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Christian Noyer: Banking in the euro area - page 4 / 5





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systems and securities markets. We have also considered that the traditionally expressed arguments in favour of separating prudential supervision and central banking would not be very convincing in the specific euro area conditions. For instance, the concern of conflicts of interest with monetary policy and a lack of domestic accountability should not be overstated in our setting where monetary policy is centralised and supervision remains national.

Still dispersed retail markets

Despite the progress I have mentioned, the markets for retail financial services are still defined quite strongly along national, or even local, lines. In these markets, for instance, interest rates are based on local competitive conditions, as you know very well. However, this does not mean that there is no international competition. The fact that this Association has now existed for thirty years is a clear sign that financial institutions have already been international for a long time.

Internationalisation of retail operations

Until now, branches and subsidiaries abroad have been preferred to large-scale mergers as a strategy for entering foreign banking markets. The establishment of foreign branches and subsidiaries has increased steadily in the euro area. For example, the number of foreign branches of German banks in the European Union is now 59, almost double that of 1995. The average market share of foreign branches and subsidiaries established by banks from EU countries was 10% at the end of 2000, which is definitely not negligible.

Also, the ownership structure of the banking sector is changing significantly. It is no longer true that only Luxembourg's banks have a significant proportion of capital owned by foreigners. In Ireland, Belgium and Portugal, and in the Nordic countries, the percentage of banks' capital in foreign hands ranges from around 40% to some 20%. France, Italy, Spain and Austria also show ratios of between 15% and 10%. For many large European banks, the holdings of stakes in other large players is sometimes associated with joint ventures in specific business lines or geographic areas – for example, in accession countries.

Looking at the strategies of individual banks, some banks have already developed strong multi-country operations in the retail field. For instance, two major banking groups have retail activities in more than five EU countries. In any case, if the integration of the retail markets proceeds, more such operations could be expected to emerge. Integration could also be advanced via electronic banking, or cross- border lending, both of which are still relatively limited. In fact, e-banking could represent a forceful boost to integration, since it could allow customers to access banking services offered by banks in other countries, or it could be a powerful way to enter a new market without the need to establish a costly branch network.

Responses by European authorities

As noted, banks with international operations have to develop local products, also to comply with different legal systems, which implies significant costs. Important steps are being taken by EU authorities to overcome the obstacles of segmentation. However, legal aspects are only one element hindering the integration of the retail markets, since proximity to the customer is still an important factor. Even though it is likely that the retail markets will maintain local features at least for some time to come, any unnecessary burden on the cross-border expansion of activities should be lifted to the maximum extent possible.

At the regulatory level, the European Commission is generally striving to finalise the Single Market programme via the so-called Financial Services Action Plan. The higher cost of cross-border retail payments, as compared with domestic ones, has been a very topical issue, and it has been taken as a sign of a lack of integration. In July 2001, the European Commission proposed a draft Regulation to close the gap between domestic and cross-border payments. In the draft now being examined by the Council and the Parliament, banks would be obliged to equalise prices for cross-border and domestic payments. The ECB has stated that the Eurosystem shares the general objective of the Regulation. However, the Eurosystem has expressed reservations about the chosen method, because it gives too little time to the banking industry to adjust in a rational way. In this context, I find the recent initiative of the European Banking Federation for a self-imposed calendar for reducing the level of such fees extremely promising.


BIS Review 91/2001

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