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for cross border transfers and for domestic transfers, and can withdraw cash in the 15 euro countries at the same cost as in their own country.

Nonetheless, the existing framework does not provide yet a level playing field for financial institutions across Europe and financial integration is not yet fully achieved. Considerable cross-country differences persist in the legal and regulatory framework for financial institutions’ operations mainly because of remaining national discretion. Apart from stability concerns, the lack of convergence implies a high regulatory burden for cross-border financial institutions.

Financial integration has progressed slowly and unevenly across different activities and segments. It is high in wholesale banking and in certain areas of corporate finance (especially in public corporate bond issuance and private equity markets), modest in some relationship aspects of banking and low in retail banking, particularly in loans to consumers (Barros et al., 2005 and ECB, 2007b). Retail banking is the most important sub-sector of banking, representing over 50% of the total EU gross income and approximately 2% of total EU GDP in 2004 (ECB, 2007b). Despite technological progress and innovation, retail banking remains regional, since proximity to clients, access to information and long term relationships are still the key competitive drivers. Cross-border banking is especially performed via foreign establishments –branches or subsidiaries – in the target jurisdiction. Foreign establishments have recently expanded their role although they still account only for approximately 15% of the total banking assets. Most of those assets are held by foreign subsidiaries (ECB, 2007b).

The concern for the low integration and competition in retail banking led the Commission to open a sector inquiry in 2005. The inquiry, which was concluded in January 2007, highlighted several major barriers for cross-border competition. The Commission found high concentration levels in several markets for payment cards and payment systems, large variations in merchant fees and in interchange fees between banks, high and sustained profitability (in particular in card issuing), and divergent technical standards. According to the Commission all these elements contribute to restrict entry, charge higher

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