INTEGRATION OF EUROPEAN BANKING AND FINANCIAL MARK

ProjectfinancedbytheEuropeanCommission,DGResearchImprovingtheHumanPotentialandtheSocio-EconomicKnowledgeBaseProgrammeKielInstituteofWorldEconomicsInstituteforNewTechnologies,UnitedNationsUniversityUniversityofOxfordUniversityofRome,LaSepienzaWarwickBusinessSchool,UniversityofWarwickDavidMarquesIbanez,EuropeanCentralBankPhilMolyneux,UniversityofWales,BangorandErasmusUniversity,TheNetherlandsNO.02-14INTEGRATIONOFEUROPEANBANKINGANDFINANCIALMARKETSDavidMarquesIbanez*andPhilMolyneux**AbstractThispaperinvestigatesbankingandcapitalmarketdevelopmentsinEuropeandthemovestowardsthecreationofasinglefinancialservicesmarket.AcriticalelementintheintegrationprocessisthesuccessoftheEU'sFinancialServicesActionPlan(FSAP).Thisseekstointroduceawiderangeoflegislationaimedatreducingbarriersandpromotingcross-bordertradeinfinancialservices-especiallyforcapitalmarketsandretail/SMEfinancialserviceareas.Aswasthecasein1992,itislikelythattheexpectationoffurtherfinancialmarketintegrationwillencouragemarketparticipantstoadjusttheirstrategiesinthelightofthesedevelopments.Ortoputitanotherway,manybanksarelikelytoacceleratetheirplanstosellfinancialproductscross-bordergiventhechangingenvironment.StockandderivativemarketswillbeencouragedtoconsolidateandinvestmentandpensionfundsintheEurozonewillincreasinglyembracetheequitymarketcultureandsoon.Regulatorystandardsinthefinancialsectorwillmoveinlinewithinternationalbestpractiseandfurtherharmonisationwilltakeplace.Thechallengeforthefinancialservicesindustryistoreorganiseandadapttothisnewenvironment.Targetingasuccessfulpan-Europeanstrategypost-2005(thedeadlinefortheFSAP)willbeofcriticalimportanceforfinancialservicesfirmsingeneral.ISSN1682-3739Copyright@2001EIFCConsortium[ContractNoHPSE-CT-1999-00039]PublishedbytheUnitedNationsUniversity,InstituteforNewTechnologies,KeizerKarelplein19,6211TCMaastricht,TheNetherlandsE-mail:[e-mail]:http:\*ResearchAnalyst,EuropeanCentralBank,Frankfurt,Germany.TheviewsexpressedinthispaperarethoseoftheauthorandnottheECB.**ProfessorofBanking&Finance,UniversityofWales,Bangor,UKandLEVOBProfessorofFinancialConglomeratesatErasmusUniversity,Rotterdam,NetherlandsTABLEOFCONTENTS1.INTRODUCTION72.STRUCTURALCHANGEANDINTEGRATIONINEUROPEANBANKING9TECHNOLOGY14PRIVATISATION18TRENDSINCREDITANDDEPOSITSACTIVITIES20EFFICIENCYANDPERFORMANCEINEUROPEANBANKING23CAPITALANDRISK333.INTEGRATIONOFEUROPEANBANKINGSYSTEMS394.INTEGRATIONOFEUROPEANCAPITALMARKETS415.CONCLUSION47REFERENCES4971.INTRODUCTIONTheintegrationofbankingandfinancialsystemsisofcriticalimportancefortheprogressofasingleEuropeanmarketingeneralanditsfunctionasadriverofgrowthandcreationofemployment.TherehasbeenconstantemphasisonthispointoverthelastdecadeorsobythedifferentbodiesoftheCommunity,andmanyinitiativesoftheEuropeanParliament,theEuropeanCommissionandtheECOFINMinisters.ThemostimportantcurrentinitiativeistheEU'sFinancialServicesActionPlan(FSAP),approvedin1999withacalendarofactionsplannedtofinalisein2005.TheFSAPencompassessome42legislativeandnon-legislativemeasuresthataimtofulfilthreemainobjectives.First,tocreateanopenandsecuremarketforretailfinancialservices.Second,todevelopasingleEUwholesalefinancialmarketandfinallytoensurethatthefinancialindustryisoverseenbyappropriateprudentialrulesandsupervisorypractices.1EUHeadsofGovernmenthavecalledfortheFSAPtobecompletedbythebeginningof2005.2AmajormotivationfortheFSAPhasbeenthepoliticalimpetustocreateamoremarket-orientatedandcompetitivefinancialsystemthroughEuropebyreducingcross-borderbarrierstotradeinfinancialproductsandservices.Themainaimis,ofcourse,toreducefragmentationacrossdifferentproductareasandmarketsandtoensurethatthesystemissupervisedtotheappropriatestandard.Inthecontextofthesedevelopments,Allen(2002)notesthattheEUfacestheimportantdecisionabouthowtostructureitsfinancialsystem-whetheron'anAnglo-Saxonmarket-basedmodel,aGermanstylebank-basedsystemorsomecombinationofthetwo?'(p.1).WhilethegeneraltenetoftheFSAPlegislationveerstowardsamoremarket-basedapproachitisafactthatthebank-basedsystemstillpredominatesinmostofcontinentalEurope.Itislikely,however,thattheongoingregulatoryprocessislikelytoresultintheevolutionofamoremarket-basedsystemovertime.1FordetailsontheFSAPsee::(seeMatutesandVives1992,andVives2000)andmarketcontestability(seeDeBandtandDavis1999)inEuropeanbankingthroughoutthe1990’s.Anoutcomeoftheincreasedcompetitivepr