lars heikensten : the integration of european banking - some regulatory challenges speech by mr lars heikensten, governor of sveriges riksbank, at the seminar “ the integration of financial markets in europe ”, at the “ riksdagshuset ” ( swedish parliament ), stockholm, 21 april 2004. * * * thank you for inviting me to share my views on the integration of financial markets in europe. we have just heard about the positive role capital markets might have in fostering economic growth and stability. we have also heard about how the regulatory process has been changed to promote the growth of an integrated european market for capital and securities. it is my hope that also the area of bank regulation will become part of this simplified process. it is certainly needed. compared to the european securities market, the banking market is lagging many years behind in terms of integration. true, large companies may have access to foreign bank funding as well as to international debt and equity markets. when it comes to choosing your bank at the retail level, however, swedish households and small and medium sized companies are left to a market which is to more than 90 percent dominated by swedish banks. this situation is shared by most other eu countries. this is not a problem in itself. swedish ( or, in general, domestic ) banks might very well be excellent. however, most of us tend to believe that cross - border integration, just as trade, is something good because it increases competition. higher competition, in its turn, improves the efficiency, which ultimately leads to higher quality and lower prices for consumers. indeed, this is one of the main ideas underpinning the european single market. this idea is undoubtedly true also for the banking industry. there is increasing evidence of the positive link between the efficiency of the financial system, of which banking is the most important part, and the wealth and growth of the real economy. thus the potential benefits of a more efficient financial system are substantial. considering that most financial services bought by consumers ( private individuals and smes ) are bought from their bank, the low integration ( and in many cases low efficiency ) of european banking is a significant hindrance to creating an overall efficient market in financial services. barriers to integration why then is integration of european retail banking not happening or only happening very slowly? the first and second bank harmonisation directives and more recently the many initiatives within the financial services sector plan, fsap, have set the legal framework for cross

it is easy to see that the difficulties related to cross - border expansion might seem insurmountable to a bank manager. on the margin, i think these extra hurdles or barriers might be more important than the inherent economics of banking. generally, in countries where the costs of entering the national banking market are relatively low, the market share held by foreign banks tends to be higher. in the last decade, countries with less developed banking systems and few or no powerful incumbents have seen extensive entry by foreign banks. witness the expansion by european and american banks into emerging markets, e. g. in central and eastern europe and latin america. in the eu, in contrast, national banking markets are generally well developed and incumbents are strong, making entry costs much higher. hence, the insignificant degree of eu cross - border banking integration is probably partly explained by economic factors. however, the existence of large differences in profitability and efficiency between individual eu countries ’ banking systems indicates potential for cross - border expansion also within the eu. in competitive industries, such differences do not exist for a longer period, as less efficient firms would be pushed out of business or acquired by more efficient competitors. these wide profitability gaps should attract more efficient entrants. against this background, it is interesting to note that many european banks seem more attracted to the us banking market. the us banking system is by many considered as the most developed and competitive in the world. you would indeed expect eu - based banks to find it easier to expand within the eu than into the us. still, several major european banks have much larger retail operations in the us than they have in neighbouring european countries, e. g. hsbc, abn amro, and bnp paribas. one cannot avoid the question of whether larger obstacles to cross border banking exist in europe than in the us. regulatory schemes and practices still a major problem for integration given the gradual increase in harmonisation of eu banking and financial sector legislation, it is perhaps surprising to find regulation to be one of the most important barriers to further integration. in my view, there are two issues here. first, although the general legal framework has been converging, the practical implementation of rules and regulations still differs widely between member states. eu level harmonisation often applies to high level principles and minimum requirements, while implementation, additional requirements and enforcement is left to the member states. in practice, this becomes a barrier to integration. an eu bank will be subject to as many