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

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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
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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
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In fact, it should be mentioned her
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As far as coordination at the feder
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Despite the trend towards the estab
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Another important factor in the cho
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In the European Union, contrary to
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Although younger than CESR, both CE
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4.2.5.1.1.1.1 Limitation of the geo
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