spain)
each operate a large value settlement system in euro
for (in total over 680 direct and indirect) participants
of their respective national banking communities.
These systems are either strict net settlement systems
(Spain), or combine features of multilateral netting
and gross settlement (Finland), or features of
bilateral netting and real time gross settlement
(France). During 2004 these three systems in total
processed 8,63 million payment instructions (a
decrease of 16% compared to 2003) for a (stable)
combined value of €18,2 trillion.
On a non-national basis the EURO1 system of the
Euro Banking Association (EBA) provides settlement
in euro on the basis of a “single obligation” contract to
over 70 direct participants. In 2004 EURO1 processed
over 44 million payment instructions for a combined
value of €44 trillion.
6.3.2.4 Clearing of retail and commercial
transactions in the European Union
Across the 15 initial Member States there are some
18 retail and commercial payment clearing systems,
owned and operated either by banking communities,
or by a National Central Bank, or jointly. In addition
the EBA operates a retail clearing capability (STEP2)
which currently handles cross-border payment
instructions within the EU yet is expected to process in
the near future some “national” transactions as well,
when smaller national clearing houses cease operation
as the Singel Euro Payments Area is being established.
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The existing clearing systems provide clearing and
settlement services for electronic payment instructions
and cheques to a combined total of over 11,000
direct and indirect participants (not counting third
parties e.g. corporates who may input payment
instructions directly into a system yet under the
responsibility – “sponsorship” – of a direct participant).
In 2004 these systems processed a combined total of
over 25,6 billion payment instructions for a
combined value of €25 trillion (note: no figures were
available for the Netherlands).
6.3.3 Initial considerations as regards
the US and EU payments markets
At first glance any comparison between the US and
EU payment systems would seem unfair. Indeed, even
if the populations concerned are of a somewhat
similar size (294 million in the US vs. 386 million in
the EU15) this is about comparing payment systems
which have evolved out of completely different
historical, legal, regulatory, practice, market and
pricing structure legacies.
In addition one market has been relying on a single
currency for over 200 years, whereas the other
market has not only – partially – just migrated to a
wholly new, single currency, but also it is not
constituted of a single payments market, but of the
consolidation of 15 national markets, all with their
own legacies. Nevertheless, drawing a comparison is
tempting, as we are dealing with the two largest
cashless payment areas in the world, and as the
European Union has embarked on the SEPA (or
Single Euro Payments Area) project aimed at
delivering the same level of ease and convenience for
customers regardless of the location in the European
Union where they make and receive payments.
The table hereafter provides a summary of the
relative weight of each payment instrument in each
area, as well as the respective growth rates for
these instruments over the period under review
(2000 to 2004).
Relative weight (%) Respective growth rates (%)
of each payment instrument (2004) over 2000 – 2004 period (average over period)
US EU US EU
Credit transfers 5.7 24.5 6 5
Debit transfers 6.4 22.8 25 8
Cheques 38.6 10.4 -5 -6
Debit card transactions 21.5 22.8 24 13
Credit card transactions 21.2 5.9 5 9
ATM cash withdrawals 6.5 13.6 n.a. 6
Total cashless transactions 100 100 n.a. 6
Excluding ATM cash withdrawals 93 86 4 6
Excluding cheques and ATM cash withdrawals 54 77 12.5 8
Note: this comparison assumes that the number of cash transactions per capita in the US and the EU are comparable.
Evidence to that effect – or to the contrary – is not readily available.
137

Assuming that technology, globalisation, customer
requirements as well as regulatory and legal
obligations continue to drive a gradual convergence
across countries and continents of the types of
payment instruments being used, assuming as well
that cash’s favour will erode over time, what could a
future snapshot of EU and US retail and commercial
payment systems be
To try and answer that question, we have elected to
take as benchmark the country which a) already today
boosts the highest number of cashless payment
transactions per inhabitant (ATM withdrawals being
excluded), b) has already over the past decade taken
decisive steps to optimize the role of cash in society,
and c) has the reputation of rapidly implementing
new technology in payment solutions (e.g. mobile
payments, electronic bill payments,…). This country
is Finland. The table below compares the US and
US numbers per type of payment transaction and
per inhabitant to those of Finland, and derives
theoretical “gaps”:
Assuming that the overall population remains stable
(which is not necessarily true, as we know that the
US, notably thanks to the direct and indirect effects
of migration, see their population grow more rapidly
than the European Union), and that the average
growth rate for cashless payments (excluding ATM
withdrawals and cheques) remains stable as well,
the US could already reach the compounded figure
of 69 billion (i.e. 238 cashless transactions per capita,
times the area’s population) of such transactions
suggested by the number of transactions per
inhabitant of the “benchmark” country in the course
of 2007 (i.e. within three years). The European Union
(limited for the purpose of this exercise to the
15 Member States as existing prior to 2004) would
not reach the figure of 92 billion (i.e. 238 cashless
transactions per capita, times the area’s population)
transactions any earlier than 2011 (i.e. it would need
seven years).
Payment transactions Payment transactions Payment transactions
per inhabitant per inhabitant per inhabitant
per annum (2004) per annum (2004) Gap vs. per annum (2004) Gap vs.
in Finland (“the benchmark”) in the US “benchmark” in the EU “benchmark”
Credit transfers 110 17 -93 45 -65
Debit transfers 16 20 4 42 26
Cheques 0 119 119 19 19
Debit card transactions 97 67 -30 42 -55
Credit card transactions 15 65 50 11 -4
ATM cash withdrawals 42 20 -22 25 -17
Total cashless transactions 280 308 28 184 -96
Excluding ATM cash withdrawals 238 288 50 159 -79
Excluding cheques and
ATM cash withdrawals 238 169 -69 140 -98
In the present historical and economic context, these
considerations lead to raising two questions:
- The US have been traditionally presented as a
payment area still relying to a great extent on paper
for conducting retail and commercial payment
transactions. The above summary shows that this
assertion has become less true in recent years, and
that the US growth rate for genuine electronic
payment transactions (i.e. excluding ATM withdrawals
and cheques) outpaces the European
Union growth rate by 1,5 to 1 (12,5% vs 8%).
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Assuming that a shift towards efficient instruments
can be achieved (as suggested as a hypothesis
in the table immediately above), what types of
economies of scale can be achieved by US banks,
payment schemes and operators Would such
economies be all passed on to US customers, or
would they be (partly) used to finance banks’,
card schemes’ and operators’ expansions abroad,
and notably in the European Union
- Banking payment communities in the European
Union have for a long time taken pride in the high
level of efficiency and customer friendly instruments
and payment solutions that they have developed.
This pride was justified. However, in this post-euro
phase, regulators have began exerting pressure
on the banking industry to establish a Single Euro
Payments Area (SEPA), which would deliver core
customer payment functions in 2008, with a full
migration from current national solutions ideally
completed by the end of 2010. Some regulators
have been pressing to include as many technological
changes and innovations into this migration to
pan-European payment instruments as possible.
Some regulators also expect the economies of
scale to be reaped from the accompanying
standardisation to be fully passed on to
customers. Because of the present focus on SEPA,
the European payment industry should however
not lose sight of the developments currently
underway outside the European Union, and decide
from a market participant perspective the level
and the pace of the migration to undertake, and
which alliances to form in order to accompany
that migration.
6.4 Distribution channels in retail banking
6.4.1 United States
6.4.1.1 The bank branch
As reported in the economic section of this paper,
though the number of credit institutions in the US
has decreased significantly in the last couple of decades
(by 44% between 1985 and 2003, and by 22%
between 1995 and 2003), the number of branches
of credit institutions has in fact been increasing: from
89,509 branches in 1995 to 99,807 in 2003, an
increase of 12%. This increase has in fact been
driven by growth in the branches of commercial
banks (19% over that same period), since the
number of branches of savings institutions has
actually fallen over that period, while that of the
credit unions has remained stable (see table 2 in the
economic comparison).
On a per capita basis, as we reported also in the
economic comparison, the total number of branches
per 1 million heads of population has remained stable,
with 336 branches recorded in 1995 and 343 in 2003.
Looking at commercial banks alone however reveals
that they grew their branch network over that period
by nearly 10% (see table B in table annex).
It isn’t known exactly why the number of (mainly
commercial) bank branches has grown to such an
extent in the US in spite of significant decreases in
the number of credit institutions. There exists enough
anecdotal evidence however to suggest first of all
that banking executives still regard the bank branch
as an essential distribution channel, and second that
many also regard having a wide retail network as a
competitive necessity in the US today.
A 2004 survey 376 of bank executives in the US
conducted by The Economist publication goes some
way to explaining the nature of the importance of
bank branching in the US, as well as the reasons for
recent growth in bank branches there. It reports on
‘WaMu’, once a Seattle thrift, which has recently
risen to rival with Wells Fargo for leadership of
the national mortgage market in the US by buying
1,000 branches in the last 4 years.
376 “Trust me, I’m a banker: survey on international banking”, 15th April 2004, The Economist.
139

The report adds: “although it bought its way to the
top rank, it now grows mainly by opening new
branches”, and also quotes Kerry Killinger, WaMu
Chief Executive, as saying that “when it started doing
this about five years ago, no one thought branching
made much sense. Among big banks the fashion then
was to steer customers towards the telephone and the
internet. Branches were old hat.” WaMu, according to
the report, planned to open 250 branches in 2004.
The report also quotes Todd Thomson, Chief Financial
Officer of Citigroup, as saying: “What we understand
is that stores are good,” and “People like to go to a
real physical presence. It feels safe. It feels solid.”
Bank One's head of retail banking, Charles Scharf, is
also quoted as saying that his bank has been adding
branches for the first time in five years. In another
part of the report, it gives cross-selling as the reason
why Bank One has spent so much on opening new
branches, refurbishing old ones and adding 1,000
‘relationship bankers’.
The report also mentions the case of Commerce
Bank in the US, which has grown at an annual rate
of 30% in like-for-like (organic) sales in the last two
years, and has opened 179 outlets in the last five
years, with plans to have 700 branches by 2009.
6.4.1.2 Complementary channels
An important innovation which had a powerful
impact on retail banking in the US in the 1990’s was
the Automated Teller Machine (ATM). The number of
ATM’s in the US increased considerably from 1997 to
2003: by 125% (see table R in table annex). Being a
relatively new invention in the history of banking
(ATMs were first introduced in the mid 70’s), it’s not
possible to directly compare growth in ATMs and
growth in branches, although the continued increase
in bank branches suggests that ATM’s haven’t replaced
branches so much as to complement them (for growth
in ATMs in the US, see table AF in the table annex).
Another recent innovation in retail banking has been
internet banking. The estimated number of internet
banking users in the US (2002 figures) varies from 17
million (eMarketer) to 30 million (Fulcrum analytics),
with trade associations such as the American Bankers
Association calculating some 20 million users,
corresponding to about 15% market penetration 377 .
The Pew Internet & American Life Project 378 has
reported that 32% of all American internet users
have used online banking. The advantages cited by
consumers include convenience, cost savings, time
saving, better control over finances, privacy and the
ability to access more information 379 .
Looking to the future, internet banking is expected
to grow: one study of online banking traffic forecasts
that the adoption of online banking in the US will
increase from 4% to 6% annually, reaching 50% of
banking households by 2007 380 .
To take individual bank examples of internet banking
use, as of 2002, Bank of America had 15 million
active checking accounts, 4 million of which were
accessed on a regular basis via the internet. The bank
has experienced an increase in the amount of bills
paid online of 50% between 2001 and 2002, to 1.3
million account holders. Similarly, Wells Fargo had
approximately 9.9 million checking accounts in
2002, 3.3 million of which were regularly assessed
online. Further, research conducted by Wells Fargo
revealed that account holders who bank online had
a 50% lower attrition rate, typically held higher
balances and saw significantly higher growth in their
balances than traditional customers. In other words,
these were better, long term customers whose
business easily paid a handsome return on the bank’s
web site development expenses 381 .
Such examples are in fact representative of what has
become the principle model of internet banking, and
which is commonly referred to as the “click and mortar”
model which combines a transactional internet site
with the traditional brick-and-mortar bank offices
and/or ATM networks 382 .
377 “Internet Banking Update”, C. Goldfinger, European Commission’s Financial Internet Working Group, September 2002.
378 The Pew Internet & American Life Project produces reports that explore the impact of the internet on families, communities, work and home, daily life,
education, health care, and civic and political life. The Project aims to be an authoritative source on the evolution of the internet through collection of data
and analysis of real-world developments as they affect the virtual world.
379 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004.
380 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004.
381 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004.
382 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004.
140

In its most extreme form, there are a relatively small
number of internet-only banks that offer their
services exclusively on the internet. As of July 2002
there were just 20 such internet-only operations in
the US. Approximately another dozen internet-only
institutions have failed, been acquired or have
voluntarily liquidated, and in addition several large
banks integrated their internet-only units into the
main bank after poor stand-alone performance 383 .
The prevailing view is that online banking is unlikely
to replace the bank branch as the main means of
conducting retail banking business. Instead, what
has been suggested is that the most successful banks
will be those that take full advantage of the stability
of traditional, branch based operations in combination
with the growing popularity of internet-based
banking services 384 . Such a strategy commonly entails
the following:
- Integration of bank branches, call centres and
internet-based offerings to consumers, providing
choices of place and method of banking services.
- Communication of a seamless brand identity and
level of service throughout branches, ATMs and
web sites.
- A broad offering of fee-generating services and
products that are presented and positioned in a
coordinated manner that will satisfy a customer’s
need for time-saving convenience and thorough
service and follow-through.
This would also suggest that the internet is more an
opportunity, rather than a threat, to relationship
banking. For instance, there have been suggestions that
thanks to the internet, large banks, mutual funds,
and brokerage companies can now seek deposits in
smaller communities without having a physical
branch or office there. This would mean that in such
communities, relationship banks such as community
banks could lose some deposit customers because
the lower costs of online companies allow them to
offer more favourable rates. Community banks could
also lose other customers who prefer the convenience
of online banking 385 . However, a more optimistic view is
that relationship banking, along with bank branching,
will always be highly valued by a certain proportion
of banking customers, especially in certain customer
segments such as small business lending.
The opportunity is therefore there for banks such as
community banks to use the internet to offer greater
convenience and choice of financial service to their
customers, while continuing to provide person-toperson
contact through brick-and mortar offices.
6.4.2 Europe
6.4.2.1 The bank branch
As already reported in the economic section of this
study, the total number of credit institutions operating
in the European Union has fallen considerably in
recent years, with numbers declining by 41% between
1985 and 2003. Parallel to this fall however, Europe
experienced a slight increase in bank branches, from
173,152 branches in 1985 to 186,009 in 2003, an
increase of 7.4%. The equivalent increase in bank
branches between 1995 and 2003 is less than 1%
(see table in the economic comparison for the
evolution of the number of bank branches in the EU,
per Member State).
On a per capita basis, there were 495 branches per
1 million inhabitants in 1995 in compared to 485 in
2003 (see table D in table annex).
A number of surveys have assessed the importance
of the branch in European retail banking. One 2005
branch banking survey 386 reveals that 70% of retail
financial sales come via branches in Western Europe.
Another survey 387 conducted in 2004 revealed
that 79% of customers in 6 European countries
(UK, Germany, Spain, Netherlands, Denmark and
Switzerland) still prefer to buy current and savings
account products from a branch rather than from
other sales channels, and also that 78% prefer
the branch for purchasing mortgages and 60% for
life insurance.
In addition, the preference for the branch doesn’t
seem to be eroding with time. A survey conducted
in 2001 388 already revealed that almost 80% of
European consumers state that a personal visit to a
branch is their preferred method for dealing with
banking products.
383 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004.
384 “Major trends in the financial services industry”, Plunkett Research Ltd, 2004.
385 “The role of Community Banks in the US Economy”, Federal Reserve Bank of Kansas City, 2003.
386 “Branch banking in Western Europe 2005”, Lafferty, 2005.
387 2004 branch banking survey of 600 European banking customers by Booz Allen Hamilton.
388 Datamonitor, Impact 2001 Survey.
141

Graph 19: Use of different distribution channels
in banking in some selected EU countries
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Many banks are likely to see their existing branches
undergo a shift from convenience to excellence as
they specialise in providing more value added, expert
services while the more mundane tasks are taken
care of by electronic channels 391 .
6.4.2.2 Complementary channels
The number of ATMs in the EU grew by 52%
between 1997 and 2003. Looking at table R in the
table annex reveals that growth was particularly high
in Greece, the UK and in Portugal, and that all
countries in the EU 15 experienced positive growth
in that period, with the exception of Finland.
0%
Germany
Spain
■ Telephone
■ Mail/Fax
■ Internet
■ Branch
■ No response
France
United Kingdom
Italy
Sweden
Europe
Online banking is not a particularly popular distribution
channel in Europe. Looking at table AG in the table
annex reveals that it is only the third most commonly
used means to purchase or arrange banking services
in Europe. Of European consumers with internet
access, slightly more than one-quarter banked online
in 2001 392 .
Source: Datamonitor survey, impact 2001.
Further, banks in Europe increasingly recognise that the
financial benefits associated with improving branch
service make it a key business priority. In a 2005
branch banking survey 389 , 73% of retail bankers
interviewed expressed viewing branch service as
more important or significantly more important than
it was three years ago. This explains why in the last
few years Western European banks have invested
heavily in trying to transform often ageing cost
centres into profitable sales outlets with many
borrowing the ideas of successful retailers 390 .
Such is the importance of having a branch presence
in Europe that the prediction has even been made
that some standalone internet banks will soon move
to establish some form of branch presence, and also
that these new branches may not appear in the form
with which we are currently familiar, as tie-ups with
retailers are likely.
In Sweden, for example, SkandiaBanken has launched
a new online bank in partnership with the Coop
supermarket chain, which will involve it developing a
presence in supermarkets.
A distinct feature of European internet banking
however is the persistence of significant regional and
national differences, as follows 393 :
Scandinavian banks maintain their leadership both in
terms of market penetration and technological
sophistication. Thus, Nordea can boast of a customer
penetration rate of 29% (over 3 million customers)
and an integrated range of services including payment
and lending, securities brokerage and insurance.
In Germany, the biggest banks (DeutscheBank, HBV
and Commerzbank) serve more than 20% of their
customers on line, capitalising on the early passion
of German consumers for online brokerage.
UK banks, particularly the largest ones such as Barclays,
Halifax or Lloyds TSB, accelerated the deployment of
their online offerings in response to the perceived
competitive threat from newcomers such as Egg.
French banks continue to convert their wellestablished
customer base of first generation on-line
banking (Minitel) to the internet.
389 “Improving branch service: a priority for change”, Finalta, March 2005.
390 “Branch banking in Western Europe 2005”, Lafferty, 2005.
391 “Branches still rule banking in Europe”, M. Pastore, November 2001.
392 Datamonitor, Impact 2001 Survey.
393 Source: “Internet Banking Update”, C. Goldfinger, European Commission’s Financial Internet Working Group, September 2002.
142

Dutch banks, particularly ING, are strongly committed
to internet banking, not only in the Netherlands but
across Europe. In June 2002, ING announced that its
internet banking arm, ING Direct, had welcomed its
4 millionth customer, thus becoming the largest
internet bank in the world. ING Direct operates in
Canada, Spain, Australia, France, the United States,
Italy and Germany.
While southern Europe is lagging in the penetration
of internet banking, this basically reflects a low
internet access in countries such as Italy, Spain and
Portugal. However, while Italian banks appear
generally reticent towards internet banking, this is
certainly not the case for the Spanish banks, which
have been very active and quite innovative in their
strategies and product deployment.
6.4.3 Comparison
The importance of the branch as the primary distribution
channel in both the US and the EU is evident, not only via
the statistics revealing the growth of branch banking in the
last two decades, but also via the proportion of customers
that express a preference for the branch and the comments
of the retail banking executives on the importance of having
a branch centred retail banking strategy. Whatever the retail
banking strategies of a few years ago, it would seem
therefore that most banks today, whether in the US or the
EU, have realised that reducing the branch network is not a
strategic option.
In terms of the numbers of branches in the US and the EU,
while the EU has twice the number of branches (186,009
in the EU compared to 99,807 in the US), translating to
485 branches per 1 million inhabitants in the EU compared
to 343 for the US, the growth in the number of branches
has been much more significant lately in the US than the EU,
with respective growth rates for each of 12% and 1%
between 1995 and 2003.
What is interesting about both the US and the EU is that
the number of branches has continued to increase in spite
of the significant decline in the number of banks and
the significant growth in the number of ATMs. This goes
to show that ATMs are indeed seen as a complimentary
channel to the retail branch, as opposed to a substitute.
The same can be said about online banking. The prevailing
view today is that internet banking can only succeed if it is
thoroughly integrated within the existing infrastructure,
which should combine click and mortar. Under this view,
internet is considered as another distribution channel,
complementing the physical branch, phone banking and
ATM networks.
6.5 Issues of competition in retail banking
6.5.1 United States
The share of domestic debt funded by banks in the US has
declined over the years. For instance, while three decades
ago, 30% of US domestic debt was funded on commercial
bank balance sheets, it now stands at 20%. Also, commercial
bank loans now account for only 60% of short-term
borrowing by non-financial businesses, compared with 75%
in the mid-1970s 394 .
This decline occurred in parallel with a dramatic increase in
the extent to which lending to households and even
businesses became securitised. Advances in the application
of information technologies in the financial-services industry
have driven down the costs of securitisation, making it
increasingly feasible to standardise, unbundle, and
repackage credit flows and risks; thus, many of the loans
that used to be funded by traditional lenders are funded
instead in securities markets.
In order to assess the evolution of credit financing by US
banks, the Federal Deposit Insurance Corporation reports 395
on the areas which have been traditionally funded by banks.
Considering first of all the role of banks in funding shorterterm
non-mortgage business borrowing 396 , commercial banks
now fund around half of such credit, as against 75% in the
early 1970s. The share funded by finance companies (nonbanks)
has steadily increased, now accounting for 20% of
shorter-term non-financial business-sector credit, as against
around 10% in the early 1970s. ABS issuers, who did not
exist 20 years ago, have also made inroads in this market,
although they account for only 6 percent of it at present.
Commercial paper, which is also a type of short-term nonmortgage
business borrowing, accounts for only 7% of the
US short-term business credit market, in spite of the fact that
it has often been cited as an alternative to bank borrowing.
394 “The evolving role of commercial banks in US credit markets”, Future of banking study, FDIC, 2004.
395 “The evolving role of commercial banks in US credit markets”, Future of banking study, FDIC, 2004.
396 Which includes all non-mortgage loans to non-financial businesses—from vehicle or equipment loans to business credit lines. It also includes the very liquid
commercial-paper issues that fund only the largest corporations.
143

In terms of funding of the business mortgage market,
commercial banks now directly fund more than a third of
outstanding business mortgages, up from 20% two
decades ago. Private ABS issuers are now the second biggest
providers of business-mortgage funding, accounting for
15% of the market. Meanwhile, direct funding by savings
institutions has declined significantly (savings institutions
hold less than 8%, compared with 22% twenty years ago).
In terms of the types of business loans being extended by
banks, there has been a notable shift from shorter-term
non-mortgage business loans to loans collateralised by
business real estate.
The FDIC study also reports on household-sector credit,
which includes both mortgage credit and consumer credit to
households.
Home mortgage credit market shares are already reported
and commented on earlier in this chapter, under the section
on mortgage credit, where the dramatic loss of market share
of savings institutions to mainly mortgage banks and
government-sponsored entities is explained, and where the
market share of commercial banks is said to have remained
stable in the last 30 or so years.
In terms of consumer credit, commercial banks fund around
a third of the market (compared to around half the market
in the 70s), with ABS issuers also funding about a third.
The rest of the market is made up of credit unions and
finance companies, which each originate around 15% of
the market’s loans, while savings institutions fund about
3%. As in business mortgages, ABS issuers have risen to
represent key players in the consumer credit market, when
20 years ago they did not exist.
Another sector that has grown market share as a funder of
the non-financial sector is the mutual-fund industry. Of course,
since mutual funds hold securities rather than loans, their
growth represents less direct competition than the growth
of federally related mortgage pools and ABS issuers for
the types of lending that make banks special-loans to
households and businesses.
The above makes clear the extent to which US domestic debt
has moved from being funded via traditional intermediation
to being funded through direct credit markets. However, it
only partially explains the role of banks in providing funds,
as it does not recognise the importance of the services
provided by US banks to facilitate funding in securities
markets. The same FDIC study highlights the role of banks
in providing services in originating, servicing, or enhancing
the creditworthiness of credit flows that end up being
funded elsewhere. It then considers the contribution that
such assets, which are not booked on a bank’s balance
sheet, make to the income of banks. Noting that the share
of net operating revenue from non-interest income of
commercial banks has more than doubled since 1980, the
study reveals that about 18% of non-interest income
reported by banks in 2001 reflected fees for servicing assets
funded elsewhere and securitisation income.
The study concludes that although commercial banking’s
on-balance-sheet activity has declined as a piece of the
credit-market pie, the industry's off-balance-sheet activities,
which in home-mortgage and consumer-credit markets tend
to be related to the loan-securitisation process, are a growing
source of income, particularly in the case of large banks.
This has not been the case for community banks. As explained
above (in the section on small business lending), size is
important in securitisation which depends on achieving
large scale. Thus growing commoditisation has perhaps
penalised small banks more than most. The result has been
that community banks have virtually dropped out of credit
card lending and no longer dominate mortgage or auto
lending 397 , while community banks have remained important
for less standardised types of lending, such as small business
loans (as reported above) and loans collateralised by
business real estate.
397 “The past, present and probable future for community banks”, R. De Young, W.C. Hunter, G.F. Udell, Journal of Financial Services Research, 2004.
144

6.5.2 Europe
As already discussed in this chapter, retail banks in Europe
are still very much anchored as the main loan providers in
both the mortgage and SME lending markets, and there is
at this stage no significant threat posed by competition
coming from secondary market funding sources. In the case
of mortgage loans, while there are a few well developed
national markets, no pan-European platform currently exists
and there seems to be little enthusiasm in any case for
replicating the US mode of GSEs, while in the case of SME
loans, the nature and characteristics of such loans make
securitisation an unlikely alternative to bank funding.
In this section therefore, we consider in particular the
competition that European retail banks are facing in the
consumer credit market in a number of EU Member States.
We examine this one country at a time, as the situation
varies significantly from country to country 398 .
France has a wide range of consumer credit companies, but
it is difficult to say whether they provide real competition to
traditional banks as almost all of them are owned by banks.
The biggest players such as Cetelem, Sofinco and Cofinoga
are owned by large banking groups. Cetelem is owned by
BNP Paribas, Sofinco is owned by Crédit Agricole and
Cofinoga is jointly owned by Galeries Lafayette/Cetelem.
However some of these companies operate with a high
degree of autonomy. For example 70% of Sofinco’s business
is outside the orbit of Crédit Agricole. They also have lower
costs through being unburdened by the systems and staffing
agreements of the big banks, and can afford to price their
services aggressively. In some quarters of the banking industry
they are, therefore, viewed as serious competition.
A number of leading retailers also have banking operations
in France, such as S2P at Carrefour and Edel at Leclerc.
Their services are however offered in association with one
of the big bank-owned consumer finance companies.
Carrefour has an exclusive arrangement with Cetelem, and
Galeries Lafayette supplies its financial services through the
Cofinoga subsidiary which it partly owns with Cetelem.
In Germany, non-bank competition exists in the form of
mainly subsidiaries of insurance companies, household
retailers or car manufacturers.
The three biggest German car manufacturers 399 account for
42% of new car financing. The BMW bank has an established
credit card company and deposit banking operation
alongside its traditional leasing and finance business with
some 500,000 customers in Germany. The Volkswagen Finance
Company takes deposits, issues credit cards and offers a
range of savings and loans products through Volkswagen
Bank Direct. It has over half a million customers.
Another non-bank competitor in Germany is Entrium Direct
Bankers, formed in 1990 by the Quelle mail order group and
transformed, in 1995, into one of Germany's first internet
banks. By 2001, it had 700,000 customers.
By 2000 however, such non-bank groups had less than 1%
of the German retail banking market.
In the UK, many of the so-called non banks engage in
traditional banking activities such as deposit-taking as well
as the provision of loans. Non-banks in the UK come from a
wide array of different sectors such as the supermarket banks
(Sainsbury’s, Tesco, Safeway, Asda, Marks and Spencer),
insurance subsidiaries (Standard Life, Scottish Widows,
Prudential, Legal & General), transport companies (British
Airways and Easyjet) and utilities (Centrica, Thames Water).
Many of the non-banks in Britain therefore build on their
established brand names and existing client relationships to
diversify into financial services.
In the UK, many of the new entrants are partnerships with
existing banks, such as Safeway with Abbey National, Tesco
with Royal Bank of Scotland, and Sainsbury’s with Bank of
Scotland. Marks and Spencer is the only retail company which
established its own financial services company. They offer
only a limited range of products – loans or deposits – and
they avoid current accounts. Unlike in other European
countries, they have not ventured into investment products,
such as broking services and mutual funds.
Non-banks in the UK have made some impact, having
captured about 5% of the UK’s interest bearing accounts,
and about 1% of total mortgages outstanding. More
importantly, they gained a 10% share of new lending by the
first half of 1999.
398 The two main sources used for this section are as follows: 1. “The Future of Retail Banking in Europe: A view from the top”, O. McDonald and K. Keasey,
Unisys, 2002; 2. “Europe’s new banks. The ‘non-bank’ phenomenon”, CSFI Centre for the Study of Financial Innovation, June 2000.
399 Volkswagen, BMW and DaimlerChrysler.
145

Since then, established banks have responded quite
aggressively in the UK: via offering a wider range of deposit
accounts with varying interest rates, highly competitive
mortgage packages and competing with each other over
interest paid on current accounts. The result has been that
the new entrants in the UK have been unable to sustain the
attractive interest rates offered initially to lure in customers,
or to sustain their share of the mortgage market. They are
no longer leaders in the league tables of mortgage or
deposit rates.
In Italy, the main sources of consumer credit and personal
loans are some 41 companies, 24 of which are non-captive
finance houses 400 , 9 of which are banks, and 8 of which are
car makers’ finance houses. Together, they are responsible
for 65% of the total consumer credit market granted to
Italian households. There has also been some concern in
Italy about the growth of ‘loan sharks’ who have taken the
advantage of restrictions on interest rates and accessibility of
credit, and who have thrived because of weak competition
from legitimate lenders.
Banks in Italy also face some notable competition from Poste
Italiane, which was established as a bank in 1999 and has
now expanded into financial services. By March 2001, it had
over 1 million retail banking clients (out of Italy’s 29 million
current accounts) and 230,000 corporate accounts. It is in a
good position to take advantage of the growth in the
financial services sector since it has about 14,000 branches,
many of which are in rural areas from which the banks have
withdrawn through branch closures. It has also set up a
payments card business, established a life insurance company
and has started selling equity-linked bonds. One could in
fact consider Poste Italiane as a fully-fledged universal bank
that is a new entrant.
In Spain, many large retailers have their own consumer arms,
and could become major players in the banking market if
the opportunity arose. El Corte Inglés, the leading department
store, offers loan and investment services through its Centro
de Seguros, and its store card is estimated by the Federation
of Spanish Savings Banks to be used by 7% of the population.
Insurance companies in Spain are also launching new life
insurance products which compete directly with savings,
and it is likely that they will move more directly into the
banking business at some point in the future.
The majority of these specialised credit institutions are
actually owned by banks and, all in all, it is considered that
they are not a threat to Spanish banks.
The Swedish banking market is very much controlled by the
four main retail banks, sharing 90% of the market’s assets
between them. The remaining 10% of the market is split
between some small savings banks, and four non-banks
including Ikano Banken, an off-shoot of IKEA furniture
retailer, WasaBanken and SkandiaBanken (off-shoots of
insurance companies), and GE Capital Bank.
The above case studies serve to give an idea of the activity
of non-banks in the consumer credit segment of the retail
banking market in Europe. Looking at Europe as a whole, it
can be concluded that the scale of non-bank activity in
Europe is small, less than 1%. Also, in many European
Member States, non-banks operate in cooperation with
established banks or are part-owned by those banks,
lessening even further the competitive threat that they
represent.
In the one country where non-bank activity has had a
notable impact on competition, the UK, the strategies of the
new entrants have not had a lasting impact. A number of
new entrants sought to attract clients initially by offering
attractive products and high interest rates on accounts, but
a very limited range of banking services. Further, the high
interest rates could not be sustained as the established
banks responded aggressively. Other new entrants on the
UK scene offered a wider range of products and services but
have failed to provide more than peripheral competition for
the established banks.
There are however some factors which could lead to the
non-banks becoming a more serious threat in the future.
Consumers have become more price sensitive and less loyal
as competition has intensified, and convenience has also
become more important.
On the latter, ‘near-banks’ such as auto banks, supermarket
banks, finance subsidiaries of retailers, credit card specialists
and insurance companies offer the biggest competitive
threats as they can bring their knowledge and skill to bear
on very specialised segments of the market and they can
also build on critical mass and economies of scale.
400 Captive finance companies use the financial strength of their parent company to raise low cost capital and their product knowledge to efficiently resell assets
acquired in loan defaults, hence decreasing their total cost of capital. Non-captive finance companies supply finance products marketed by other companies,
and typically have no comparative advantage in raising capital or disposing of products acquired in a loan default. Non-captive finance firms depend on
offering other financial services (such as consulting, sales financing, and accounts receivable factoring) to survive.
146

6.5.3 Comparison
The largest competitive threat to traditional credit institutions
in the US has come in the form of private and public issuers
of asset-backed securitisations in the last twenty years.
In Europe it has been in the form of non-banks, operating
especially in the consumer credit segments of the market.
As US domestic debt has moved from being funded via
traditional intermediation to being funded directly through
credit markets, ABS issuers have clawed significant parts of
the residential and business mortgage markets as well as the
consumer credit market.
US commercial banks have however largely held their own
pretty well. Though they suffered losses in market shares of
the short-term non-mortgage business borrowing (mainly to
non-banks), and the consumer credit market (to ABS issuers),
they have actually increased their share of the business
mortgage market and kept their share of the residential
mortgage market. The big losers from commoditisation
were however savings institutions, who lost their prime
positions on the mortgage markets, especially the residential
mortgage market.
Given that securitisation has not occurred on any big scale
in Europe, relative either to the US or to funding via
traditional means, issuers of securities do not represent a
threat in any of the traditional areas of activity of the EU
retail banks. However, unlike in the US, other non-banks
such as credit companies, auto companies and retailers
banks have appeared offering a number of competitive
products and services, though with little impact to date in
terms of market share. This and the fact that banks
themselves are getting involved in a number of non-bank
ventures means that the threat is measured. How this
develops going forward depends very much on the ability of
these non-banks to leverage on specialised, convenience
aspects of what they offer but, as the UK example has
proven to date, it is likely to be difficult for them to rival on
price with the established banks.
But US commercial banks, with the exception of the community
banks, have also benefited from commoditisation by providing
services for loans not booked on their balance sheets,
earning important non-interest income from such activities.
Other than the competition that has come with increased
securitisation of parts of the US retail banking market, the
threats of non-banks on the traditional activities of the retail
banks have not been significant in the US. Supermarket
banking is well established there, but not in the European
form of retailers establishing their own banks, rather in the
form of banks establishing themselves in supermarkets. As
many as 8,000 such branches exist in the US. Other types of
non-banks such as credit unions, auto financing from the
large car makers, GE capital financing and leasing
operations and broking houses, proliferate but, as we could
see above, none of those register any significant market
share in the traditional businesses of US retail banks.
147

148

ABBREVIATIONS
ABS
Asset-Backed Securities
EPN
Electronic Payments Network
ACB
America’s Community Bankers
ESBG
European Savings Banks Group
ACCIS
Association of Consumer Credit Information
Suppliers
ESC
ESCB
European Securities Committee
European System of Central Banks
ACH
Automated Clearing House
EU
European Union
ACSSS
American Council of State Savings Supervisors
FASB
Financial Accounting Standards Board
AMA
Advanced Management Approach
FATF
Financial Action Task Force
AMEX
American Stock Exchange
FCRA
Fair Credit Reporting Act
APA
Administration Procedure Act
FDI
Federal Deposit Insurance
APRC
Annual Percentage Rate of Charge
FDIC
Federal Deposit Insurance Corporation
ATM
BIF
Automated Teller Machine
Bank Insurance Fund
FDICIA
Federal Deposit Insurance Corporation
Improvements Act
BSC
Banking Supervisory Committee
Fed
Federal Reserve
CDIA
Consumer Data Industry Association
FFIEC
Federal Financial Institutions Examination Council
CDO
Collateralised Debt Obligation
FHLB
Federal Home Loan Bank
CEBS
CEIOPS
Committee of European Banking Supervisors
Committee of European Insurance and
Occupational Pensions Supervisors
FIRREA
FRA
Financial Institutions Reform, Recovery,
and Enforcement Act
Federal Reserve Act
CEPS
Centre for European Policy Studies
FSA
Financial Services Authority
CESR
Committee of European Securities Regulators
FSAP
Financial Services Action Plan
CFR
Code of Federal Regulations
FSLIC
Federal Savings and Loan Insurance Corporation
CFTC
Commodity Futures Trading Commission
GAAP
Generally Accepted Accounting Practices
CHIPS
Clearing House Interbank Payment Systems
GDP
Growth Domestic Product
CRA
Community Reinvestment Act
GLB
Gramm-Leach-Bliley
CRA
Congressional Review Act
GSE
Government Sponsored Enterprise
CSBS
Conference of State Bank Supervisors
HOLA
Home Owners’ Loan Act
CSFI
Centre for the Study of Financial Innovation
IAS
International Accounting Standards
CSR
Corporate Social Responsibility
IASB
International Accounting Standards Board
CU
Credit Union
ICA
International Cooperative Alliance
CUNA
Credit Union National Association
ICPF
Insurance Corporations and Pension Fund
CUSO
Credit Union Service Organisation
IFRS
International Financial Reporting Standards
EBA
Euro Banking Association
IPO
Initial Public Offering
EBC
European Banking Committee
IRB
Internal Rating Based
EC
European Community
ISD
Investment Services Directive
ECB
European Central Bank
IUHF
International Union for Housing Finance
ECN
Electronic Communication Network
KfW
Kreditanstalt für Wiederaufbau
EEA
European Economic Area
LBS
Landesbausparkasse
EFR
European Financial Roundtable
LSE
London Stock Exchange
EIB
European Investment Bank
M&A
Merger & Acquisition
EIF
European Investment Fund
MAP
Multi-Annual Programme
EIOPC
European Insurance and Occupational
Pensions Committee
MBS
MFI
Mortgage-Backed Securities
Monetary Financial Institution
EMFA
European Mortgage Finance Agency
MHC
Mutual Holding Company
EMV
Europay, Mastercard and Visa
MiFID
Markets in Financial Instruments Directive
149

MoU
Memorandum of Understanding
OTC
Over The Counter
MSB
Mutual Savings Bank
OTS
Office of Thrift Supervision
MTFs
Multilateral Trading Facilities
POS
Point Of Sale
NACHA
National Automated Clearing House Association
QTL
Qualified Thrift Lender
NAIC
National Association of Insurance Commissioners
RIA
Regulatory Impact Assessment
NASCUS
National Association of State Credit Union
Supervisors
RMBS
ROE
Residential Mortgage-Backed Securities
Return On Equity
NASD
National Association of Securities Dealers
RTGS
Real Time Gross Settlement
NASDAQ
National Association of Securities Dealers
Automated Quotations
S&Ls
SAIF
Savings and Loans
Savings Association Insurance Fund
NASS&LS
National Association of State Savings
& Loan Supervisors
SBA
SCE
Small Business Administration
Societas Cooperativa Europeae
NBBO
National Best Bid and Offer
SE
Societas Europeae
NCB
National Central Bank
SEC
Securities and Exchange Commission
NCUA
National Credit Union Administration
SEPA
Single Euro Payments Area
NCUSIF
National Credit Union Share Insurance Fund
SIA
Securities Industry Association
NFA
National Futures Association
SLC
State Liaison Committee
NMS
National Market System
SME
Small and Medium Size Enterprise
NYSE
New York Stock Exchange
SSBF
Survey of Small Business Finances
OCC
Office of the Comptroller of the Currency
SRO
Self Regulatory Organisation
OECD
Organisation for Economic Co-operation
and Development
UCITS
Undertakings for Collective Investment
in Transferable Securities
OFI
Other Financial Institution
UK
United Kingdom
OHSA
Occupational Health and Safety Administration
US
United States of America
OJ
Official Journal
USD
US Dollar
OMB
Office of Management of the Budget
WSBI
World Savings Banks Institute
150

ANNEXES
Annex 1: Gauging customer satisfaction
via the use of an index
In the US 401
Established in 1994, the American Customer Satisfaction Index
(ACSI) is a uniform and independent measure of household
consumption experience. The ACSI was developed by the
National Quality Research Center at the Stephen M. Ross
Business School at the University of Michigan.
The ACSI is considered to be a powerful tool to track trends
in customer satisfaction and provides valuable customer
information for companies, industry trade associations and
government agencies. What the ACSI measures is the
quality of goods and services that are purchased in the US
and produced by both domestic and foreign firms that have
substantial US market shares. With the data obtained via the
ACSI, US companies and governmental agencies can know
if customers are satisfied with their consumption
experiences and what is the evolution of the satisfaction
levels. The ACSI would show which are the improving and
declining industry sectors or specific companies within a
sector in terms of levels of customer satisfaction.
ACSI is based on findings from telephone interviews of
a sample of approximately 65,000 customers, and is
conducted annually. The ACSI for each company is based
on 250 customer interviews.
In the EU 402
In 1999, a pilot project was initiated and coordinated by
the European Foundation for Quality Management, the
European Organisation for Quality and the international
academic CSI-network as primary stakeholders to establish
a European Customer Satisfaction Index (ECSI). For this
purpose, stakeholders from 11 European countries worked
together to develop and test a system for regular customer
satisfaction monitoring and analysis. The European
Commission provided financial support for the project.
The ECSI project aimed at delivering macro-economic
indicators and statistical results concerning perceived
customer satisfaction and quality measurements for
commodities and services in a number of central industries
(i.e. telecommunications, banking and food retail).
The data collection was done using a harmonised set of
questionnaires and a common survey design structure.
A minimum number of 250 observations have been
conducted for each pre-identified company through
telephone interviews and statistical samples of current
customers of the respective company.
Comparison
In both the US and the EU, companies feel very concerned
about the levels of satisfaction of their customers as well as
the evolution of the satisfaction curve which ultimately impacts
on how they plan their business strategy. Customer satisfaction
data is equally important for government agencies and
policy makers responsible for enacting consumer protection
regulation.
In contrast to the common use of a uniform Customer
Satisfaction Index in the US, it appears to be difficult to
establish or to further promote a uniform tool to measure
consumers’ satisfaction levels in the EU as a whole. While in
the European political debate, there are increasingly calls to
increase consumer satisfaction levels, in particular in the
context of consumer opportunities arising from the EU single
market, there appears to be an important information gap
concerning what are the real expectations and current needs
of European consumers. What is more, sometimes evidence on
the potential gains for European consumers from introducing
further internal market legislation is not sufficiently
compelling to justify an increase in the regulatory burden.
401 Information obtained from the American Customer Satisfaction Index organisation website: http://www.theacsi.org/overview.htm
402 Information obtained from the International Foundation for Customer Focus website: http://www.ifcf.net/ecsiPilot.asp
151

Annex 2: Statistical appendix
Table A: Evolution of the number of depository institutions per 1,000,000 inhabitants in the US
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 61 50 37 35 33 32 31 29 28 27 27
Savings institutions 15 11 8 7 7 6 6 6 5 5 5
Credit unions (CU) 63 52 44 42 41 40 38 37 35 34 32
Total excl. CU 76 61 45 42 40 38 37 35 34 32 32
Grand Total 139 113 89 85 81 78 75 72 69 66 64
Sources: ESBG calculation on the basis of information from FDIC, NCUA and the Census Bureau.
Table B: Evolution of the number of depository institutions' branches per 1,000,000 inhabitants in the US
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Commercial banks 181 201 210 213 219 223 226 225 228 228 230
Savings institutions 88 75 50 51 48 47 46 44 44 43 43
Credit unions (CU) n.a. n.a. 75 78 79 75 73 72 71 71 71
Total excl. CU 269 276 261 264 267 269 272 269 272 270 272
Grand Total n.a. n.a. 336 342 346 344 345 342 343 341 343
Sources: ESBG calculation on the basis of information from FDIC, NCUA and the Census Bureau.
Table C:
Evolution of the number of credit institutions in the EU, per Member State
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 165 157 145 141 131 123 117 118 112 111 108
Denmark 166 124 122 125 213 212 210 210 203 178 203
Germany 4,740 4,720 3,785 3,675 3,420 3,238 2,992 2,742 2,526 2363 2,225
Greece 38 41 53 55 55 59 57 57 61 61 59
Spain 695 696 484 434 416 404 387 368 366 359 348
France 2,109 2,027 1,445 1,382 1,258 1,226 1,158 1,099 1,050 989 939
Ireland 58 48 56 62 71 78 81 81 88 85 80
Italy 1,192 1,156 970 937 909 934 890 861 843 821 801
Luxembourg 118 177 220 221 215 212 211 202 194 184 172
Netherlands 81 111 102 101 648 634 616 586 561 539 481
Austria 1,241 1,210 1,041 1,019 928 898 875 848 836 823 814
Portugal 224 260 233 228 238 227 224 218 212 202 200
Finland 654 529 381 373 348 348 346 341 369 369 366
Sweden 543 498 119 124 237 223 212 211 211 216 222
United Kingdom 655 624 578 555 537 521 496 491 452 451 426
EU 12,679 12,378 9,734 9,432 9,624 9,337 8,872 8,433 8,084 7,751 7,444
Notes: For Denmark and Netherlands, there is a change in definition in 1998 (different accounting of cooperative banks).
For Sweden, finance companies are also included in the definition of Cis. For Finland, Cis other than banks are included (including finance companies).
Source: ECB; From 1985 until 1996: "Mergers and acquisitions involving the EU banking industry", December 2000;
From 1997 until 2003: "Report on EU Banking Structure", November 2004.
152

Table D: Evolution of the number of branches per 1,000,000 inhabitants in the EU, per Member State
1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003
Belgium 870 900 760 740 722 698 682 645 598 536 480
Denmark 720 580 440 440 431 431 430 442 443 395 392
Germany 610 630 590 580 770 731 713 692 654 616 574
Greece 170 190 230 230 232 256 261 275 286 296 298
Spain 760 830 930 950 961 983 985 974 955 939 942
France 470 450 440 440 437 435 434 435 439 439 431
Ireland 240 270 290 300 255 275 259 230 249 234 229
Italy 230 310 410 430 450 470 477 495 514 522 527
Luxembourg 880 780 1,030 1,000 753 758 796 763 617 605 596
Netherlands 590 540 440 440 434 431 394 374 323 285 226
Austria 540 580 580 580 588 575 573 570 566 551 540
Portugal 150 200 350 380 469 487 530 552 536 518 519
Finland 730 580 390 340 250 243 231 232 242 243 240
Sweden 430 380 300 280 285 248 241 232 229 228 230
United Kingdom 370 350 290 270 277 267 258 246 241 238 234
EU 482 497 495 494 540 534 529 523 512 499 485
Source: ESBG calculations onf the basis of data from the ECB (see Table 4 in the text) and Eurostat (for the population).
Table E: Change in the number of FDIC-insured institutions, 1985 - 2002
Additions Deletions Total Institutions
Year De Novos Other additions Unassisted mergers Failures Other changes at year end
1985 442 158 -429 -122 80 18,043
1986 327 113 -444 -145 -7 17,887
1987 273 51 -682 -207 23 17,345
1988 301 16 -872 -216 3 16,575
1989 208 11 -471 -524 3 15,802
1990 193 24 -475 -376 -6 15,162
1991 116 35 -560 -257 -8 14,488
1992 80 13 -543 -162 -20 13,856
1993 71 12 -594 -89 -32 13,222
1994 68 21 -661 -29 -15 12,604
1995 111 43 -727 -24 -35 11,972
1996 157 55 -663 -17 -48 11,456
1997 200 67 -728 -45 -25 10,923
1998 222 40 -678 -23 -20 10,464
1999 270 32 -503 -23 -17 10,223
2000 225 34 -538 -18 -20 9,904
2001 147 24 -424 -20 -16 9,615
2002 94 14 -335 -24 -10 9,354
Source: FDIC.
153

Table F: Share of US banking industry assets by size group, 1984 and 2003
1984 2003
Less than $ 100 million 8% 2%
$ 100 million to $ 500 million 14% 8%
$ 500 million to $ 1 billion 6% 4%
$ 1 billion to $ 10 billion 30% 13%
Greater than $ 10 billion 42% 73%
Source: "The declining number of US banking organisations: Will the trend continue ", FDIC study, February 2004.
Table G: Evolution of concentration in the US, 1980-1998 (percent of assets)
1980 1985 1990 1995 1998
Top 10 18.6% 17.0% 20.0% 25.6% 36.7%
Top 25 29.1% 28.5% 34.9% 43.0% 51.2%
Top 50 37.1% 40.5% 48.9% 55.8% 62.6%
Top 100 46.8% 52.6% 61.4% 66.9% 70.9%
Source: "Bank Mergers and Banking Structure in the US, 1980-98", Stephen A. Rhoades, August 2000 - NIC database, Federal Reserve Board.
Table H: Share of industry assets and deposits held by the US's 25 largest banking companies (Pro-forma),
year end 2003
Share of Cumm. Domestic Share of Cumm.
Total assets* industry Percentage deposits industry domestic Percentage
Ranking Bank holding companies (in $ billion) assets of assets (in $ billion) deposits of deposits
1 J.P. Morgan Chase & Co. / Bank One ** 1,009 11.11 11.11 345 6.61 6.61
2 Bank of America / Fleetboston ** 870 9.58 20.69 512 9.82 16.43
3 Citigroup Inc. 796 8.77 29.46 181 3.47 19.90
4 Wells Fargo & Company 380 4.19 33.65 241 4.62 24.52
5 Wachovia Corporation 362 3.99 37.64 213 4.09 28.61
6 Washington Mutual Inc. 276 3.04 40.68 168 3.23 31.84
7 U.S. Bancorp 192 2.12 42.80 114 2.19 34.03
8 U.S. City Corporation 132 1.45 44.25 61 1.17 35.20
9 Suntrust Banks, Inc. 125 1.37 45.62 76 1.47 36.67
10 ABN Amro Holding N.V. 107 1.18 46.80 46 0.88 37.55
11 HSBC Holdings PLC 98 1.08 47.88 45 0.86 38.41
12 Fifth Third Bankcorp 95 1.05 48.93 51 0.97 39.38
13 BB&T Corporation 95 1.04 49.97 60 1.16 40.54
14 The Bank of New York Company, Inc. 90 0.99 50.96 34 0.65 41.19
15 Keycorp 85 0.93 51.89 48 0.92 42.11
16 State Street Corporation 80 0.89 52.78 13 0.25 42.36
17 Golden West Financial Corp. 80 0.89 53.67 45 0.87 43.23
18 The Royal Bank of Scotland Group PLC 78 0.86 54.53 58 1.12 44.35
19 The PNC Financial Services Group, Inc. 64 0.71 55.24 45 0.87 45.22
20 MBNA Corporation 59 0.64 55.88 31 0.59 45.81
21 Comerica Incorporated 53 0.58 56.46 40 0.78 46.59
22 Southtrust Corporation 52 0.57 57.03 33 0.62 47.21
23 Allied Irish Banks, P.L.C. 50 0.55 57.58 31 0.59 47.80
24 Mitsubishi Tokyo Financial Group, Inc. 48 0.53 58.11 35 0.67 48.47
25 Amsouth Bancorporation 46 0.50 58.61 29 0.56 49.03
Total top 25 banking companies 5,322 58.61 2,555 49.03
Notes: * Non-bank assets are excluded
** Pro-forma data includes two pending mergers: Bank of America and Fleetboston, J.P. Morgan Chase & Co. and Bank One Corp.
Source: FDIC - Call and Thrift Financial Reports
154

Table I: Structure of the liabilities of the US FDIC-insured institutions, 1992 - 2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Non-bank deposits 80.7% 77.7% 73.9% 72.5% 72.3% 70.8% 69.9% 68.6% 68.4% 69.4% 69.4% 69.1%
Interbank deposits 3.3% 3.7% 4.1% 4.3% 4.0% 3.7% 3.6% 3.3% 3.6% 3.0% 3.3% 3.2%
Federal funds purchased &
repurchase agreements 6.6% 7.1% 7.9% 7.8% 7.2% 8.4% 8.4% 8.4% 8.1% 8.2% 8.4% 7.5%
Trading liabilities n.a. n.a. 2.6% 2.9% 2.9% 3.7% 3.5% 3.0% 3.1% 2.6% 3.2% 3.3%
Other borrowed funds 5.8% 7.5% 8.1% 8.8% 10.0% 9.5% 10.4% 12.7% 12.5% 11.8% 11.1% 12.4%
Subordinated debt 0.9% 0.9% 0.9% 0.9% 1.0% 1.2% 1.3% 1.3% 1.3% 1.4% 1.3% 1.3%
All other liabilities 2.7% 3.0% 2.4% 2.7% 2.7% 2.7% 3.0% 2.8% 3.0% 3.5% 3.4% 3.2%
Source: ESBG calculations based on FDIC data
Table J: Structure of the assets of the US FDIC-insured institutions, 1992 - 2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Cash and due from
depository institutions 7.34% 6.46% 6.55% 6.24% 6.41% 6.28% 5.92% 5.74% 5.33% 5.41% 5.03% 4.70%
Securities 22.94% 23.63% 22.17% 20.59% 18.94% 18.54% 19.13% 19.44% 18.24% 18.62% 19.36% 19.51%
Federal funds sold & reverse
repurchase agreements 3.76% 3.41% 3.09% 3.60% 3.10% 4.48% 4.49% 3.44% 3.95% 4.39% 4.02% 3.89%
Net loans and leases 57.89% 57.86% 58.61% 59.92% 61.36% 59.74% 59.62% 60.79% 61.26% 59.50% 58.89% 58.94%
Bank premises and
fixed assets 1.42% 1.42% 1.39% 1.35% 1.35% 1.29% 1.26% 1.24% 1.18% 1.13% 1.10% 1.07%
Other assets 6.65% 7.21% 8.18% 8.30% 8.84% 9.67% 9.58% 9.35% 10.04% 10.95% 11.59% 11.89%
Source: ESBG calculations based on FDIC data.
Table K: Composition of loans to the private sector in the euro area and the US, 2002 - 2004
2002 2003 2004
Households Business Households Business Households Business
Consumer Housing Other Consumer Housing Other Consumer Housing Other
Austria 12% 18% 3% 67% 11% 20% 4% 4% 12% 23% 10% 55%
Belgium 5% 35% 10% 50% 5% 39% 9% 9% 4% 42% 9% 45%
Germany 10% 41% 12% 37% 8% 42% 14% 14% 8% 43% 14% 35%
Spain 8% 34% 9% 49% 7% 35% 10% 10% 7% 36% 9% 49%
Greece 12% 25% 0% 63% 13% 27% 1% 1% 15% 29% 1% 55%
France 11% 32% 7% 50% 11% 34% 6% 6% 11% 36% 6% 47%
Finland 8% 39% 11% 41% 8% 41% 11% 11% 8% 42% 11% 39%
Italy 3% 16% 15% 66% 4% 17% 14% 14% 4% 19% 13% 64%
Ireland 13% 38% 1% 48% 9% 40% 3% 3% 8% 41% 3% 48%
Luxembourg 2% 11% 23% 64% 2% 14% 23% 23% 2% 16% 22% 59%
Netherlands 4% 53% 4% 39% 4% 54% 4% 4% 4% 55% 4% 37%
Portugal 5% 40% 6% 48% 5% 41% 6% 6% 5% 41% 6% 48%
Euro area 8% 35% 10% 47% 7% 36% 10% 10% 7% 37% 10% 45%
US 9% 68% 3% 20% 8% 74% 2% 17% 6% 62% 2% 30%
Source: ESBG calculations based on data from the "Aggregated balance sheet of euro area monetary financial institutions, excluding the Eurosystem"
(National Bank of Belgium) and "Flow of Funds Accounts of the Unites States", Board of Governors of the Federal Reserve System.
155

Table L: Structure of the liabilities in the EU, 1992 - 2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Borrowing from
Central bank 1.7% 1.8% 1.5% 1.4% 1.2% 1.0% 1.0% 0.8% 0.9% 0.7% 0.9% 1.2%
Interbank deposits 25.2% 25.3% 27.2% 27.6% 27.7% 27.6% 28.0% 26.9% 26.0% 25.0% 24.9% 24.5%
Non-bank deposits 45.7% 46.0% 44.9% 44.4% 44.5% 43.7% 43.0% 42.2% 42.0% 42.7% 42.5% 42.6%
Bonds 14.1% 14.5% 14.5% 14.3% 14.2% 14.3% 14.3% 15.6% 16.0% 16.6% 16.8% 16.9%
Other liabilities 13.3% 12.4% 11.9% 12.2% 12.5% 13.4% 13.8% 14.4% 15.1% 14.9% 14.8% 14.8%
Note: Excludes Ireland for the years 1992, 1993 and 1994.
Source: ESBG calculations based on OECD data; "Bank profitability", 2002 & 2004.
Table M: Structure of the assets in the EU, 1992 - 2003
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Cash and balance
with Central Bank 2.2% 1.9% 1.5% 1.3% 1.3% 1.2% 1.1% 1.3% 1.1% 1.3% 1.2% 1.2%
Interbank deposits 24.5% 25.2% 24.8% 24.8% 24.3% 23.7% 22.8% 21.5% 20.0% 19.7% 19.8% 19.9%
Loans 48.1% 46.2% 45.8% 45.6% 45.3% 45.2% 45.2% 45.3% 46.6% 46.4% 47.1% 47.0%
Securities 15.3% 17.0% 18.5% 18.7% 19.7% 20.2% 21.0% 21.1% 20.8% 21.1% 21.2% 21.3%
Other assets 9.8% 9.8% 9.4% 9.6% 9.5% 9.7% 9.9% 10.8% 11.5% 11.5% 10.8% 10.6%
Note: Excludes Ireland for the years 1992, 1993 and 1994.
Source: ESBG calculations based on OECD data; "Bank profitability", 2002 & 2004.
Table N: Share of new mortgages financed in secondary markets in the EU
1996 1997 1998 1999 2000 2001 2002
Mortgage Bond Funding 26.00% 26.00% 30.00% 25.50% 22.50% 21.70% 18.50%
MBS Funding 0.00% 2.00% 2.50% 4.00% 7.10% 7.70% 9.50%
Total Secondary Market Funding 26.00% 27.70% 32.50% 29.60% 29.20% 29.20% 27.90%
Source: "The Costs and Benefits of Integration of EU Mortgage Markets", London Economics, August 2005 (EMF Database).
Table O: Recent evolution of the mortgage market in the EU and the US, 2000-2003
EU
US
2000 2001 2002 2003 2000 2001 2002 2003
Residential housing loans outstanding (in € billion) 2,793 2,991 3,278 3,539 6,018 6,457 6,506 6,119
as a proportion of GDP 32% 33% 35% 38% 57% 57% 59% 63%
Source: ESBG calculations based on information from the national central banks for the EU figures and from the US Mortgage Bankers Association
for the US figures. GDP figures and exchange rate are based on Eurostat database.
156

Table P:
Percentage of SMEs using debt financing in EU-15, by country
Overdraft Leasing Factoring Bank Loan
Belgium 37.5 25.0 4.0 56.0
Denmark 73.0 25.0 7.0 24.0
Germany 47.5 42.5 2.0 66.0
Greece 23.0 15.0 8.0 68.0
Spain 8.0 48.0 15.0 58.0
France 36.0 47.0 32.0 63.0
Ireland 70.0 48.0 14.0 39.0
Italy 78.0 41.0 17.0 17.0
Luxembourg 22.0 33.0 11.0 44.0
Netherlands 17.5 31.0 3.0 50.0
Austria 42.0 39.0 6.0 65.0
Portugal 16.0 47.0 10.0 48.0
Finland 46.0 37.0 14.0 64.0
Sweden 70.0 39.0 3.0 37.0
United Kingdom 59.0 42.0 7.0 34.0
European Union 50.0 39.0 11.0 45.5
Note: The survey was conducted among independant medium-sized entreprises (50-250 employees).
Source: Grant Thornton, The European Business Survey, London, 2001.
Table Q: Use of different distribution channels in banking in some selected EU countries
Telephone Mail/Fax Internet Branch No response
Germany 6% 2% 5% 86% 1%
Spain 5% 1% 3% 88% 3%
France 11% 4% 2% 80% 3%
United Kingdom 25% 5% 5% 63% 2%
Italy 5% 3% 4% 84% 4%
Sweden 14% 2% 7% 76% 1%
Europe 11% 3% 4% 79% 3%
Source: Datamonitor Impact 2001
157

Table R: Number of ATMS in the EU and the US, 1997 - 2003
1997 1998 1999 2000 2001 2002 2003 % change
(1997-2003)
Belgium 5,004 5,757 6,199 6,732 6,873 7,061 7,067 41%
Denmark 2,387 2,549 2,641 2,701 2,763 2,822 2,873 20%
Germany 41,397 45,615 46,200 47,650 49,620 50,487 51,129 24%
Greece 2,190 2,168 3,054 3,472 4,377 5,078 5,468 150%
Spain 33,940 37,893 41,871 44,851 46,990 49,876 51,978 53%
France 27,077 29,407 32,445 35,162 36,912 38,975 41,988 55%
Ireland 1,051 1,229 1,225 1,302 1,335 1,412 1,914 82%
Italy 25,546 28,042 30,203 31,720 36,621 39,648 39,017 53%
Luxembourg 233 284 310 325 355 375 387 66%
Netherlands 6,397 6,568 6,673 6,921 7,142 7,530 7,556 18%
Austria 4,302 4,776 5,338 5,913 6,622 7,028 7,499 74%
Portugal 6,280 7,081 8,506 9,701 10,524 11,117 11,985 91%
Finland 2,285 2,208 2,181 2,134 2,132 2,110 2,001 -12%
Sweden 2,370 2,485 2,580 2,617 2,567 2,647 2,676 13%
United Kingdom 23,193 24,574 27,379 33,000 36,666 40,825 46,461 100%
EU 183,652 200,636 216,805 234,201 251,499 266,991 279,999 52%
US 165,000 187,000 227,000 273,000 324,000 352,000 371,000 125%
Source: ECB (Blue book) for the EU and Insurance Information Institute (ATM & Debit News) for the US.
158

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161

162

About WSBI-ESBG
WSBI (World Savings Banks Institute) is one of the largest international banking associations and the only global
representative of savings and retail banks. Founded in 1924, it represents savings and retail banks and associations
thereof in 86 countries of the world (Asia-Pacific, the Americas, Africa and Europe – via the European Savings
Banks Group).
It works closely with international financial institutions and donor agencies and facilitates the provision of access
to financial sectors worldwide – be it in developing or developed regions.
ESBG (European Savings Banks Group) is an international banking association that represents one of the largest
European retail banking networks, comprising about one third of the retail banking market in Europe. It represents
the interests of its members vis-à-vis the EU Institutions and generates, facilitates and manages high quality
cross-border banking projects.
WSBI-ESBG members are typically savings and retail banks or associations thereof. They are often organised in
decentralised networks and offer their services throughout their region. WSBI and ESBG member banks have
reinvested responsibly in their region for many decades and are one distinct benchmark for corporate social
responsibility activities throughout Europe and the world.
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Published by WSBI/ESBG. Copyright September 2006