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

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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
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September 2006 RESEARCH A COMPARATI
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IE UK FR BE NL LU DK DE SE CZ AT SL
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The following WSBI/ESBG committees
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4 Regulation and supervision compar
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6.5 Issues of competition in retail
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To finish, if we had to pick from a
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In the US, credit institutions have
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Following the same logic, the EU co
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In that context, it is tempting to
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3. INSTITUTIONAL COMPARISON 3.1 Sec
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The market share of the US banking
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FDIC-insured commercial banks are i
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The subsidiary stock institution is
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Regulatory reform over the past thi
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State credit unions were first exem
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There has however been much effort
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3.2.2.2.2.2 Ownership and corporate
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Hermann Schulze-Delitzsch and Fried
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In contrast, building societies in
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The commitment of savings banks is
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4. REGULATION AND SUPERVISION COMPA
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In addition, for regulations define
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The European Parliament has to be k
Page 49 and 50: In fact, it should be mentioned her
Page 51 and 52: As far as coordination at the feder
Page 53 and 54: Despite the trend towards the estab
Page 55 and 56: Another important factor in the cho
Page 57 and 58: In the European Union, contrary to
Page 59 and 60: Although younger than CESR, both CE
Page 61 and 62: 4.2.5.1.1.1.1 Limitation of the geo
Page 63 and 64: 4.2.5.1.1.3 Recent trend: regulatio
Page 65 and 66: Another important common feature be
Page 67 and 68: The best execution rule was first m
Page 69 and 70: 4.3.2.2.4 National Market System ru
Page 71 and 72: The ISD set a basis for the develop
Page 73: Best execution rules exist in both
Page 76 and 77: The decline of savings institutions
Page 78 and 79: Relative to population, the Europea
Page 80 and 81: 5.2.2 Size of credit institutions 5
Page 82 and 83: 5.2.2.2 European Union In Europe, t
Page 84 and 85: 5.2.3 Concentration and consolidati
Page 86 and 87: 5.2.3.2 European Union Average CR5
Page 88 and 89: In terms of the nature of consolida
Page 90 and 91: 100% Graph 9: Structure of the asse
Page 92 and 93: In terms of growth of the volume of
Page 94 and 95: 5.3.2 Efficiency of credit institut
Page 96 and 97: Table 16: Evolution of the Return o
Page 98 and 99: Finally, looking at cost-income rat
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Page 104 and 105: Furthermore, the average outstandin
Page 106 and 107: Under an open-end credit, the credi
Page 108 and 109: Table 19: Evolution of outstanding
Page 110 and 111: 6.2.1.2.2 Regulatory framework over
Page 112 and 113: 6.2.1.3 Comparison 6.2.1.3.1 Size o
Page 114 and 115: In terms of market competition, the
Page 116 and 117: The residential mortgage market in
Page 118 and 119: Funding by retail deposits represen
Page 120 and 121: In sharp contrast, the US mortgage
Page 122 and 123: 6.2.3.1.2 Lenders to small business
Page 124 and 125: The securitisation process requires
Page 126 and 127: Factoring is also continuously gain
Page 128 and 129: 6.2.3.2.4 Securitisation of small b
Page 130 and 131: The above fears can hardly be allay
Page 132 and 133: - ACH credits and debits: the stati
Page 134 and 135: 6.3.2.1.2 Financial intermediaries
Page 136 and 137: It should be noted that two of the
Page 138 and 139: Assuming that technology, globalisa
Page 140 and 141: The report adds: “although it bou
Page 142 and 143: Graph 19: Use of different distribu
Page 144 and 145: In terms of funding of the business
Page 146 and 147: Since then, established banks have
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MoU Memorandum of Understanding OTC
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Annex 2: Statistical appendix Table
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Table F: Share of US banking indust
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Table L: Structure of the liabiliti
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Table R: Number of ATMS in the EU a
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F - Federal Deposit Insurance Corpo
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