Regional Financial Market Integration Learning fro

Inter-AmericanDevelopmentBankOfficeoftheChiefEconomistWorkingpaper#362RegionalFinancialMarketIntegration:LearningfromtheEuropeanExperienceDr.BennSteilDirectorInternationalEconomicsProgrammeTheRoyalInstituteofInternationalAffairs______Thispaperwaspresentedattheseminar“FinancialMarketIntegrationandharmonizationintheAmericas,”Santiago,Chile.December1st,1997.2©1997Inter-AmericanDevelopmentBank1300NewYorkAve.N.W.Washington,D.C.20577TheviewandinterpretationsinthisdocumentarethoseoftheauthorsandshouldnotbeattributedtotheInter-AmericanDevelopmentBank,ortoanyindividualactingonitsbehalf.3INDICEINTRODUCTION...................................................................................................................42.THEEUMODELOFFINANCIALMARKETINTEGRATION...........................................42.1.PRINCIPLESOFEUFINANCIALREGULATION................................................................................................42.2.TENSIONBETWEENTHEPRINCIPLESOFHARMONIZATIONANDMUTUALRECOGNITION:THECASEOFTHEINVESTMENTSERVICESDIRECTIVE...........................................................................................................62.2.1.MutualRecognitionastheBasisoftheCommission’sDraft............................................................................62.2.2.HarmonizationastheBasisoftheCouncilRedrafting.....................................................................................72.2.3.EvaluatingtheEffectsoftheISD..................................................................................................................102.3.DIFFICULTIESINHARMONIZINGPRUDENTIALSTANDARDS:THECASEOFTHECAPITALADEQUACYDIRECTIVE..................................................................................................................................................................122.4.EVALUATINGTHEIMPACTOFTHESINGLEMARKETPROGRAMMEINTHEBANKINGSECTOR..........152.5.EVALUATINGEUDIRECTIVESASATOOLOFLIBERALIZATION..............................................................182.6.EVALUATINGTHEEUMODELOFFINANCIALMARKETINTEGRATION:THESIGNIFICANCEOFHOMECOUNTRYCONTROL....................................................................................................................................203.IMPLICATIONSOFTECHNOLOGICALCHANGEFORREGIONALSTANDARDSSETTING........................................................................................................................................213.1.TECHNOLOGICALCHANGEANDMARKETSTRUCTURE..............................................................................223.1.1.ProductDifferentiation...................................................................................................................................233.1.2.MarketContestability....................................................................................................................................233.2.MALADAPTEDREGULATION:EXCHANGESAS“PUBLICUTILITIES”........................................................243.3.MALADAPTEDINSTITUTIONALSTRUCTURES:REFORMOFEXCHANGEGOVERNANCE.......................264.AMODELFORREGIONALFINANCIALINTEGRATIONREGIMES:LESSONSFROMTHEEU.........................................................................................................................................274.1.THEUSEOF“DIRECTIVES”ANDSIMILARMULTILATERALAGREEMENTS.............................................274.1.1.HomeStateVersusHostStateRegulation....................................................................................................284.1.2.HarmonizedPrudentialStandards.................................................................................................................294.2.INSTITUTIONALARRANGEMENTS...................................................................................................................304.3.INITIATINGAGENDAS.......................................................................................................................................304.4.DRAFTINGAGREEMENTS.................................................................................................................................314.5.REVISINGANDRATIFYINGTEXTS..................................................................................................................314.6.DISPUTESETTLEMENT......................................................................................................................................325.CONCLUSIONS........................................................................................................................33APPENDIX:EUDRAMATISPERSONAE.................................................................................35REFERENCES..............................................................................................................................36IntroductionTheEuropeanUnion’sSingleMarketProgrammehasbeenanextraordinarilyambitiousinitiative,involvingamassivelegislativeagendamanagedwithinalarge,multi-faceted,andhighlydevelopedinsti