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

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4.2.5.2.2 The “universal banking” model A key feature of the Second Banking Directive relates to the fact that the activities in which credit institutions can engage are defined exhaustively 195 . The model promoted by the Directive, and imposed throughout the EU, is the “universal banking” model, as the Directive foresees that credit institutions can engage in activities such as “Acceptance of deposits and other repayable funds”, “lending”, “Trading for own account or for account of customers” or “Safekeeping and administration of securities”. It should be noted that before the adoption of the Directive, important differences existed from Member State to Member State, as whereas in some countries strict limitations were imposed as regards to authorised activities for banks, in other countries the model was already that of universal banking. The Directive has thus been a key milestone in terms of the creation of a level playing field in the EU banking sector. Noteworthy is also the fact that the activities defined in the Directive apply to the institutions defined as “credit institutions”, which includes institutions such as banks, savings banks and cooperative banks. Concretely, this means that whereas the legal environment of individual Member States can foresee specific features for the different categories of credit institutions, the activities in which these can engage are the same and are those defined by the Directive. 4.2.5.2.3 Most recent regulatory trends: more detailed rules, based on international standards The 1929 crash in the New York Stock Exchange also triggered reforms on the European side of the Atlantic. In particular, in a number of European countries, measures were taken that strictly regulated the activities in which the different categories of actors in the financial area were allowed to engage. It is also in that period that some European countries decided to set up supervisory agencies, in the banking and securities areas. As indicated, the second banking Directive has imposed the universal banking model across Europe, extending in many cases the activities in which banks were allowed to engage and softening the limits imposed previously. From that perspective, the adoption of the second banking directive in 1989 can be regarded as the peak of a period of deregulation that started in the 1970, and that followed a period a regulation initiated in 1929 with the great depression. The 1980’ and to a greater extent the 1990’ has also been a period of adoption of complex, detailed and often burdensome regulation in the banking area, which very often originated in international fora. The Basel I accord, replaced recently by the much more complex and comprehensive Basel II framework, is probably the most well-known example of such regulation, whose aim is to enhance the soundness of the banking system worldwide. This has led some to point out that while credit institutions have been given more breathing space as regards the activities in which they can engage, they are now more limited by the much stricter prudential requirements with which they are required to comply, and thus that one type of regulation has been replaced by another, new type of regulation. The trend towards the development of international standards accelerated in recent years, with for instance the adoption of the International Financial Reporting Standards (IFRS) and of rules relating to the fight against the financing of terrorism and against money laundering. The EU took the decision to include all these new international rules in its own regulatory framework. 4.2.5.3 Comparison The EU countries and the US have gone through similar experiences in the course of the 20th Century, often deciding to apply similar solutions to similar problems. As an illustration, the 1929 crash in Wall Street has led many countries around the world to regulate more strictly the area of financial services, while both in Europe and in the US the 1980’ have been an important period of deregulation. Likewise, the trend towards the introduction of increasingly complex and burdensome legislation could be observed in the 1990’ in the US and in Europe. 195 Annex I to 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. 64
Another important common feature between the US and the EU is the fact that in both cases, it has been decided to go in the direction of the “universal banking” model approximately during the same period, i.e. the end of the 1980’ / beginning of the 1990’. An important distinction worth underlining is the fact that in the US, there are important differences in the banking system between the different categories of institutions, not only from the perspective of the business model, but also from a legal point of view. This is not so much the case in the EU, where the 2nd Banking Directive introduced the criteria that have to be fulfilled by all credit institutions to be authorised and to benefit from the single passport, whatever their specific type (e.g. commercial bank, savings bank, cooperative bank). 4.3 Regulation of the capital markets 4.3.1 Introduction Sound and liquid capital markets are generally considered necessary to facilitate the efficient allocation of capital through a dynamic interaction between investors, issuers and financial intermediaries. This chapter defines capital markets as places where long-term equity securities are traded. As an increasing number of retail banks are becoming active in various operations on the global capital markets, it is important to understand the legislative framework that determines a large part of a bank’s behaviour in this respect. The purpose of this section is to provide a presentation of the regulatory frameworks of the US and EU capital markets and to identify similarities and distinctions between them. A comparative analysis of the two markets is useful in view of the fact that these are currently the most developed capital markets in the world. According to the Securities Industry Association (SIA), the US and EU together account for about 70% of global equity capitalisation: approximately $16 trillion in the US and $10 trillion in the EU (equivalent to approximately €13 trillion and €8 trillion respectively) 196 . It is remarkable that only a couple of decades ago a comparative analysis such as this one would have been practically impossible, mainly because these two markets have developed from a completely different basis, in a different time span and with different objectives. In the meantime, many global changes have affected both EU and US capital markets equally, e.g. developments in the communication industry and trading technologies, as well as increased competition from new market players. The US capital markets have traditionally played a leading role in the global financial services industry. While not comparable in size, a number of European countries have developed national capital markets that are as competitive and efficient as their bigger US counterparts. While a single European capital market does not yet exist, despite the efforts of the last twenty years of the European Union’s policy makers, the national capital markets of a number of European Member States fulfil important roles as prime global financial exchanges. In fact, the rationale of attempts to integrate European capital markets is still questioned by some who argue that the domestic capital markets of individual Member States are able to adequately satisfy investors’ needs. Nevertheless, regulatory action at the EU level is very much focussed on the aim of diminishing barriers to integration and creating an efficient and competitive single market for financial services. Emerging legislative measures in both the US and the EU are developing in the same direction, making it possible to compare the two jurisdictions. In recent years, both the EU and the US authorities have been active in revising the existing regulatory framework, which resulted in adoption of key legislative measures that will enter into force within the next few years. The US regulators focussed their efforts on revising the national market system which is set to increase integration by creating equal rules for different trading venues 197 . EU regulators possibly have an even more challenging task, trying to integrate 25 national markets and simultaneously upgrade the legislation that can facilitate fair market competition. The following chapters will describe all these developments in more detail. 196 Testimony of Marc E. Lackritz, president Securities Industry Association, «The US-EU relationship: what comes next», 16 June 2005. 197 Different trading venues such as regulated exchanges, over-the-counter market makers, electronic communication networks, etc. 65
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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
Page 14 and 15: In the US, credit institutions have
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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
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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 43 and 44: 4. REGULATION AND SUPERVISION COMPA
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Page 59 and 60: Although younger than CESR, both CE
Page 61 and 62: 4.2.5.1.1.1.1 Limitation of the geo
Page 63: 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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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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