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

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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
Page 1: September 2006 RESEARCH A COMPARATI
Page 4 and 5: IE UK FR BE NL LU DK DE SE CZ AT SL
Page 6 and 7: The following WSBI/ESBG committees
Page 8 and 9: 4 Regulation and supervision compar
Page 10 and 11: 6.5 Issues of competition in retail
Page 12 and 13: To finish, if we had to pick from a
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Page 16 and 17: Following the same logic, the EU co
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Page 21 and 22: 3. INSTITUTIONAL COMPARISON 3.1 Sec
Page 23 and 24: The market share of the US banking
Page 25 and 26: FDIC-insured commercial banks are i
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Page 35 and 36: 3.2.2.2.2.2 Ownership and corporate
Page 37 and 38: Hermann Schulze-Delitzsch and Fried
Page 39 and 40: In contrast, building societies in
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Page 59 and 60: Although younger than CESR, both CE
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In terms of growth of the volume of
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5.3.2 Efficiency of credit institut
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Table 16: Evolution of the Return o
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Finally, looking at cost-income rat
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9. The last couple of decades have
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102
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Furthermore, the average outstandin
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Under an open-end credit, the credi
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Table 19: Evolution of outstanding
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6.2.1.2.2 Regulatory framework over
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6.2.1.3 Comparison 6.2.1.3.1 Size o
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In terms of market competition, the
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The residential mortgage market in
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Funding by retail deposits represen
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In sharp contrast, the US mortgage
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6.2.3.1.2 Lenders to small business
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The securitisation process requires
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Factoring is also continuously gain
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6.2.3.2.4 Securitisation of small b
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The above fears can hardly be allay
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- ACH credits and debits: the stati
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6.3.2.1.2 Financial intermediaries
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It should be noted that two of the
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Assuming that technology, globalisa
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The report adds: “although it bou
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Graph 19: Use of different distribu
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In terms of funding of the business
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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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