"offensive" and "defensive" banking consolidation has mainly developed within national industries, thus significantly increasing concentration, particularly in the smaller countries (Table 3); it may be related not so much to the direct impact of EMU as to globally intensified competition and the need to increase efficiency.
In the coming years internationalisation is likely to increase,
because, with the euro, foreign entrants can now fund lending from their
domestic retail deposit base or from euro-denominated money and capital
markets. The relatively large number of foreign branches and subsidiaries
already established could be a sufficient base for an expansion of
international banking activity (Table 4) since a single branch, or a small
number of branches, may be sufficient to attract customers, especially when
they are served through direct banking techniques, such as telephone and
Internet banking. Also, the cross-border supply of services on a remote
basis is likely to spread as direct banking techniques develop. As to cross-
border mergers and acquisitions aimed either at achieving a "critical mass"
for wholesale financial markets, or at rapidly acquiring local expertise
and customers in the retail sector, they may remain scarce because the cost
savings from eliminating overlaps in the retail network are likely to be
limited and the managerial costs of integrating different structures and
corporate cultures are substantial.
11. However, banks' internationalisation does not provide the full
picture of the interconnections of banking systems. As "multi-product"
firms, banks operate simultaneously in many markets which have different
dimensions: local, national, continental (or European) and global. The
advent of the euro is likely to enlarge the market for many banking
products and services to the continental dimension; this will
"internationalise" even those banks that remain "national" in their branch
networks and organisation.
The formation of the single money market in the euro area has largely
taken place already. The dispersion in the euro overnight rate across
countries, as reported by 57 so-called EONIA banks, fell in January from
around 15 to 5 basis points. The variation between banks has been
significantly greater than between countries. The TARGET system has rapidly
reached the dimension of Fedwire, with a daily average value of payments of
E1,000 billion, of which between E300 and E400 are cross-border. The ever
stronger interbank and payment system links clearly increase the
possibility of financial instability spreading from one country to another.
Through these links the failure of a major bank could affect the standing
of its counterparties in the entire euro area. On the other hand, the
deeper money market could absorb any specific problem more easily than
before.
As regards the capital markets, the effects of the euro will take
more time to manifest themselves, but are likely to be substantial. The
single currency offers substantial opportunities for both debt and equity
issuers and investors. The increase in the number of market participants
operating in the same currency increases the liquidity of the capital
markets and reduces the cost of capital. The low level of inflation and
nominal interest rates and diminishing public sector deficits are
additional supporting factors of capital market activity, especially
private bond market activity which has so far been relatively limited
(Table 5). Banks will thus operate in increasingly integrated capital
markets and will be exposed to shocks originating beyond their national
borders.
As to corporations, they may concentrate their operations (treasury, capital market and payment management) in a single or few "euro banks", while the disappearance of national currencies may break links between firms and their home country "house bank". This dissociation would make the domestic economy indirectly sensitive to foreign banks' soundness, thus creating another propagation channel of banking problems across countries.
12. When considering the industry scenario for the coming years, the
viewpoint has to be broadened beyond the impact of the euro. Rather than
the exclusive, or even primary, force for change, the euro is expected to
be a catalyst for pre-existing trends driven by other forces. The recent
ECB report prepared by the Banking Supervision Committee on "Possible
effects of EMU on the EU banking systems in the medium to long term" gives
a comprehensive analysis of such trends, which can be summarised as
follows. First, regulation: the industry has yet to feel the full impact of
such fundamental, but relatively recent, regulatory changes as those
related to the single market legislation. Second, disintermediation: other
financial intermediaries and institutional investors will grow relative to
banks, pushed by demographic and social changes, as well as by the
increasing depth and liquidity of the emerging euro area-wide capital
market. Disintermediation is expected to take the form of increasing
recourse to capital market instruments relative to bank loans by firms, and
diminishing investment in deposits by households relative to mutual funds
and related products. Third, information technology: bank products,
operations and processes are changing rapidly, while technology offers
increasing possibilities for dissociating the supply of a large number of
services from branches and face-to-face contact with customers. The current
tendency in the EU banking systems to reduce over-branching and over-
staffing will grow stronger.
These factors will increase competition, exert pressure on profitability and oblige banks to reconsider their strategies. Such effects are already visible throughout the EU. They produce changes in organisation, new products and services, mergers, strategic alliances, co- operation agreements, etc. They also involve strategic risks, because the pressure for profitability and some losses of revenue due to the euro, for example from foreign exchange, may push some banks to seek more revenue from unfamiliar business or highly risky geographical areas. Inadequate implementation of new technologies or failure to reduce excess capacity may also affect banks' long-term viability. In the short term, the structural adaptation process could be made more difficult by the combination of factors like the protracted financial difficulties of Asia and Russia, or the preparations for the year 2000.
IV. CURRENT SUPERVISION
13. Against the background of the institutional framework and the industry scenario I have outlined, let me now turn to the functioning of banking supervision in the euro area. Two preliminary observations. First, the objective of financial stability pursued by banking supervisors is only one in a range of public interests, which also includes competition policy and depositor and investor protection policy. Second, current supervision and crisis management involve different situations and procedures and will therefore be examined in sequence.
14. Starting with current supervision, let me consider banking regulation first. As observed earlier, the regulatory platform for the euro area banking industry combines harmonised rules with country-specific (non- harmonised, but mutually recognised and hence potentially competing) rules.
The harmonised part of the platform includes most of the key
prudential provisions that have been developed in national systems over the
years. More than 20 years ago (1977), the 1st Banking Co-ordination
Directive adopted a definition of a credit institution and prescribed
objective criteria for the granting of a banking licence. In 1983 the first
Directive on carrying out supervision on a consolidated basis was approved,
and in 1986 the rules relating to the preparation of the annual accounts
and the consolidated accounts of banks were harmonised. In 1989 the 2nd
Banking Co-ordination Directive (which became effective on 1 January 1993)
marked the transition from piecemeal to comprehensive legislation,
introducing, inter alia, the principle of "home country control". A number
of other specific directives have subsequently addressed the main aspects
of the regulatory framework - notably, own funds, solvency ratios and large
exposures. A Directive imposing deposit guarantee schemes supplemented the
legislation in support of financial stability. All in all, the European
Union, including the euro area, now has a rather comprehensive "banking
law" consistent with the Basle Committee's rules and with the 1997 Core
Principles of Banking Supervision.
The country-specific, non-harmonised, part of the platform is also quite relevant and very diversified. It includes, among other things, the different organisational arrangements for the conduct of banking supervision (central bank, separate agency or a mixed arrangement); the tools used by banking supervisors (e.g. supervisory reporting, on-site inspections); provisions for the liquidation and restructuring of banks; and the definition and legal protection of financial instruments and contracts. Even the key notion of a regulated market is harmonised only to a very limited extent.
15. Such "neutrality" and "incompleteness" on the part of the EU
legislator with respect to key aspects that are normally incorporated in
the regulatory framework is a unique feature of EU banking regulations and
is likely to trigger a deregulatory process, pushed by competition among
the national systems and the different financial centres in the euro area,
and beyond that in the EU. Against the background of the increasing
competition and other changes in the banking industry, one can expect that
the regulatory platform will evolve in the years to come. Additional EU
legislation may prove necessary to complete and strengthen the harmonised
part. One important part of common legislation, namely the draft Directive
on liquidation and re-organisation measures for credit institutions, has
not yet been adopted and, indeed, has been stalled for years. This
Directive is needed to bring legal certainty to the framework for banking
crisis management. In this regard, it would be useful for the Eurosystem,
if necessary, to be able to exclude counterparties from the single monetary
policy on prudential grounds. Also, the non-harmonised part of the platform
will come under pressure to converge, as I have just mentioned, through the
process of "regulatory competition". Like any other rapidly changing
industry, the banking sector will require careful attention by regulators.
As indicated earlier, the ECB will have the possibility of contributing to
the rule-making process through its advisory tasks under Article 105 (4) of
the Treaty and Article 25.1 of the Statute of the ESCB.
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