Eight years after European monetary union (EMU) was created and five years since the introduction of the euro, the unified European financial market is still far from being a reality, especially in the retail business. Significant differences remain between European banking systems, and they prevent banking institutions from benefiting from the economies of scale that could be derived from a more economically integrated Europe.
This does not mean that European authorities have not taken the issue seriously. Many initiatives included in the Financial Services Action Plan or in the recent Capital Adequacy Directive have been aimed at achieving more harmonisation between European regulatory frameworks. However, the devil is in the detail. On many occasions, the domestic implementation of the approved regulations creates dissimilarities, hence the goal of a single market has proven extremely complex to achieve.
Ambition is lacking
Progress is not satisfactory. The pace of reform is not ambitious enough to deliver the benefits that an integrated financial market can offer.
The shared conviction that the industry could and should make a substantial contribution to the European financial debate led a group of European banks and insurance companies to create the European Financial Services Roundtable (EFR). In this forum, we are analysing the main challenges for achieving a single market for financial services. There are a lot of issues on the agenda because several pillars of the future financial industry are being set up.
In the future, for example, European banks will work in a different risk management environment due to the implementation of Basel II. The sophistication in the risk metrics will be rewarded by a more efficient use of bank capital. Nevertheless, to reap the benefits of this, it is important that the domestic authorities avoid the introduction of local provisions that would prevent global banking institutions from adopting a global perspective in risk management.
Payment systems will be transformed by the single euro payments area (Sepa) project. This is relevant for retail banking because it will allow eurozone citizens to make payments throughout the area from one bank account, using one set of payment instruments, as easily and safely as in the national context today. To achieve this goal, there remain issues that deserve further reflection.
The Markets in Financial Instruments Directive (MiFID), as a comprehensive regulatory framework for European financial investment services, together with the corporate movements taking place in European stock exchanges, is going to change the trading landscape, blurring the business barriers between banks and exchanges.
The European financial industry faces crucial challenges in the next few years. However, the support of the European authorities and the interest of the banking industry in the widening of business possibilities that financial integration represents, and the big changes that financial regulations are going to bring, have not been enough to obtain clear, tangible results in the European financial integration project. This is mainly because there is one important piece missing: national governments’ lack of drive.
This faint-hearted attitude reflects a lack of commitment to the objectives of the Lisbon agenda and a lack of broad-mindedness, which stands in sharp contrast to the vision of a European single market. Governments should understand that without a competitive and flexible banking industry, it is impossible for Europe to become the most dynamic economic area in the world.
Survival tactics
Even if Europe were to be less ambitious, flexibility and competitiveness would still be needed to survive in a changing financial landscape where banking services should be provided on a global basis. In this context, European banking institutions must be capable of meeting not only European challenges, but also the worldwide demands of the 21st century. We need the support of domestic authorities on this front.
Overcoming the barriers to reaching a pan-European banking market would be of great help in capitalising EMU potential. That means higher degrees of efficiency and a much wider range of products and services at more competitive prices for the best advantage of customers, European citizens and businesses alike.
Francisco González is chairman of the European Financial Services Roundtable, and chairman and CEO of BBVA.
