svante oberg : increased financial integration – future challenges speech by mr svante oberg, deputy governor of the sveriges riksbank, at the conference “ bank & finance outlook ” ( affarsvarlden ), stockholm, 19 april 2007. * * * introduction to begin with i would like to thank you for the opportunity to come here and speak about financial integration and the challenges this entails. my main message today is that financial integration is increasing rapidly in europe, and that this leads to better conditions for economic growth, but that it also means that regulations, supervision and arrangements for crisis management must become more international. i have divided my speech into four parts. i shall begin with a brief description of financial integration in europe in recent years. after that i shall discuss the advantages of greater integration. then i will go on to talk about the challenges we face as a result of integration and conclude with some possible solutions to the problems. it is a broad subject and we have very little time, so i will limit myself to the banking sector. financial integration traditionally, most countries ’ bank markets have been almost exclusively national. when banks have conducted operations abroad, these have primarily focused on large corporations and securities markets. smaller companies and consumers have in principle been obliged to use the services offered by the domestic banks. however, in recent years the bank markets have undergone major changes. several european banks now offer their services outside of their national borders. more than 40 european bank groups have a substantial part of their operations in more than three european countries. names such as unicredit, barclays, fortis and ing are all examples of banks in the forefront of this development. the internationally - active banks are moreover increasingly offering services to households and smaller companies. the integration process has been particularly evident in our own neighbourhood. nordea and danske bank have substantial market shares outside of their respective home countries. with the exception of iceland, it is in nordea ’ s case a question of market shares of more than 10 per cent in all of the nordic countries. swedbank and seb are dominant actors in the baltic region. but financial integration is now also increasing rapidly in other parts of europe. the timing of my speech could hardly be more appropriate. only in recent weeks the media has reported on farreaching plans for a merger between british barclays and dutch abn amro, two banks which together would become one of the world's largest players in this sector. parallel

is not adapted to banks with cross - border operations. within the eu the supervisory responsibility for banks is governed by the principle which in practice imbues all ec regulations in the financial field, namely the home country principle. this means, in brief, that the responsibility for supervision lies with the country where the bank is legally domiciled. to illustrate how this works, we can imagine a bank with branch offices abroad. the bank and its branch offices are regarded as one single legal entity. they are therefore governed by the regulation and supervision that apply in their home country. how the operations are actually divided up between the different countries in principle has no relevance. danske bank is an example of a bank that has chosen to organise its operations in this way. the relatively extensive operations conducted by the bank in sweden are largely under danish regulations and supervision. if a bank instead chooses the form of subsidiaries for its foreign operations, then its subsidiaries – as they are regarded as independent entities – will be covered by the regulations and supervision that apply in the respective countries in which they are domiciled. in this case, there are in a formal sense several " home countries ”. nordea ’ s operations in sweden, finland, norway and denmark are organised in this type of subsidiary structure, which means that the group is covered by four different systems of regulation and supervision. in both of these cases there is reason to ask whether a pure “ home country principle ” is the best basis for supervision of banks with considerable operations in several countries. in the case of danske bank, where the foreign operations are conducted in the form of branch offices, the most important question is whether it is reasonable and appropriate that the responsibility for supervision is concentrated to one single country. this question becomes particularly relevant if the bank is a large actor outside of the home country and in these countries plays a decisive role in the stability of the financial system. in the case of danske bank ’ s swedish operations, one perhaps cannot say that this is currently the case. however, it is not inconceivable that this situation might arise in the future. the situation would be even more critical if the bank was at the same time a relatively small actor in its own country. in this type of situation the supervisory authority in the home country – which in this case is the one that decides – would probably consider that the need for supervision was not as great as the other countries might consider it to be. there is an evident risk of a conflict