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

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.
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