European Community liberalizes financial services market to become more competitive

Business America, Feb 8, 1993 by Bob Straetz

* Under home country control, the member state authorizing the bank's license is responsible for monitoring the bank's financial safety and enforcing compliance with its own prudential regulations. Minimum requirements covering financial controls are outlined in directives covering solvency, accounting, payment systems, deposit guarantee schemes, monitoring large exposures, and mortgage credit, for example.

In order to adopt this financial services liberalization program, the EC had to settle differences within the Community and with the United States. Some member states feared their previously protected and overstaffed firms would do poorly in a competitive situation. Other member states thought the rules of the single market might be too lax and could hurt consumers in their country. These differences were settled in several ways. First, member states have had six years to adjust to the coming of the single market in banking, since the second banking directive, the cornerstone of the EC banking program, was proposed in 1987. Banks have prepared by restructuring, adopting new technologies, and by merging in some cases with other banks. Second, to quell fears about consumer safety and weaker requirements in other member states, the EC has adopted legislation regulations solvency and levels of lending to a single company (large exposures). The community has also proposed a deposit guarantee scheme.

The United States objected to the reciprocity clause the EC inserted in the early version of the second banking directive. As originally written, the reciprocity clause could have prevented U.S. firms from gaining full access to the EC market because of the differences in the regulatory systems which would have resulted between the EC and United States. A mutually acceptable understanding on this issue was reached, although the U.S. government continues to monitor the situation.

Following is a description of EC initiatives in the financial services sector:

Banking

* Second Banking Directive--The second banking directive, adopted in 1989, serves as the foundation of the EC financial services program. The directive introduces the single license based on the principles of mutual recognition and home country control. Once a credit institution is authorized by an EC member state, the credit institution can sell a wide range of products, including securities, throughout the EC. Banks are allowed to branch freely in the EC without having to meet separate member state requirements. In addition, branches of authorized banks do not have to be separately capitalized. Foreign banks have to establish a subsidiary in a member state to gain authorization for a single license. A foreign bank establishing just a branch in the EC is not eligible for the single license and might have to meet each host country's rules for capital reserves.

The directive lists 14 services a bank can perform. Among them are: lending; financial leasing; money transmission services; issuing and administering credit cards, travelers' checks, and bankers' drafts; trading money market instruments, foreign exchange, financial futures and options, exchange and interest rate instruments, and securities; money brokering; and portfolio management and advice.