Higher competition, in its turn, improves the efficiency, which ultimately leads to higher quality and lower prices for consumers. Indeed, this is one of the main ideas underpinning the European single market. This idea is undoubtedly true also for the banking industry. There is increasing evidence of the positive link between the efficiency of the financial system, of which banking is the most important part, and the wealth and growth of the real economy. Thus the potential benefits of a more efficient financial system are substantial. Considering that most financial services bought by consumers (private individuals and SMEs) are bought from their bank, the low integration (and in many cases low efficiency) of European banking is a significant hindrance to creating an overall efficient market in financial services. Barriers to integration Why then is integration of European retail banking not happening or only happening very slowly? The first and second bank harmonisation directives and more recently the many initiatives within the Financial Services Sector Plan, FSAP, have set the legal framework for cross-border expansion. In principle, any European bank can easily set up or acquire a subsidiary in another member state. More importantly, a bank only needs one single banking licence in one member state to be able to offer banking services in all EU member states. So why are we not seeing serious integration of European banking? A number of possible reasons have been cited. These could roughly be divided into three kinds: economic, regulatory, and political.
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.