Europe 1992: Implications for the U.S. Financial System

Europe 1992 will be unified and reinvigorated when the 12 member nations of the European Community (Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and the United Kingdom) remove all barriers to the free movement of goods, services, capital, and people. According to the Delors plan, the physical, technical, and fiscal barriers are cumbersome and cosily. Their removal will generate a large internal market with free capital flows, a compatible payments system, and issuance of a single European license. These outcomes will have far-reaching implications for the U.S. financial system. Of the 13,000 commercial banks in the U.S. in 1990, the largest five control about 15 percent of the total assets amounting to over $900 billion. The largest ten control about 22 percent, and the largest 100 control about 59 percent. In Germany, out of the 320 commercial banks, the largest six control about 39 percent of total assets. In France, out of 370 commercial banks, three control about 43 percent, and in the U. K. the largest five control about 48 percent. Thus, by international standards, the U.S. banking industry is relatively fragmented, exhibiting the least concentrated structure among the industrial countries. This fragmentation is partly attributable to the restrictions on interstate banking prior to the 1980s, ~ la the McFadden Act, which prohibited national banks from opening branches across state lines. Furthermore, the Glass-Steagall Act separates commercial banking from reinvestment banking by prohibiting any institution to simultaneously undertake both functions. Also, the Banking Holding Act stipulates that a corporation owning banks cannot acquire banks in other states unless the host state permits such action. The end result of these three statutes is the emergence of a large number of commercial banks, most of which are relatively small, and the separation of commercial banks and securities firms with different federal supervisory agencies. In the European Community, there is no such separation in that there is a smorgasbord approachto financial activities. Recent U.S. legislation, however, has enabled most states to permit interstate banking within certain geographically defined regions. However, such a measure is a far cry from universal banking under the Europe 1992 program. European integration is setting in motion the wheels of change for the U.S. financial system to replace archaic legislation and organization. Deregulation of the banking industry will undoubtedly lead to more mergers, acquisitions, and regulations. Moreover, the globalization of financial markets, aided by the electronics revolution, raises questions about the effectiveness of regulations that were devised for domestically focused markets. The realization of a unified and integrated Europe in 1992 fosters liberalized continental banking and illustrates the inflexibility of U.S. banks to compete with European banks, which are subject to lower reserve and capital requirements. Regulating risk-based capital in the U.S. adds to the cost of doing business and inhibits effective competition. European monetary integration will accentuate the competition for capital flows on both sides of the Atlantic.