European banks: Divided we fall

The European market would integrate faster if its banks competed harder

BANKERS in Europe lament that they are hobbled in global competition with American financial firms by the lack of a truly integrated home market to give them economies of scale and lashings of liquidity. They are not wrong. Where progress toward European banking integration is concerned, “could try harder” is the judgment of both a new academic study* released in Britain on March 18th and a conference of financial bosses, Eurocrats and politicians held in Luxembourg the week before.

In an earlier report, the Centre for Economic Policy Research (CEPR), a British-run network of European academics, defined Europe's financial markets as “fundamentally segmented”. Five years, one euro area and a Financial Services Action Plan (FSAP) later, it returns to the scene.

The authors find, predictably, that integration is most advanced in wholesale banking, where success is related to the ability to process commoditised transactions and gain access to large amounts of capital rather than to relationships or local knowledge. That American banks dominate this business in Europe gives the authors only a few sleepless nights.

In retail banking, by contrast, progress has been “very slow”. There have been few cross-border mergers, and these have not had much luck in capitalising on economies of scale or indeed on anything else. Prices vary greatly from country to country. The surprise, the report says, is not that integration is incomplete (only to be expected, given cultural factors such as consumers' different habits and languages); it is that market integration in some areas falls so far short of expectations.

The authors conclude that policymakers may have been barking up some wrong trees, chafing at the provincialism of syndicated bank loans, for example, while missing out on how integrated private-equity financing has become. The report shows palpable disenchantment with legislation that leaves implementation to the discretion of domestic authorities. The authors suggest more power for home-country regulators and less for hosts, tougher competition policy and stronger institutions to implement and enforce the FSAP - either a pan-European body or an inner club of states prepared to harmonise faster than the rest.

The banking bigwigs who attended the conference in Luxembourg on March 10th organised by Eurofi, a Europe-minded think-tank in Paris, also believe that integration has not gone as far as it might. Michel Pebereau, chairman of the European Banking Federation, says that modern banking has less to do anyway with physical branch networks than with providing services online and through cash machines. More cross-border competition, and more reliable consumer protection, would do wonders to integrate the market. Thomas Seale, chairman of the Association of the Luxembourg Fund Industry, says that even though his business is pan-European, it is held back by a jumble of national rules and taxes and by a lack of competition among distributors, most of which are banks. Neelie Kroes, the EU's competition commissioner, evidently agrees: she said last week that banking would be among the first targets of a unit she is setting up in Brussels to bash cartels.

What may be holding Europe back as much as anything is the lack of a centralised retail payments mechanism - an unglamorous back-office process that is the backbone of any financial system. Here it was Charlie McCreevy, the EU's internal-market commissioner, who put the boot in. Europe's bankers have had four years to develop a European payments area on their own and they had better produce something soon, he said in Luxembourg. Mr McCreevy is known for his light regulatory touch, but he hinted that he would know what to do if they didn't.

* “Integration of European Banking: The Way Forward. Monitoring European Deregulation 3”.

Article argues that the European banking market would integrate faster if its banks competed harder.

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