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

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This blurring of roles is considered by some as one of the causes of the crash of 1929. Against this background, the Banking Act of 1933, also referred to as the Glass-Steagall Act, imposed a separation of ownership of commercial and investment banking firms (and prohibited them to merge) and barred banks from underwriting or even dealing in corporate securities. Because of this division, banks and investment firms did not compete with each other. Some market participants took measures to avoid the separation between the commercial and investment bank activities, notably by creating bank holding companies which hold both a commercial and an investment bank. The Bank Holding Company Act of 1956 was also a policy response to this tendency, seeking to maintain the division between the different activities. Most restrictions of the Glass-Steagall Act have been lifted with the “Financial Modernisation Act” of 1999, also known as the Gramm-Leach-Bliley Act 183 . Specifically, in the first title of the Act (“Title I – Facilitating affiliation among banks, securities firms, and insurance companies”), the following important measures are included: - repeal of some of the restrictions on banks affiliating with securities firms contained in the Glass-Steagall Act; - creation of a new “financial holding company”, which can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities as well as merchant banking and insurance company portfolio investment activities; - lifting of some of the restrictions governing nonbank banks. 4.2.5.1.1.2 The savings and loans crisis: an example of deregulation followed by re-regulation The savings and loans crisis (“S&L crisis”) provides us with an example of deregulation, which has led to a crisis and subsequently resulted in a new phase of regulation. Until the end of the 1970’s, the savings and loans were strictly limited in the activities they were allowed to perform, notably accepting deposits and granting long term fixed rate home mortgage loans. The regulation of savings and loans also included a ceiling on the interest rates they could offer to depositors. At the end of the 1970’s / beginning of the 1980’s, a series of measures were taken to lift the regulation applicable to savings and loans. These new provisions allowed them for instance to expand the activities in which they could engage (e.g. make commercial loans, issue credit cards) and to pay higher rates for their deposits. Deregulatory measures included the Depository Institutions Deregulation and Monetary Control Act of 1980 and, most importantly, the Garn – St Germain Depository Institutions Act of 1982. However, the deregulation of the thrift industry has not been accompanied by a parallel increase in examination resources. A combination of several factors caused serious problems to the thrift industry, resulting in the failure of hundreds of individual institutions. Deregulation was often mentioned as a key reason for the problems of the industry, as it made it possible for these institutions to engage in more risky activities. Savings and loans institutions were also highly vulnerable to the strong interest rate volatility experienced at the beginning of the 1980’s, as often they had to pay higher interest rates on deposits but were locked into their credit engagements by lower long term fixed interest rates. A bailout plan was finally adopted in August 1989, the Financial Institutions Reform Recovery and Enforcement Act (FIRREA). The plan included important provisions, such as the abolishment of the Federal Home Loan Bank Board and of the Federal Savings and Loan Insurance Corporation (FSLIC) and the creation of the Office of Thrift Supervision, newly responsible for the supervision of S&L regulation. Other measures included the shift of the deposit insurance function to the FDIC and the creation of a new entity, the Resolution Trust Corporation, to resolve the insolvent S&Ls. In a study published in December 2000 184 , the FDIC estimated that the combined total for all direct and indirect losses was an estimated USD 152.9 billion, of which US taxpayer losses amounted to USD 123.8 billion and the thrift industry losses amounted to USD 29.1 billion. 183 Information on the Gramm-Leach-Bliley Act can be obtained on the website of the US Senate at the address http://banking.senate.gov/conf/. 184 FDIC Banking Review - 2000 - Vol. 13 No. 2. Article available from: http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf. 62
4.2.5.1.1.3 Recent trend: regulation in specific areas In parallel with the deregulation trend in the US the financial services area, another important trend has been that of regulating specific aspects of the sector. In particular, it can be said that the restrictions for some institutions to enter into particular types of activities, such as those introduced by the Glass-Steagall Act, have been replaced by strict and far-reaching prudential rules. An illustrative example is provided by the prudential rules put forward by the Basel Committee on Banking Supervision, which set strict prudential rules that have to be observed by banks. 4.2.5.2 Europe 4.2.5.2.1 Historical developments at the EU level When describing the regulatory trends in the European Union, a borderline should be drawn between the period where the trends were mostly determined at the level of the individual Member States, and the period where the trends were triggered by developments at the EU level. Unlike the US, which at the beginning of the last century was already a ‘federally organised but united country’, Europe had to decide to become more integrated; a first step was taken in 1957, with the creation of an economic community between six European countries. At the European level, the first initiatives to coordinate banking regulation started in 1969 and culminated in the First Banking Coordination Directive, which was subsequently adopted in 1977 185 . It contains basic provisions about the authorisation of credit institutions and branches, cooperation between responsible supervisory bodies, and it led to the establishment of the Banking Advisory Committee. The adoption of the Second Banking Coordination Directive 186 followed in 1989, introducing the principle of mutual recognition and the home country principle for supervision – the cornerstones of current European regulatory principles. Further harmonisation has also taken place in the following areas: protection and control rules (Own Funds Directive) 187 , solvency ratios 188 , control of major risks (Large Exposures Directive) 189 and deposit guarantees 190 . These were all integrated in the consolidating directive of March 2000 191 . A similar legislative progression can also be observed in the insurance (i.e. First Coordinating Directive in Non-Life Insurance) 192 and securities sectors (i.e. UCITS 193 and Investment Services Directive 194 ). The most important achievement of the second banking directive is that it has for the first time provided the credit institutions of the European Union with a single passport. This passport, granted by the competent authority of the Member State where the credit institution is located, allows the institution to be active throughout the EU territory, through the providing of services or the establishment of branches. The passport does however not apply as regards the setting up of subsidiaries: as a subsidiary is considered as an institution of the Member States in which it is located, it has to get an authorisation from the competent authority of the Member State in which it is located. 185 First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (OJ L 322, 17/12/1977 P. 0030 – 0037). 186 Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC (OJ L 386, 30/12/1989). 187 Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions (OJ L 124, 05/05/1989). 188 Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (OJ L 386, 30/12/1989 P. 0014 – 0022), updated: 91/15/EC, updated 94/7/EC, updated 95/15/EC. 189 Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions (OJ L 029, 05/02/1993 P. 0001 – 0008). 190 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ L 135, 31/05/1994 P. 0005 – 0014). 191 Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions (OJ L 126, 26/05/2000 P. 0001 – 0059). 192 First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws, regulations and administrative provisions relating to the taking-up and pursuit of the business of direct insurance other than life assurance (OJ L 228, 16/08/1973 P. 0003 – 0019). 193 Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 375, 31/12/1985 P. 0003 – 0018). 194 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ L 141, 11/06/1993 P 0027 – 0046). 63
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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
Page 12 and 13: To finish, if we had to pick from a
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Page 23 and 24: The market share of the US banking
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Page 27 and 28: The subsidiary stock institution is
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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
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Page 43 and 44: 4. REGULATION AND SUPERVISION COMPA
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Page 59 and 60: Although younger than CESR, both CE
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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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