Lars Heikensten: The integration of European banking - some regulatory challenges Speech by Mr Lars Heikensten, Governor of Sveriges Riksbank, at the seminar “The Integration of Financial Markets in Europe”, at the “Riksdagshuset” (Swedish Parliament), Stockholm, 21 April 2004. *  *  *  Thank you for inviting me to share my views on the integration of financial markets in Europe. We have just heard about the positive role capital markets might have in fostering economic growth and stability. We have also heard about how the regulatory process has been changed to promote the growth of an integrated European market for capital and securities. It is my hope that also the area of bank regulation will become part of this simplified process. It is certainly needed. Compared to the European securities market, the banking market is lagging many years behind in terms of integration. True, large companies may have access to foreign bank funding as well as to international debt and equity markets. When it comes to choosing your bank at the retail level, however, Swedish households and small and medium sized companies are left to a market which is to more than 90 percent dominated by Swedish banks. This situation is shared by most other EU countries. This is not a problem in itself. Swedish (or, in general, domestic) banks might very well be excellent. However, most of us tend to believe that cross-border integration, just as trade, is something good because it increases competition.
Hence, the insignificant degree of EU cross-border banking integration is probably partly explained by economic factors. However, the existence of large differences in profitability and efficiency between individual EU countries’ banking systems indicates potential for cross-border expansion also within the EU. In competitive industries, such differences do not exist for a longer period, as less efficient firms would be pushed out of business or acquired by more efficient competitors. These wide profitability gaps should attract more efficient entrants. Against this background, it is interesting to note that many European banks seem more attracted to the US banking market. The US banking system is by many considered as the most developed and competitive in the world. You would indeed expect EU-based banks to find it easier to expand within the EU than into the US. Still, several major European banks have much larger retail operations in the US than they have in neighbouring European countries, e.g. HSBC, ABN Amro, and BNP Paribas. One cannot avoid the question of whether larger obstacles to cross border banking exist in Europe than in the US. Regulatory schemes and practices still a major problem for integration Given the gradual increase in harmonisation of EU banking and financial sector legislation, it is perhaps surprising to find regulation to be one of the most important barriers to further integration. In my view, there are two issues here. First, although the general legal framework has been converging, the practical implementation of rules and regulations still differs widely between member states.