A step too far for protectionism?

By Stewart Fleming

Date: 24/03/05

Bloodied and characteristically angry after having to call off his second bid for the London Stock Exchange (LSE), Werner Seifert, chief executive of Deutsche Börse, Germany's leading stock market, is not simply licking his wounds.

Instead Seifert is already preparing his next assault from Frankfurt. He wants to be ready to return to the fray if Euronext, the rival bidder which runs the Paris exchange, tries to move in.

The LSE battle is not the only cross-border deal currently mooted that could re-shape the landscape of the EU's financial markets. The Dutch bank ABN Amro and Spain's BBVA have both announced that they are preparing to challenge Italian central bank governor Antonio Fazio's policy of blocking foreign bids for Italian banks.

These prospective deals highlight difficult issues of principle for the EU-wide regulation of the financial sector. How they are resolved will determine whether or not the Commission's much trumpeted Financial Services Action Plan proves to be the foundation for the longed-for fully integrated EU single financial market or whether, as many fear, it will be undermined by continued protectionism.

"The core problem at the heart of the battle for control of the LSE is power and sovereignty," said Karel Lanoo, chief executive of the Brussels-based Centre for European Policy Studies.

He said that London is determined to hang on to its own financial market regulatory system as the best for so international a financial centre and for a financial services industry which is crucial to Britain's economic performance. It certainly does not want to be forced to import German rules.

The British authorities defend themselves against a charge of protectionism by citing the recent takeover of Abbey National by Santander Central Hispano of Spain as evidence that London is the most internationally open financial market. Fazio's national champions policy in Italy is certainly less subtle.

Antonio Borges, vice- chairman of Goldman Sachs, asked about Italy's alleged financial market protectionism at this month's Eurofi conference in Luxembourg, said that it was unfair to single out one country. "Italy is not the worst case," he remarked, adding that other governments were leaning on potential cross-border investors to deter their overtures.

In May, Internal Market Commissioner Charlie McCreevy is scheduled to produce a Green Paper on how the Commission plans to advance policies to create a single financial market.

He will do so against a growing undercurrent of concern that the 40 directives and regulations and recommendations of the 1999 Financial Services Action Plan, which were meant to speed progress towards a single financial market, are not proving as effective an integrating tool as intended.

Jacques de Larosière, Eurofi co-chairman and former governor of the Banque de France, has doubts about whether EU-level legislation is enough. Hence his support for a "new regulatory approach," a so-called '26th regime' which would establish a body of "simple but credible rules" for creating cross-border financial market products by by-passing the national laws and regulations of the 25 EU member states.

Even if they are applied impartially, many EU-wide rules, including new proposals such as the capital requirements directive for banks and the potentially even more complex Solvency II directive for insurance companies, raise difficult cross-border co-operation issues for regulators and cost issues for firms.

Major banks are calling for a new "lead supervisor" structure for firms with big cross-border activities. Others, including Ieke van den Berg of the European Parliament's economic and monetary affairs committee, say that the time has come to move to a system of pan-European financial market regulation - a step too far in the view of most EU governments, which prefer to see how current arrangements under the so-called Lamfalussy process evolve.

That better cross-border co-operation amongst regulators is badly needed is widely agreed. Jean-Claude Trichet, president of the European Central Bank, told the Eurofi conference that further progress in enhancing financial integration was "inextricably linked to the improvement of the regulatory and supervisory framework and the financial stability arrangements".

Significantly he also warned that the current EU agreement on managing major financial crises involving big cross-border banking groups "may not be sufficiently detailed".

When he took office, McCreevy was emphasising the need for a "regulatory pause" in Brussels in the financial services field. Now he is saying that the 2005-10 period will be one of "consolidation of existing legislation with few new initiatives". He clearly recognises that the Financial Services Action Plan is proving a smaller step towards an integrated EU financial market than was once promised.

• Stewart Fleming is a freelance journalist based in Brussels.