Banking revolution rocks regulators

Date: 13/05/1999

By Tim Jones

THE scurrying sound you can hear across Europe's trading floors is that of EU regulators running to catch up.

It is no exaggeration to say that continental Europe's financial services industry is going through a revolution, driven by the creation of the single EU market for capital six years ago and the advent of the euro in January.

The putative three-way mega-merger between Banque Nationale de Paris, Paribas and Société Générale is just the tip of a banking industry consolidation iceberg, including Deutsche Bank and Banco Santander among many others.

German, French, Italian and Spanish savers - long averse to risky investments, preferring to salt away their hard-earned cash in government debt, houses and gold - are stampeding into mutual funds.

Their net inflows to joint funds hit €213 billion in 1998, up 47% on the year and exceeding, in absolute terms, total retail fund inflows in the US - home of the small stock-holder.

All the prognoses suggest that this is no freak of nature; as the population greys, long-term savings will accummulate and they will look for investments with the best return, wherever they are to be found. Yet, ranged against them and their fund managers are an arsenal of disincentives to invest across EU borders.

Last spring, feeling left out as 11 fellow Union governments geared up to form a single currency area, the British administration warned that the euro would never work efficiently without the creation of a truly unified capital market.

The others played along and ordered an audit by the European Commission and a team of national experts of the remaining obstacles, loopholes and regulatory bloody-mindedness standing in the way of a single market in banking, insurance and securities trading.

Although a report from the Commission this week identifies a range of barriers to cross-border 'wholesale' business between institutions, market participants are hardly complaining. Instead, they are taking matters into their own hands.

During a jam-packed two-day period last week, three private-sector bodies did more to unify the European capital market than governments have since the ground-breaking Investment Services Directive entered force in 1993.

First, Euroclear, the world's largest clearing house for settling short-term debts between institutions engaged in wholesale debt trading, announced plans to create a single settlement system for Europe and ultimately merge with rival Centrale de Livraison de Valeurs Mobilières (CEDEL).

Second, the London and Frankfurt stock exchanges - Europe's largest - brought the Amsterdam, Brussels, Madrid, Milan, Paris and Zurich markets on board their "common trading platform" for 300 of the continent's bluechip stocks. This is the electronic system and regulations which allow markets to function as a unit.

This is becoming increasingly important as former national corporate champions shed their flag-carrying role and become European or even global in character.

According to IFR Securities Data, the value of EU cross-border mergers totalled €225 billion over the past nine months, compared with just €62 billion over the previous three quarters.

This growing trend has been taken on board by the Forum of European Securities Commissions which, on the same day as the eight stock markets linked hands, approved a 'European passport' for listed companies. Once quoted on one of FESCO's 17 member exchanges, a firm could tap the others using the passport.

Nevertheless, while mutual recognition and common trading platforms can go a long way, they cannot forge a US-style single market with all the advantages - access to the cheapest and most appropriate form of capital, tight supervision and transparency - that this brings.

The stock-exchange alliance, for example, looks easier on paper than in reality and the problems are less to do with information technology than culture, tradition and national practices.

At the most basic level, in the giant London market, stock buyers and sellers either deal directly with each other or through professional market-makers, while Latin countries use the central exchange itself as the middle-man to match supply and demand.

Acquisition rules in London are policed by a City institution - the Takeover Panel - which relies on 'gentlemanly' behaviour, while Paris' Commission des Opérations de Bourse has statutory powers which can land a transgressor in court.

The outrage expressed last month by Italian fashion house Gucci after French luxury goods producer Louis Vuitton Moet Hennessy snapped up nearly a quarter of the former's stock on the Amsterdam market without having to make an announcement told its own story. The Takeover Panel would have forced an announcement once LVMH had 5% of Gucci stock.

For these reasons, Acting Internal Market Commissioner Mario Monti is calling for a handful of EU-wide legislative changes, including laws against "market manipulation", clear definitions of eligible collateral for cross-border loans and a relaxation of the rules for small-scale public offerings of stock (IPOs).

The 1989 prospectuses directive sets minimum standards for IPOs, but the differences between exchanges remain onerous for small firms, because documents must be in several languages.

" There are some provisions that effectively make it impossible to raise cross-border capital for SMEs," says Gregor Pozniak, deputy secretary-general of the Federation of European Stock Exchanges. "Unilever might be able to produce120-page documents in seven languages but an SME will not."

Monti, supported by the national experts' panel, is keen to encourage 'shelf registration' by small firms. This would allow them to register advance details of securities to be issued without an issue date, so allowing them to raise capital 'off the shelf' in another national market without new regulatory clearance.

The toughest battle will undoubtedly be the Commission's second stab at ending 'currency matching' requirements for pension funds, under which some EU governments oblige fund managers to set aside a proportion of their assets in the same currency as their liabilities.

This cheap way for governments to offload their debt has rankled Monti as well as pension fund managers for years, but attempts to scrap it have met stiff resistance from Italy, France and Belgium.

" It makes absolutely no sense at all under EMU," says a manager at one of the UK's largest pension fund companies. "It is against the spirit of EU laws and is increasingly easily dodged."

Major feature on the increasing moves to a single market in financial services.