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

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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
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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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4.2.5.1.1.3 Recent trend: regulatio
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Another important common feature be
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The best execution rule was first m
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4.3.2.2.4 National Market System ru
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The ISD set a basis for the develop
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Best execution rules exist in both
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Page 78 and 79: Relative to population, the Europea
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Page 86 and 87: 5.2.3.2 European Union Average CR5
Page 88 and 89: In terms of the nature of consolida
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Page 92 and 93: In terms of growth of the volume of
Page 94 and 95: 5.3.2 Efficiency of credit institut
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Page 98 and 99: Finally, looking at cost-income rat
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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 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
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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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Page 150 and 151: MoU Memorandum of Understanding OTC
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Page 154 and 155: Table F: Share of US banking indust
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Page 158 and 159: Table R: Number of ATMS in the EU a
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A comparative analysis of the US and EU retail banking markets - Wsbi

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