BANKING & FINANCIAL SYSTEMS
FALL 2008
Session 3
Reading Materials
EU Banking Structures – October 2005
The French Banking System – G20 Report
HRA (3A)
EU BANKING STRUCTURES
OCTOBER 2005
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EU BANKING STRUCTURES
OCTOBER 2005
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The cut-off date for data in this report is
3 October 2005.
ISSN 1830-186X (print)
ISSN 1830-1878 (online)
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October 2005
CONTENTS
EXECUTIVE SUMMARY 5
1OVERVIEW OF DEVELOPMENTS IN THE EU
BANKING SECTOR IN 2004 7
1.1Regulatory developments 7
1.2Consolidation 8
1.3Market structure 10
1.4Internationalisation and integration 11
1.5Intermediation aspects 12
1.6Changes in funding structures 13
1.7Conclusion and outlook 14
2THE EU SYNDICATED LOAN MARKET 15
2.1Introduction 15
2.2The global and EU market 15
2.3Pricing of syndicated loans 17
2.4Main borrowing sectors 19
2.5Concentration 21
2.6Conclusions and financial stability
implications 22
3COMPETITIVE CONDITIONS IN
EU MORTGAGE MARKETS 23
3.1Introduction 23
3.2Indicators of competition in EU
mortgage markets 23
3.2.1 Price and product
differences 24
3.2.2 Market structure and entry
barriers 26
3.2.3 Variety in distribution
channels, innovation and
substitution 27
3.2.4 Competition at the funding
side 29
3.3Conclusions and financial stability
implications 29
4THE STRUCTURE OF EU CONSUMER
LENDING MARKETS 31
4.1Introduction 31
4.2The evolution of EU consumer
lending market 31
4.3Product mix, competition,
technology and funding 32
4.4The integration of the EU consumer
lending markets 34
4.5Conclusions and financial stability
implications 35
5INTERNATIONAL ACTIVITIES OF LARGE EU
BANKING GROUPS 37
5.1Characteristics of the group of major
EU banks relative to EU banks as a
whole 37
5.2Outward reach and bank
characteristics 38
Assets held outside the home
country 38
Establishments abroad 41
5.3Foreign presence and host country
characteristics 42
5.4Conclusions 45
Annex: Sample coverage 46
ANNEXES
1 Structural indicators of the
EU banking sector 48
2 Methodological note on the
structural indicators 63
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October 2005
LIST OF COUNTRY ABBREVIATIONS
AT Austria
BE Belgium
BG Bulgaria
CH Switzerland
CY Cyprus*
CZ Czech Republic*
DE Germany
DK Denmark
EE Estonia*
ES Spain
FI Finland
FR France
GR Greece
HU Hungary*
IE Ireland
IT Italy
JP Japan
LT Lithuania*
LU Luxembourg
LV Latvia*
MT Malta*
NL Netherlands
PL Poland*
PT Portugal
RO Romania
SE Sweden
SI Slovenia*
SK Slovakia*
UK United Kingdom
US United States
EEA European Economic Area (18 countries; EU-15 plus Norway, Iceland, and
Liechtenstein)
EU (EU-25) European Union (25 countries, after enlargement on 1 May 2004)
EU-15 European Union (15 countries, before enlargement on 1 May 2004)
NMS New Member States (10 countries, marked with *)
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Continuing with a practice that began in 2002,
this is the fourth annual review of structural
developments in the EU banking sector. The
analysis is based on a wide range of indicators
as well as on an exchange and assessment of
qualitative information by the Banking
Supervision Committee’s (BSC) member
organisations.
The report starts with a review of general trends
in the banking sector, focusing on
developments until mid-2005. Four short
articles then look in more detail at the structure
of and developments in EU syndicated lending
markets, competition in EU mortgage markets,
EU consumer lending, and the international
activities of a sample of large EU banks.
The finalisation of the Basel II framework and
the introduction of new International Financial
Reporting Standards (IFRS), as well as the
revision of some existing International
Accounting Standards (IAS) were the most
significant regulatory developments in 2004
and early 2005. Retail financial services and
corporate governance also received some
attention from regulators during the past year,
as the European Commission set out its plans
for the future of financial services policy in the
EU and as part of amendments to governance
frameworks in various countries.
Internationalisation and consolidation
continued to shape developments in the
banking industry in the review period,
although, in recent years, this trend has been in
decline. Whilst this consolidation process
within and across borders and sectors may
make individual institutions less reliant on any
single region or product line – and hence
contribute positively to financial stability in
the longer-term – as institutions grow larger, so
too will their systemic relevance. Also, the
changing nature of banks’ activities and their
linkages to one another have an impact on the
industry’s long-term risk profile.
With regard to banking activities, these
continued to focus on retail business – in
EXECUTIVE SUMMARY
particular mortgage and consumer lending –
and consequently represent a growing share of
banks’ profits. In addition, the business model
followed by EU banks is slowly changing from
being an integrated production and distribution
platform for financial services into an
increasingly open architecture. Furthermore,
the funding structure of EU banks is being
reshaped and is becoming more diversified and
less reliant on deposits.
Overall, the EU banking system is becoming
more integrated over time, and it is probable
that competitive conditions will continue to
intensify. Notwithstanding this, some
important obstacles remain, the removal of
which would effectively improve consumer
welfare. This is particularly evident in
consumer lending markets, as documented in
this report.
Turning to the short articles, the chapter on
syndicated lending shows that this activity has
grown significantly over the last two decades
and has reshaped banks’ relationships with
large corporations. Syndicated lending
contracts have become more standardised and
have contributed to financial integration, by
creating wider and more liquid funding
opportunities for borrowers and a level playing
field for banks. Some notable developments
have emerged in the EU syndicated loans
market over the last decade, in particular
relating to margins for investment-grade
borrowers. The latter have narrowed owing to
strong competition among banks in this
segment, and a sharp rise of the leveraged
market segment, where lower levels of risk
compensation may have taken root. A careful
assessment of the way in which this market
segment is evolving and whether such
developments signal potential risks is
warranted.
The special focus on competitive conditions
across the different EU countries’ national
mortgage markets reveals that these have
intensified in recent years, albeit mostly within
domestic markets. Although differences in
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October 2005
national rules and natural barriers such as
culture, tradition and language play a central
role, industry representatives have also
identified different consumer protection
standards and the lack of profit opportunities
stemming from strong domestic competition as
factors limiting foreign presence. More
generally, intense competition in EU mortgage
markets – should it result in a lowering of
standards in credit risk assessment, too narrow
margins or a greater exposure to markets that
have shown some deviation of house prices
from intrinsic values – could threaten financial
stability. Comfort is provided by the relative
security of mortgages and by the fact that risk
management practices are generally assessed
as being sound.
As regards consumer lending, the range of both
products and providers appears to have
expanded significantly during the past decade,
whereas the funding has gradually shifted from
deposits to capital market instruments. Cross-
border integration is found to be relatively
weak at present but may develop over time,
supported by new EU proposals for regulations
aimed at harmonising the various national
consumer credit frameworks. However, some
natural barriers such as language and cultural
differences are likely to continue to uphold the
importance of the supplier’s proximity. As
with mortgage products, intense competition in
this market segment could raise concerns over
financial stability were margins to be eroded or
standards for credit risk assessment lowered.
The article on large EU banks that are
internationally active compares their
characteristics with those of a wider group of
peers, as well as with each other. This group of
around 40 large banks is typically better
capitalised, more profitable, and less risky than
its national competitors. However, when
contrasted with one another, a higher foreign
presence is positively associated with size, and
negatively with provisions and capital buffers,
possibly signalling some diversification
benefits within the group from cross-border
operations. Furthermore, several factors are
found to be conducive to a higher presence of
foreign credit institutions in local banking
markets. Where the local banking market is
more profitable, has higher safety buffers
(i.e., solvency and provisions) and is more
concentrated, the foreign presence tends to be
higher. Smaller and financially less developed
banking markets are relatively more penetrated
by foreign banks, and a stable environment
tends to favour the development of larger
domestic entities relative to foreign ones.
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This chapter provides an overview of general
structural developments in the EU banking
sector between 2004 and mid-2005.1 General
regulatory developments that have affected the
banking sector, as well as developments in
banking structures – i.e. consolidation, market
structure, internationalisation and integration,
intermediation, and funding – are discussed.
1.1 REGULATORY DEVELOPMENTS
Regulatory initiatives pertaining to the EU
banking sector focused on three issues
during 2004 and early 2005: the adoption
of new international financial reporting
standards, progress in the finalisation of
the European Commission’s Directive for
the implementation of Basel II, and the
presentation of the European Commission’s
Green Paper on Financial Services Policy
(2005-2010) upon the completion of the
Financial Services Action Plan (FSAP).
Furthermore, corporate governance rules
continued to be an important issue in some EU
countries and international fora.
The main regulatory initiative under discussion
in 2004 was the adoption of a new set of
international financial reporting standards
(IFRS) and the revision of some existing
standards (IAS) issued by the International
Accounting Standards Board (IASB).
Discussion of this initiative has been
particularly prominent in the EU given that the
regulation in question2 requires all listed
European companies, including banks, to
publish their consolidated financial statements
in accordance with the IFRS from 1 January
2005.3 The policy discussion surrounding the
IFRS has centred on some of their potential
effects on financial stability in response to
some studies which show that the adoption of
the IFRS may result in greater income and
balance sheet volatility relative to current
accounting standards.
In June 2004 the Basel Committee published
the final version of the new capital adequacy
1 OVERVIEW OF DEVELOPMENTS IN THE
EU BANKING SECTOR IN 2004
rules (Basel II) and, one month later, the
European Commission released its own
proposals on new capital requirements for
banks and investment firms in the EU. The new
rules are more risk-sensitive than the existing
rules (Basel I) as they require less capital for
better quality loans and more capital for poorer
quality loans. The introduction of the new rules
could release some of the banks’ current
regulatory capital, which could translate into
an estimated annual increase in profits of
€10-12 billion for the EU banking sector as a
whole.4
Under the Financial Services Action Plan
(FSAP), which originally brought together 42
legislative measures to create a single market
in financial services, 39 measures were
adopted by mid-2005. Some important
measures adopted in 2004 include amendments
to company law to allow fair value accounting,
modernisation of accounting provisions,
communication and corporate governance,
supplementary supervision of financial
conglomerates, and the Directive on financial
instruments markets.5
In its Green Paper on Financial Services Policy
(2005-2010), the European Commission
prioritised the simplification and consolidation
of existing relevant financial regulations and
the pursuit of further supervisory convergence
as well as implementation of the outstanding
FSAP measures. Moreover it aims at carefully
assessing any new legislative action and giving
relevant stakeholders sufficient time to adapt
1 A number of structural statistical indicators (SSIs) for the
banking sector are collected each year from EU supervisory
authorities and central banks and are listed in Annex 1. This
year, the annex is expanded with data from the new EU Member
States (NMS) that joined on 1 May 2004. As far as possible,
historical data are also provided for the group of NMS.
2 Regulation (EC) No 1606/2002 on the application of
international accounting standards.
3 See also the box on the financial stability implications of the
new IFRS in the ECB (2005), Financial Stability Review, June,
p. 76-77
4 Basel Committee on Banking Supervision, Third Quantitative
Impact Study, July 2003, and national impact studies (QIS4)
undertaken in 2004 and early 2005.
See also www.bis.org/bcbs/qis
5 See also europa.eu.int/comm/internal_market/finances/actionplan
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to the changes these measures require.6 As
regards the banking sector, regulatory
interventions on retail banking as well as asset
management will be considered.
New corporate governance rules have been
introduced or strengthened in the past two
years in many European countries, in line with
a trend towards greater accountability and
transparency.7 Good corporate governance will
continue to be important for companies as a
factor for accessing capital and for share price
performance. For banks, adequate corporate
governance is even more important, owing to
their role as a financial intermediary and the
comparatively higher risk of contagion in the
banking sector.
These recent regulatory developments may
affect some of the longer-term trends under
way in the EU banking sector. They have the
potential to enhance the EU banking sectors’
competitiveness, facilitate the cross-border
provision of services and promulgate a more
integrated and diversified financial system.
1.2 CONSOLIDATION
The number of credit institutions in the EU has
been declining since 1997, and in 2004 it
dropped by a further 2.8% (see Table 1 in the
annex).8 In 2004 the total number of EU credit
institutions stood at 8,374.
Mergers & Acquisitions (M&A) activity has
been declining since 1999, and this trend
continued in 2004 and the first half of 2005.
This suggests that consolidation is proceeding,
albeit at a decelerating pace (Chart 1 and 2).
This decline can be explained mainly by a
slowdown in domestic M&A activity. By
contrast, cross-border M&As have increased
relative to the period 1993-1998, both in
absolute and relative terms, accounting for
about 30% of the number and 24% of the value
of all deals in the more recent period, up from
20% in the earlier period.9 Increased financial
market integration, higher competition and
limits to domestic concentration, as well as the
introduction of the euro are seen as possible
explanations for this development.
The high profile acquisition of Abbey National
(UK) by Banco Santander Central Hispano
(ES), as well as other recently announced M&A
transactions10, have served to renew public
debate on cross-border consolidation in the EU
banking sector. Some claim that this may mark
the resurgence of cross-border banking
Chart 1 Number and value of banking sector
M&As in EU-15
(1990-2005H1; number of deals = left-hand scale; value (EUR
billions = right-hand scale)
Source: Thomson Financial SDC.
Note: 2005 figures are annualised. Cross-border M&A
refers to transactions in EU-15 involving a non-domestic
acquirer. Outward M&A refers to non-EU acquisitions of
EU-15 banks (only up to 2005Q1). The number of deals is
shown on the left-hand scale. Value of deals is
represented as stacked lines on the right-hand scale, but is
missing for a number of deals.
0
50
100
150
200
250
90919293949596979899000102030405H1
0
25
50
75
100
125
domestic
cross-border
outward
domestic (value)
cross-border (value)
outward (value)
6 European Commission, Green Paper on Financial Services
Policy (2005-2010), COM (2005) 177, May 2005.
7 See also ECB (2005), “The evolving framework for corporate
governance”, Monthly Bulletin, May, 89-100. Also note that
the BCBS is currently evaluating an update of the guidance on
“Enhancing Corporate Governance for Banking
organisations”.
8 See also ECB (2005), “Consolidation and diversification in the
euro area banking sector”, May, Monthly Bulletin, 79-87.
9 However, cross-border M&As in other sectors of the economy
generally account for around 45% of all M&A deals.
10 During the first half of 2005, two other large cross-border deals
were finalised: the acquisition by Danske Bank (DK) of two Irish
banking units and of Hansapank (EE) by Swedbank (SE). At the
same time, three proposals for cross-border M&As that attracted
wide public attention were those by ABN Amro (NL) and BBVA
(ES) wishing to acquire Antonveneta (IT) and BNL (IT),
respectively, and by Unicredit (IT) to acquire HVB (DE).
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1 OVERVIEWOF
DEVELOPMENTS
IN THE
EUBANKING
SECTOR
IN2004
Chart 2 Number and value of banking sector
M&As in NMS
(1990-2005H1; number of deals = left-hand scale; value (EUR
billions = right-hand scale)
Source: Thomson Financial SDC.
Note: See notes to Chart 1.
90919293949596979899000102030405H1
domestic
cross-border
outward
domestic (value)
cross-border (value)
outward (value)
0
10
20
30
40
50
60
70
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Chart 3 Bancassurance M&As in the EU-25
(1990-2005H1; number of deals = left-hand scale; value (EUR
billions = right-hand scale)
Source: Thomson Financial SDC.
Note: Bancassurance refers to banks acquiring insurance
companies and insurance companies acquiring banks. See
also notes to Chart 1.
domestic
cross-border
outward
domestic (value)
cross-border (value)
outward (value)
0
25
50
75
100
125
909192939495969798990001020304 05 Q1
0
15
30
45
60
75
integration in the EU, as significant excess
capital is currently being generated in the
banking sector.11 Recent changes in regulatory
frameworks (the IFRS, Basel II, and the
Financial Conglomerates Directive) could also
stimulate moves towards bigger entities.12
The ongoing consolidation of the EU banking
sector may change competitive conditions and
further improve the efficiency and
diversification of EU banks. On the other hand,
cross-border deals are often more problematic
in delivering synergies, as it is more difficult to
quantify and realise the efficiency gains, and
may involve a potentially larger overpayment
to acquire a local branch network. Different
rules and regulations make it difficult for
financial services companies to expand into
other EU countries and bank products tend to be
specific to each country and thus cannot be
easily sold across borders. This may affect the
ability of EU banks to exploit economies of
scale through operating at a pan-European
level. Furthermore, there may be cultural and
language barriers and labour market rigidities
which act as an obstacle to cross-border M&As
in Europe.13 In this context, Chapter 5 examines
determinants of internationalisation strategies
of large EU banking groups in more detail.
Cross-sector consolidation between banks and
insurance companies remained low in 2004
relative to the peaks in deal value seen between
2000 and 2001, but was in line with the level
of market activity seen in the last two years
(Chart 3).14
11 According to a study by Morgan Stanley and Mercer Oliver
Wyman (“European Banking Consolidation”, February 2005),
the EU banking sector will generate €74 billion of “excess
capital” by 2006.
12 Other, more traditional arguments are, first, defensive reasons,
which motivate other banks to look for cross-border M&A
opportunities, or risk falling behind in international league
tables. Second, cross-border mergers have the potential to
reduce bank risk and may therefore be seen as a sound policy of
geographic diversification and creation of synergies. Third, in
local banking sectors that are already highly concentrated,
international M&As seem the only possible way forward for
growth.
13 A survey by KPMG conducted among 2,360 bank customers in
March 2004 showed that 53% of the retail customers in 10 EU
countries would prefer to deal with a local bank instead of a
foreign bank and 46% would not want to see the emergence of a
handful of pan-European “super banks”, suggesting that
people generally do not favour the idea of a few dominant
players monopolising the market.
14 In terms of value, bancassurance deals during the period
1990-2005Q1 were mainly performed in North America.
However, a large number of (low-value) deals were concluded
in other European (non-EU) countries.
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October 2005
1.3 MARKET STRUCTURE
Many countries, especially smaller EU Member
States, continue to be characterised by high
concentration in the banking sector, as measured
by the share of the five largest institutions in total
banking sector assets (see Table 3 in the annex).
However, concentration remained relatively low
in DE, IT, LU and the UK.15 Similar evidence is
conveyed by the Herfindahl index, which
measures the sum of the squared market shares of
the individual institutions.16
In recent years, a number of studies have attempted
to measure whether a concentrated market structure
adversely affects competitive market conditions.
This would primarily be the case if the market were
characterised as a monopoly or an oligopoly, as this
raises concerns over the exploitation of market
power. Evidence for most EU countries shows that
banking markets tend to be characterised by
monopolistic competition. It is noteworthy that
some studies show that a more concentrated
banking system goes hand in hand with a more
competitive structure.17 This may indicate that a
15 In DE and IT, this can among other things be attributed to a dual
banking structure (with both commercial and cooperative
banks), while in LU and UK, this is due to the presence of many
foreign banks not directly providing services to residents,
hence understating the level of concentration of banking
services to residents.
16 According to US competition authorities, a number higher than
1,800 indicates a concentrated market.
17 See, for example, Bikker and Haaf (2002), “Competition,
concentration and their relationship: An empirical analysis of
the banking industry”, Journal of Banking and Finance 26 (1),
2191-2214; Claessens and Laeven (2004), “What Drives Bank
Competition? Some International Evidence” Journal of
Money, Credit and Banking, 36, 563-584.
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