Revolution in EU Securities Kicks Off - Essay Example

For companies too--such as online shops, travel agents, and mail-order firms--a big obstacle to operating in the eurozone was thus removed.

For banks, on the other hand, it was a bitter-sweet experience. Before the euro, they easily handled 15 different West European currencies and interest rates and made good money out of trading cash, securities, and derivatives for customers and their books. On January 1st, 1999, when 11 currencies were irrevocably fixed against each other (the 12th, the Greek drachma, joined the euro two years later), ten out of 15 currencies vanished from traders' screens. Many European banks lost a chunk of their income.

The consolation was that, at a stroke, wholesale financial markets in Europe became much more integrated and more interesting for non-European investors. This caused much rebalancing of investment portfolios, because shares, bonds, loans, and derivatives could be bought across the eurozone without additional currency or interest-rate risk.

On the wholesale side, the integration of European financial markets has been a resounding success. But on the retail side--bank accounts, payments, mortgages, insurance policies, and personal investments--the process has hardly begun.

One strong sign that there is little convergence is the scarcity of cross-border banking mergers. So far there has been only one significant one, the purchase of Abbey National, Britain's sixth-biggest bank, by Banco Santander Central Hispano οf Spain. One medium-sized French bank, Crédit Commercial de France, was bought by Britain's HSBC in 2000, and in the same year, Germany's HypoVereinsbank bought Bank Austria. In Italy, another Spanish bank, BBVA, looks likely to succeed in its bid for Banca Nazionale del Lavoro, and ABN Amro οf the Netherlands has been battling to take over Banca Antonveneta. Apart from some cross-border bank consolidation in the Benelux and Scandinavian countries, that is as far as integration in Western Europe has got.

In central and eastern Europe, it is a different story. Since the early 1990s, large swathes of the banking sector there have been privatized and ended up in foreign hands. That has brought immediate benefits in terms of safety and soundness, fresh capital, innovation, and integrity, although some economists are alarmed by the long-term implications.

Why the east-west split? Ask the head of a big west European bank why he has not bought up a rival in, say, France, Germany, or Italy, and he will give two reasons. First, political and legal barriers to entry act as a disincentive. About half of the French banking system is still in public hands, and a foreigner would find it politically tricky to buy one of the three biggest banks, Crédit Agricole Lyonnais, Société Générale or BNP Paribas. In Germany, an even higher proportion of banks are in public or mutual hands, which means they are simply not for sale. There is a handful of private banks, but their share of the banking market is too small to give a foreign buyer critical mass. In Italy, several of the big banks are theoretically open to takeover, but real or perceived political barriers have discouraged foreign bids until recently.

The second reason for not buying is that, in contrast to domestic mergers, the expected cost savings and economies οf scale are rather modest. Domestic mergers benefit from the closure of branches and cuts in the number of employees and other fixed costs. Cross-border mergers are likely to bring only a few savings from the eventual integration of IT systems, back offices, and perhaps the design and marketing of some financial products. But in general, even banks that have bought subsidiaries abroad tend to run them as separate banks. For example, Citigroup has not integrated its banking operations in various European countries, and nor have Nordea (the result οf a merger of four Scandinavian banks), Deutsche Bank, HSBC, or any οf the smaller banks with subsidiaries in central and eastern Europe.

The reason is simple. When it comes to retail banking, each national banking system, whether inside or outside the EU, is still an island. Tax, ownership, consumer protection, and conduct-of-business rules have not been harmonized. Despite the principle of mutual recognition, which is supposed to allow EU banks to operate branches in other EU countries under the supervision of their home regulator, simply opening branches in other countries does not win many retail customers.