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

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4.2.4.3 Comparison In the US, supervision in the banking sector can take place either at the federal level (for federally-chartered institutions) or at the state level (for state-chartered institutions). In the latter case, a federal agency also plays a supervisory function. In the EU, supervision of banks takes place exclusively at the level of the Member States; there is no agency responsible for supervision in the European Union, nor is any national agency entitled to supervise institutions active in another Member State. However, branches of a national institution located in another Member State are supervised by the supervisory authority of the home Member State, on the basis of the principle of Home country supervision. Likewise, in the case of subsidiaries, the “consolidating supervisor” benefits from some specific powers, which have been enhanced with the adoption of the Capital Requirements Directive. Another important difference between the two systems relates to the level of competition between supervisory authorities. While competition is promoted in the United States as an efficient way to promote financial innovation or dynamism, an important characteristic of the European supervisory architecture is the desire to ensure a level playing field for all banks that are active in the EU, whatever their country of origin, size or level of complexity. Furthermore in the EU, recent developments in the financial sector have lead to calls by certain actors (notably internationally active banks) to change radically the EU supervisory framework, for example by setting up a single EU supervisor or by establishing a two tier system, with a different supervisory structure for institutions active in different countries and for locally-active institutions. Such a system would be more in line with the US structure, where banks that are active in several states have the possibility to opt for a federal charter, implying supervision at the federal level by a federal agency. The approach chosen in the EU, confirmed by texts such as the Lamfalussy Report, the Capital Requirements Directive or the European Commission’s Green Paper on Financial Services Policy (2005-2010), is however substantially different from the US approach. As opposed to competition between supervisors, the EU has introduced measures which aim at achieving supervisory convergence. Along the same lines, the EU opted for building on the existing structures in the area of supervision, instead of introducing radical changes. It should be noted here that a partial replication of the US framework in Europe would not be possible, given that both systems are based on different building blocks. Replicating the US supervisory structure in the European Union would in fact require a complete overhaul of the existing architecture. 4.2.5 Regulatory trends in the banking sector The 20th century has been a period of varying regulatory trends in the financial services sector of the industrialised world, which has traditionally been particularly heavily regulated. A number of regulations in this sector both in the US and in European countries date back to the crash of 1929 and the ensuing great depression, in an attempt to avoid a similar situation in the future. Progressively, taking account of evolutions in the financial markets, many of the measures taken following the 1929 crisis have been repealed, or amended. At the same time, other measures have been introduced to address other, more contemporaneous issues. An illustration of this are the rules implemented to control the risks taken by financial institutions. This section will provide an overview of the regulatory trends in both the US and the European Union, and will then provide a comparison of these trends. 4.2.5.1 United States 4.2.5.1.1 Historical developments in the US 4.2.5.1.1.1 Background: from regulation to deregulation In the first half of the 20th century, regulatory measures were taken in the US to limit the scope of activities of financial institutions. Specifically, two categories of measures can be mentioned: measures which limit the geographical activities of banks and measures which limit the activities in which the various categories of financial institutions could engage. 60
4.2.5.1.1.1.1 Limitation of the geographical activities of banking institutions: from the McFadden Act to the Riegle-Neal Act The intention with the McFadden Act adopted in 1927 was to establish a level playing field between national (federally-chartered) banks and state-chartered banks and to promote competition between all categories of banking institutions. According to the McFadden Act, national banks were allowed to open branches within their state (“intrastate branching”) and outside the borders of their home states (“interstate branching”) only to the extent permitted by state law. Regarding interstate branching, as no state allowed by the time interstate branching for state banks, this meant effectively prohibiting it. The McFadden Act is therefore widely regarded as having maintained the particularly decentralised structure of the US banking system, made up of an important number of small, locally-active institutions. Some banks circumvented the act by creating bank holding companies. A bank holding company is not a bank in itself, but a corporation which purchases a bank located in another state and operates it as a complete subsidiary. As a response to this, the Douglas Amendment to the Bank Holding Company Act was adopted in 1956, which prohibited bank holding companies from acquiring banks without the home state’s authorisation. Because no states permitted interstate acquisitions, this effectively stopped all interstate banking activities. In addition, the Bank Holding Act of 1956 granted the Federal Reserve sole regulatory responsibilities of bank holding companies and prescribed the requirement to obtain approval from the Fed for all firms wishing to become a bank holding company. The restrictiveness of these acts varied from state to state, but was generally maintained until the adoption of the Riegle-Neal Interstate Banking and Branching and Efficiency Act passed in 1994, which allowed national banks to operate branches in other states (interstate branching 182 ). However, this law forced states to allow branching through acquisition only, meaning that a bank must acquire another bank and merge the two structures in order to operate branches across state lines. This rule has as a consequence resulted in an increase in bank merger and consolidation activity. In addition, states also obtained the power to authorise “de novo” interstate branching across state lines, allowing a bank to simply open a new branch in another state without the requirement to acquire an entire bank. Several states have decided to allow this possibility, although most of them did it only on a reciprocal basis. Furthermore, many states that do not prohibit interstate branching still impose certain restrictions on branching into the state. All this explains why the deregulation of regional banking has not proceeded uniformly across states. The Riegle-Neal Act also changed the situation in relation to interstate banking, as it repealed the Douglas Amendment to the Bank Holding Act by allowing banking across the whole country, regardless of state law. The Riegle-Neal Act of 1994 did however not seek to change the law concerning the limitations to intrastate branching, as it specifies that state law continues to control intrastate branching, both for state and national banks. Regarding the initial restrictions to intrastate branching, the situation today is that banks can open branches throughout their respective states as since 1992, with the only exception of the state of Hawaii, all states have deregulated their restrictions on intrastate branching. In conclusion, it can be said that after very strict rules restricted the possibilities for banks to operate across the borders of their home state and severely limited the possibilities to enter into intrastate branching activities, most barriers to interstate banking and branching as well as intrastate branching have now been removed, notably through the adoption of the Riegle-Neal Act in 1994. 4.2.5.1.1.1.2 Limitation of the activities of banking institutions: from the Glass-Steagall Act to the Gramm-Leach-Bliley Act (GLBA) Following the Wall Street crash of 1929, very strict rules were adopted to regulate the activities in which the various types of financial institutions could engage. Specifically, the fact that banks could engage in both financial markets and credit-granting activities was regarded as leading to conflicts of interest and as decreasing the prudence that banks normally show in their role as providers of credits. 182 Nevertheless, the Riegle-Neal Act allowed individual states to “opt out” of the interstate branching provisions by passing a new law prohibiting it before the 1st June 1997. Two states chose to opt out of interstate branching: Texas and Montana. The “opt out” provisions prevent both state and national banks from branching into or out of their borders. 61
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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
Page 10 and 11: 6.5 Issues of competition in retail
Page 12 and 13: To finish, if we had to pick from a
Page 14 and 15: In the US, credit institutions have
Page 16 and 17: Following the same logic, the EU co
Page 18 and 19: In that context, it is tempting to
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
Page 27 and 28: The subsidiary stock institution is
Page 29 and 30: Regulatory reform over the past thi
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Page 33 and 34: There has however been much effort
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
Page 41 and 42: The commitment of savings banks is
Page 43 and 44: 4. REGULATION AND SUPERVISION COMPA
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Page 57 and 58: In the European Union, contrary to
Page 59: Although younger than CESR, both CE
Page 63 and 64: 4.2.5.1.1.3 Recent trend: regulatio
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Page 71 and 72: The ISD set a basis for the develop
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Page 76 and 77: The decline of savings institutions
Page 78 and 79: Relative to population, the Europea
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Page 84 and 85: 5.2.3 Concentration and consolidati
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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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