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The Actuary The magazine of the Institute & Faculty of Actuaries

Competition in European financial services

A new report from the Centre for Economic Policy Research published in March makes an important contribution to the continuing debate on improving cross-border competition in financial services in the European Union (EU). Integration of European banking: the way forward is available from www.cepr.org and its publication followed criticism of banks by Charlie McCreevy, European commissioner for internal market and services.

This report documents a variable level of integration in banking. It is high in wholesale banking and in certain areas of corporate finance, modest in relationship aspects of banking, low in retail banking, and patchy and heavily dependent on foreign financial institutions in the accession countries. For the most part, integration has been greatest where economic theory predicts it to be so. Care therefore needs to be taken not to attempt to correct perceived low levels of integration through excessive harmonisation of regulation in areas in which only modest amounts of integration can be expected. However, the report rejects the use of arguments about ownership and relationship banking to justify the retention of artificial barriers to integration. On the contrary, further efforts are required to eliminate these through:

  • The establishment of institutions to ensure the effective implementation and enforcement of the EU Financial Services Action Plan (FSAP).
  • The pursuit of home-country regulation and minimising host-country regulation.
  • The creation of lead regulators to co-ordinate cross-border activities.
  • Strengthening of competition policy at the EU as well as the domestic level to prevent discrimination against cross-border activity.
  • The determination of lender of last resort facilities in the EU.