European Single Market in Banking

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Secrétariat général de la Commission bancaire

• European Single Market in Banking
• Convergence of supervisory practices

Seminar on Financial Services
Sofia, 15th September 2005 Pierre-Marie
ABADIE Commission Bancaire Paris

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Outline

• 1 Opening banking services to competition
• 1 - 1 Context
• 1 - 2 Costs and benefits
• 2 Convergence of supervisory practices
• 2 - 1 The reasons for convergence
• 2 - 2 Single market and single monetary zone
• 3 The current debate on the best regulation
  process
• 3 - 1 One single supervisor for all the
  financial sector ?
• 3 - 2 One European Banking Supervisor ?
• 3 - 3 Independence or not from the Central Bank
  ?

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1 Opening banking services to competition

• 1-1 Context
• One single banking market in EU refers to the
  process of opening the banking sector to
  competition
• The process includes as preconditions
• Deregulation or reducing barriers to entry for
  domestic banking services providers
• Internationalisation or allowing entry to
  foreign owned banking institutions
• Liberalization or freeing up financial movements
  across borders (but not necessarily)

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1 Opening banking services to competition

• Globalisation of rules
• A rules-based process of globalisation is under
  way development of a harmonized legal framework
  at European level.
• Development of common
• Norms
• Directives
• Principles
• Practices
• Code of conducts

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1 Opening banking services to competition

• Common rules under the auspices of
• International groupings of national authorities
  or private associations (BSBS, IOSCO, IASC)
• IMF role
• FSAP exercise
• Article IV review

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1 Opening banking services to competition

• Common accounting practices used worldwide
• the accounting reform
• IFRS have been adopted by EU on September 2003
• IFRS is an opportunity for an European
  harmonization of disclosure and reporting
  requirements
• Supervisors focus has been to reduce undue
  volatility of equity and profit and loss accounts
  (problem IAS 39)

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1 Opening banking services to competition

• The direct effects of European Monetary Union
  (EMU)
• Standardisation and transparency in pricing
• The elimination of intra European risk
• The unification of bank refinancing across EMU
  member states
• (liquidity provided by ECB)
• (equalize costs of capital across Europe)

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1 Opening banking services to competition

• Both rules and risk management techniques are
  increasingly
• being drawn up globally

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1 Opening banking services to competition

• 1- 2 Costs and benefits
• An open banking sector can increase levels of
  growth and job creation throughout the rest of
  the economy as capital is allocated more
  efficiently
• Strong competitors from overseas can exercise
  pressures on prices in banking services in terms
  of diminished spread and intermediation costs

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1 Opening banking services to competition

• 1- 2 Costs and benefits
• Greater choice among financial instruments
• Improvement of financial expertise in banking
  domestic sector (know-how, training)
• (the transfer of new skills to the domestic banks
  through the presence of foreign players can help
  disseminate better risk management practices)

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1 Opening banking services to competition

• 1- 2 Costs and benefits
• Put pressures on the labour force to adjust by
  raising educational standards and mobility
• Painful adjustments on the part of domestic
  banks
• The risk of a  cherry picking  process by
  foreign banks
• Policy makers may worry about losses on some
  strategic decisions
• ( social disruptions)

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1 Opening banking services to competition

• 1- 2 Costs and benefits
• Large banks tend to benefit most from scale
  economies and technological progress
• Banks first merge nationally then across borders
  inside restricted geographic areas
• Steady steam of mergers in European banking in
  90. The trend has slowed down but the value of
  transactions has grown up dramatically

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2 Convergence of supervisory practices

• 2 - 2 Why more supervisory convergence ? It aims
  at
• Promoting a consistent and efficient
  implementation of EU directives in Member States
  
• Disseminating banks and supervisors best
  practices, for the sake of financial stability
• Promoting the best possible level playing field
  across Europe
• Avoiding supervisory arbitrage and
• Limiting undue administrative burden for banks.
• For all these elements, expectations are high

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2 Convergence of supervisory practices

• 2 2 Convergence and cooperation are even more
  needed in EU as we are in a single market and,
  for many of us, in a single monetary zone
• Moreover, it is a long tradition in Europe
• The Groupe de Contact (1972)
• The 1st Directive on Banking coordination (1977)
• The Banking Advisory Committee (1979)
• The 2nd Directive on banking coordination (1989)
• And now CAD III
• Also, MOUs and informal exchange of information
  have existed for long.

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2 Convergence of supervisory practices

• 2 3 Basel II implementation is an unique
  opportunity to deliver enhanced supervisory
  convergence in Europe for at least two reasons
• The new European Capital Directive-CAD III is
  more precise and more demanding than Basel II, in
  particular as far home/host relationships are
  concerned. For example, it develops further the
  concept of  consolidated supervisor  and helps
  clarify responsibilities (see, for example, art
  129 in CAD III), which is consistent with the
  strengthening of the EU unified financial market
  
• An institutional process of convergence has been
  initiated with the creation of the CEBS
  (Committee of European Baking Supervisors).

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2 Convergence of supervisory practices

• 2 4 The Committee of European Banking
  Supervisors (CEBS) is a major improvement towards
  convergence and the establishment of an internal
  market for financial services
• It was established as of 1st January 2004
  (Secretariat in London),
• It is a so-called  Level 3 Lamfalussy
  Committee ,
• It is comprised of supervisory authorities and
  central banks.

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2 Convergence of supervisory practices

• The institutional tasks of CEBS are the following
  
• To advise the Commission, in particular as
  regards the preparation of draft implementing
  measures in the field of banking activities
• To contribute to the consistent implementation
  of EU Directives and to the convergence of
  supervisory practices
• To enhance supervisory cooperation, including
  the exchange of information.

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3 The current debate on the best regulation
process

• The key questions
• One single supervisor for all the financial
  sector ?
• One banking supervisor for all the banking
  sector in EU ?
• The banking supervisor independent from the
  Central Bank ?

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3 The current debate on the best regulation
process

• 3 1 One single supervisor for all the
  financial sector ?
• An ongoing trend in favour of a FSA model
• No evidence for an optimal structure
• The French choice for a  Twin Peaks  model
• (three principles specialisation, cooperation,
  decentralisation)

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3 The current debate on the best regulation
process

• 3 2 One European banking supervisor ?
• Increasing trends of cross-border activities,
  conglomerat directive
• Single regulation entails homogeneity in rules
  implementation
• However, supervisors remain legally responsible
  for the supervision in their juridictions
• The option for a well balanced information and
  responsibilities sharing between home and host
  supervisors

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3 The current debate on the best regulation
process

• 3 4 Banking supervisors independent from the
  Central Bank ?
• Quite everywhere central banks are active in
  banking supervision area (payment systems,
  financial stability, preoccupations)
• The Basel Committee is composed of banking
  supervisory authorities and central bankers

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Conclusion

• In such a fast changing environment maintaining
  a constructive dialogue with the EU financial
  industry and all other interested parties is key.