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

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■ The Market Data Rules The Market Data Rules are designed to allocate revenues generated by market data fees to the various SROs to correct certain distortions. These rules are promoting the wide availability of market data and are allocating revenues to SROs that produce the most useful data for investors. 4.3.3 European Union 4.3.3.1 Background Following the US stock market crash in 1929, the crisis spread to European capital markets by the following year as over-exposed European banks could no longer compensate for the money they lost through investments in severely devaluated US securities. In 1939, prices on securities markets plummeted once again due to the start of World War II, after which the situation finally began to improve as reconstruction in Europe spurred economic growth. Over the years, financial markets of European Member States became globally competitive and attractive to all kinds of investors 223 . After years of relying merely on national legislation specific to each of the Member States, an increased number of legislative initiatives were delivered at the European level, which will be discussed in the following paragraphs. This situation changed in 1993 when the Maastricht Treaty introduced changes that granted the full freedom of capital movements both between Member States and between Member States and third countries 226 . At that point the cross-border flow of capital was made easier, representing the first step towards the creation of a single capital market. The Investment Services Directive (ISD), as described below, was adopted in 1993, establishing the most important legal framework for investment services and financial markets. The Directive introduced a number of novelties that enabled investment service providers to engage in cross-border activities, but there were still difficulties that had to be resolved. A revised ISD was adopted in 2004 under the name of the Markets in Financial Instruments Directive (MiFID), forming a part of the European Commission’s Financial Services Action Plan (FSAP) which has an objective to accelerate the completion of the internal market for financial services 227 . The MiFID aims to provide a “single passport” for investment firms operating across the EU, to encourage competition between regulated markets and investment firms as regards trading of securities as well as to increase market transparency and investor protection. The deadline for Member States to transpose the MiFID into national laws is 31 January 2007 and the effective application of the rules is scheduled for 1 November 2007. In 1957 the European Community Treaty laid the foundations of the European Union, though its original version did not contain any direct legal requirement to integrate the capital markets of Member States. A significant step was made almost thirty years later with the Single European Act, when capital movement was given equal legal status and treatment as the movements of goods and services, requiring Member States to abolish restrictions on movements of capital taking place between persons resident in different Member States 224 . Despite this requirement, the European Court of Justice soon after ruled that the relevant Treaty provisions did not have direct effect and the scope of those provisions did not appear to be particularly broad 225 . 4.3.3.2 Applicable legislation 4.3.3.2.1 Investment Services Directive (ISD) The conditions under which investment firms can provide specified services in the European Union were first established by the Investment Services Directive (ISD) in 1993 228 . This regulatory framework created comprehensive rules for financial services and instruments. One of the main benefits introduced by the ISD is a ‘single passport’ for investment firms, enabling them to provide services throughout the EU without a separate authorisation from the one obtained in their home Member State. 223 By “Member States” we consider all 25 current EU Member States, despite the fact that some of them joined the EU as late as in May 2004. 224 The provision came into force in directive referred to above is Directive 88/361/EEC with effect from 1 July 1990 (following the Directive 86/566/E0EC which was repealed on 1 July 1990). 225 Leo Flynn, «Coming of age: The free movement of capital case law 1993–2002», Common Market Law Review, Kluwer Law International, 2002. 226 The Treaty of Amsterdam renumbered the EU and EC Treaties in 1999. Article 56 (free movement of capital) was originally Article 73 in the Maastricht Treaty. 227 See the chapter on the Lamfalussy process. 228 Council Directive 93/22/EEC on investment services in the securities field, 10 May 1993. 70
The ISD set a basis for the development of modern EU capital markets regulation, but it soon became clear that the ISD rules did not apply equally to all markets and all market participants and as such could not facilitate the creation of a single European capital market. One example of diverging national practices derived from the fact that the ISD allowed the use of the concentration rule (which makes it obligatory to trade all shares through one centralised regulated market at the national level). Some Member States made use of the concentration rule (e.g. France), some did not (e.g. Germany), whereas others have a completely different market structure where the concentration rule is by definition not applicable (e.g. the UK). The opportunity to use the concentration rule enabled Member States to organise capital markets differently at the national level, which in fact hindered the main objective of ISD to create a single European capital market. Moreover, some of the biggest difficulties arose due to the fact that the ISD only prescribed minimum standards, which left an option for Member States to impose stricter obligations at the national level. In practical terms this diminished the attraction of making use of the ‘single passport’, as the firms that provided services across Member Sates still had to comply with different additional regulatory requirements in each of the host States. For investment firms this difference in the implementation of the ISD at the national level implied significant regulatory analysis and high compliance costs when approaching another market. Finally, the ISD scope did not cover some significant types of investment services (e.g. investment advice) or certain financial instruments (e.g. commodity derivatives). 4.3.3.2.2 Markets in Financial Instruments Directive (MiFID) In 2004, the ISD was upgraded with the MiFID, a Directive with a similar core rationale but with a wider scope and more profound provisions that can accommodate complex services and products that evolved since the beginning of 1990’s. The MiFID introduces stricter and more equal rules for all financial instruments and all trading venues, which should in turn influence conduct of business for investment service providers and strengthen the investor protection. Moreover, MiFID reaffirms the ‘single passport’ assigned to investment firms by ISD and extended it to regulated markets. One of the most important changes brought in by the MiFID is that it does not allow Member States to continue using the concentration rule. In practice this implies that transactions can be executed not only on regulated markets, where securities were traditionally traded, but also via multilateral trading facilities (MTFs) and through investment firms by internalisation of orders 229 . There is a risk that some national exchanges might lose their advantageous position in a newly created competitive environment, but the introduction of common rules for all the market actors should form a level playing field and provide more choice for investors. ■ Investor protection The MiFID enforces high standards of investor protection which are specifically adjusted to three categories of investors: retail clients, professional clients and eligible counterparties. This classification is based on the knowledge, expertise and resources that each category is expected to have to be able to make an informed decision about the nature and the risks of particular investment instrument. Depending on the type of service provided to investors, the MiFID also introduced the rules which require investment firms to obtain relevant information about their clients and assess which products and services are suitable to be offered, or alternatively asses whether the investors have appropriate knowledge to understand the risks associated with the offered product or service. 229 Article 4(1)(14) of the MiFID defines regulated market as “a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments in a way that results in a contract”; Article 4(1)(15) of the MiFID defines a MTF as “a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments”; and Article 4(1)(7) of the MiFID defines a systematic internaliser as an “investment firm which, on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a regulated market or an MTF”. 71
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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
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In the US, credit institutions have
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Following the same logic, the EU co
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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
Page 31 and 32: State credit unions were first exem
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
Page 45 and 46: In addition, for regulations define
Page 47 and 48: The European Parliament has to be k
Page 49 and 50: In fact, it should be mentioned her
Page 51 and 52: As far as coordination at the feder
Page 53 and 54: Despite the trend towards the estab
Page 55 and 56: Another important factor in the cho
Page 57 and 58: In the European Union, contrary to
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 and 64: 4.2.5.1.1.3 Recent trend: regulatio
Page 65 and 66: Another important common feature be
Page 67 and 68: The best execution rule was first m
Page 69: 4.3.2.2.4 National Market System ru
Page 73: Best execution rules exist in both
Page 76 and 77: The decline of savings institutions
Page 78 and 79: Relative to population, the Europea
Page 80 and 81: 5.2.2 Size of credit institutions 5
Page 82 and 83: 5.2.2.2 European Union In Europe, t
Page 84 and 85: 5.2.3 Concentration and consolidati
Page 86 and 87: 5.2.3.2 European Union Average CR5
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Page 92 and 93: In terms of growth of the volume of
Page 94 and 95: 5.3.2 Efficiency of credit institut
Page 96 and 97: Table 16: Evolution of the Return o
Page 98 and 99: Finally, looking at cost-income rat
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Page 104 and 105: Furthermore, the average outstandin
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Page 108 and 109: Table 19: Evolution of outstanding
Page 110 and 111: 6.2.1.2.2 Regulatory framework over
Page 112 and 113: 6.2.1.3 Comparison 6.2.1.3.1 Size o
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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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A comparative analysis of the US and EU retail banking markets - Wsbi

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