REGIONAL APPROACHES : THE EU by

The EC’s 1988 Cecchini study predicted the particular importance of banking and financial services sectors in capturing the overall economic gains sought from completing the EU internal market, the Single Market Programme (SMP). During 1996 the EC funded a series of new studies within a major research programme designed to assess the impact and effectiveness of the SMP. The generalised impact of the SMP on the development of the banking sector was found to be profound, although not always direct and necessarily measurable. A major impact of the SMP was to help change the banking industry frame of reference towards accepting the greater influence of the external market on banks’ strategies and decisions. European banking markets became more competitive during this era and the threat of foreign bank entry increased (a factor which has prompted substantial consolidation in previously highly regulated markets such as in Italy and Spain, as well as in some of the smaller markets, like the Netherlands). The SMP has been an important element in helping to transform, within a decade, an industry characterised by a high degree of government control, protection and limited competition, to an industry where nowadays the focus is increasingly based on market tests of efficiency, risk-adjusted returns and more efficient cost control. Consumers have benefited through price reductions, improved service and quality and greater choice. The present paper selectively reviews the results of the aforementioned study and draws out some general banking experiences and policy lessons for developing countries. The final section of the paper summarises EU institutional and procedural changes associated with the SMP-related harmonisation of banking regulation and those necessary to cope with greater internationalisation. i Co-Directors of the Institute of European Finance, University of Wales, Bangor, Gwynedd, LL57 2DG, UK; ii Department of Land Economy and Downing College, University of Cambridge, CB2 1DQ iii The World Bank Group The Impact of the Single Market Programme on EU Banking 2 Institute of European Finance 1. Executive Summary The SMP is one of the most dramatic and significant globalising (integrating) events of modern banking and financial services history. Completion of the EU internal market is predicated on a concurrent and integral process of internationalisation within the EU. These aspects of the SMP are similar in many respects to the current 1997/98 WTO discussions on the internationalisation of financial services. SMP experiences also provide a particularly useful ‘laboratory’ for the study of deregulation, globalisation and internationalisation effects on banking since the EU encompasses banking systems at various stages of development, ranging from highly developed, market-orientated systems to (pre-SMP) highly protected and oligopolistic systems. Although the SMP is only one of a collection of key external strategic drivers (including importantly competition and technology), its influence has apparently been profound. The EU SMP involved a complex programme of deregulating banking structure and conduct rules together with a concurrent re-regulation of supervisory (prudential) rules. These twin regulatory developments encompassed the development and implementation of greater internationalisation and globalisation within the EU. There is a widespread policy acceptance that the re-regulation of bank supervision (especially capital adequacy) is a necessary concomitant of deregulation targeted to achieve the efficiency gains of freer competition. The reasons for this kind of re-regulation include reducing systemic risk potential (which may increase during a deregulation), levelling competitive playing fields and converging different supervisory systems and jurisdictions as a growing array of traditionally segmented institutions begin to compete with each other. The Impact of the Single Market Programme on EU Banking 3 Institute of European Finance The pre-SMP environment in many EU countries was often anti-competitive and highly segmented at worst; at best free competition was not facilitated in several key banking product/market segents. A primary aim of the SMP was to shift the focal point of banking strategies away from collusion and regulatory capture towards more open competition and a greater role for external market testing of overall banking performance, products and services. The proximate impact of the SMP was, as might be expected, the greatest in those countries that pre-SMP were less advanced in their deregulation/re-regulation transition. In several cases, the strategic reaction of EU banks was defensive; this was evidenced in widespread domestic merger and acquisition activity. Case study and postal survey evidence all confirmed that the SMP encouraged and facilitated an increasing bank emphasis on cost (productive) efficiency, internal capital allocation (risk and return) efficiency, and generally a greater managerial concern with shareholder value targets within banks. A major impact of the SMP in all EU countries was to help change the strategic mindset (expectations) of bankers and their regulators towards the inevitability of greater competition. In strategic marketing, EU banks re-assesed their strategies in key areas like improving customer focus and enhancing service quality. Increasing securitisation (especially in corporate borrowing sectors) is another reflection of these changes. Overall, the EC (1997) study referred to these kinds of changes associated with the greater role of the external market in the internal resource allocation decisions of banks as ‘marketisation’. This strategic phenomenon was not just confined to stockholder-owned banks; it was also apparent in mutuals, cooperative and state-owned banking sectors. Finally, some policy lessons for developing countries are suggested from the EU SMP experiences. The most important of these is argued to be the kind of bank prudential supervisory system developed as part of the SMP. The final section outlines the EU institutional framework and decision making process in relation to banking regulation; the role of national and European banking associations in influencing legislation at the proposal stage are particularly emphasised. The influence of international institutions and organisations on the banking legislative process are also highlighted. The Impact of the Single Market Programme on EU Banking 4 Institute of European Finance (A) The Impact of the Single Market Programme on EU Banking: Select Policy Experiences for Developing Countries