Published on October 18, 2009
Retail Banking in Europe The Way Forward The European Voice of Savings and Retail Banking
Retail Banking in Europe The Way Forward Cover concept: “The diverse landscape of banking drives the economy forward”.
Acknowledgements ESBG would like to thank its members who contributed to this report. We would also like thank the colleagues of the consulted ESBG committees and other ESBG working bodies for their input: Coordination Committee Economic Affairs Committee Payments Committee Supervision and Capital Requirements Committee Accounting and Audit Committee Corporate Social Responsibility Committee Financial Regulation Committee Task Force Capital Markets Regulation Task Force Consumer Policy Task Force SMEs Task Force on Anti-Money Laundering and Counter Terrorist Financing Statisticians Network Disclaimer The opinions and views expressed in this report do not necessarily reflect the individual views of all ESBG Members; they are the result of a consultation process involving ESBG committees and other ESBG working bodies. Given current ongoing discussions with the European Commission, Lloyds TSB believes that it is not appropriate for it to comment publicly on European regulatory issues for the time being, and is therefore not a party to this report.
FOREWORD These are interesting and uncertain times, and we cannot tell yet where they will lead us. The financial world is changing and it is to be expected that banking itself – whether globally or in the EU – will undergo a significant transformation. Now is not the time for concrete predictions, yet we look ahead with optimism and with the confidence that also in the times to come, Europe’s savings and regionally oriented retail banks will drive economic growth and development, as indeed they always have. The aim of this report is to work towards this goal by stimulating and contributing to the various relevant debates and initiatives, which are currently shaping the retail banking sector along various dimensions. Firstly, fervent discussions are ongoing in the context of the financial and economic crisis. At the centre of these debates stands improving the regulation of Europe’s financial sector in all those areas where regulatory shortcomings are now recognised as having contributed to – or as not having effectively prevented – the build-up to the crisis. For the same reasons, Europe’s supervisory architecture is currently under revision. In parallel, however, it would be of similar importance to extend the ongoing political discussions to Europe’s financial players themselves and to reassess the priorities of banks as regards their role in the economy. The events of the last two years prove that, in Europe and also in the US, such a discussion on bank priorities is long overdue. As representatives of savings banks and regionally oriented retail banks we feel that it is our role to stimulate such a debate, since during the last two years these business models have undoubtedly reconfirmed their validity. Secondly, the debate on the long-run integration of Europe’s banking sector and the achievability of a Single Market for retail financial services continues. This debate on the ‘growing together’ of Europe’s national retail banking markets and on the economic aspects of market integration is of greatest importance for the sector and for Europe. As a matter of fact, the current supervisory and regulatory revisions will reset some of the underlying conditions for this debate, in ways which cannot yet be anticipated. However, there are persisting central factors that determine the building blocks for any sound and reality-based vision or strategy for the future of Europe’s retail financial services markets. As savings banks are among the oldest and most deeply embedded providers of retail financial services, we feel compelled to point out certain core parameters which are fundamental for any realistic debate on retail banking sector integration. Thirdly, in the field of retail banking policy, continuous efforts are being undertaken to drive forward the integration of Europe’s retail financial markets in practice. This applies to areas like the core retail banking business, payments, capital markets, financial inclusion and education, and accounting. Even with the ongoing crisis, in these areas a large part of the dialogue between policy makers and industry is in fact ‘business as usual’. Consequently, we use the occasion of this report to provide our recommendations for the ‘retail banking’ specific policy areas currently on regulators’ agenda, and take this opportunity to present ESBG’s expertise and views as the representative of a major part of Europe’s retail banking industry. Without anticipating our concrete conclusions and recommendations, let us already highlight that ESBG remains true to its long- standing positions and convictions. For both banks and banking regulators, a reality based approach is essential. For banks this reality based approach implies the need for responsible and sustainable business models; for policy makers it means recognising and respecting business realities and fundamental market conditions. Furthermore it goes hand in hand with internalising and maximising the value of Europe’s pluralistic banking sector, not only for the sake of Europe’s banks but even more so for the sake of its citizens, regions and the economy as a whole. The clear and objective goal of Europe is to make the most of its strengths. 5
With this insight, of course, the questions do not end. Rather, as a result of the current crisis, new questions arise, while already established answers to old questions are being revised. Central among the new questions is whether the current economic slow-down will lead to a change in the pace and direction of the integration debate. Looking back, during the past period of economic growth and prosperity until the onset of the crisis in mid-2007, the approach to European market integration taken by most EU policy makers was very ambitious and dynamic – even bullish – but unfortunately not unbiased. However, during the last two years of financial and economic crisis and the experience of fragilities in the financial system, ensuring stable national financial sectors and economies clearly has taken priority. Does it follow from this that dire economic circumstances reveal the ‘real’ constraints to sector integration which previously were overlooked or not binding? Do the experiences of the last two years redirect market players themselves towards their home-markets or change their approach to market-entry and expansion? Is sector integration, in the way previously understood and targeted by policy makers and market players, no longer a priority? Will market players’ and policy makers’ stance on integration turn bearish and, if yes, for how long? Looking at the evolution of new answers for old questions, a change is clearly observable in policy makers’ visions and priorities for the future of the European retail banking market. Until two years ago, the debate was dominated by the central objective of integration, defined as the removal of barriers to the creation of ever bigger banks. Now this approach is being counterbalanced by the recognition that financial stability cannot be taken for granted. At the same time, there are the new additional priorities of promoting financial inclusion, increasing consumer confidence, and achieving responsible business practices. It can therefore be expected that regulators and policy makers will adopt – much more so than they did in the past – holistic and balanced strategies on the basis of all these criteria. As a result, the very nature of the integration debate is likely to change and to become, indeed, more pluralistic. For us as savings and retail bankers this change in the political trend comes as a great confirmation. Europe’s savings banks and regionally oriented retail banks have always been critical towards a one-sided approach to integration: it neither internalised the stabilising impact of Europe’s pluralistic banking landscape and its beneficial effects for competition, nor did it take sufficient account of the socioeconomic role of banks and the necessity of guaranteeing financial stability. The events of the last two years have clearly demonstrated that Europe needs a pluralistic banking sector as well as a circumspect and balanced approach by policy makers. For all these reasons the new direction in the integration debate appears promising and could ensure that the benefits of an integrated European financial market will be more equally distributed. Furthermore, there is reason to hope that integration will become not only fairer, but also safer. It is evident that the European debate on retail banking integration is nearly as diverse, dynamic and multidimensional as the retail banking sector itself. Both bankers and policy makers are learning necessary lessons. By building on realistic foundations, Europe and its banks will move forward carefully, but also with confidence. Heinrich Haasis Chris De Noose ESBG President Managing Director WSBI/ESBG 6
TABLE OF CONTENT Foreword 5 Executive Summary 9 Who is ESBG? 17 1. ESBG – The European voice of savings and retail banking: identity, values and tradition 17 2. ESBG members in the European banking landscape 17 2.1. ESBG members – integrated within the European banking sector 18 2.2. ESBG members – a substantial part of the European banking sector 18 3. ESBG and responsible banking 19 Part 1 – The financial and economic crisis: ESBG key-messages and contributions 23 Setting the scene: the current financial and economic crisis – an unprecedented experience 25 1. Crisis, banks and economy – ESBG views on lending, business ethics and state aid 27 1.1. Retail banking and the real economy – bank lending during the crisis 28 1.2. Views on banks revisited – back to the roots of the business? 31 1.3. State support to the banks and related trade-offs – which approach should be taken? 33 2. Policy responses at the EU Level – ESBG views on the chosen approaches 37 2.1. EU actions as part of the global approach to crisis prevention – revision of existing regulatory and supervisory frameworks 38 2.2. EU actions as part of the global approach to crisis prevention – widening regulatory outreach 40 Part 2 – European retail banking market integration: core parameters for a reality-based approach 43 Setting the scene: the long-run debate on the integration of Europe’s retail banking markets 45 1. Retail banking realities and their implications for market integration 47 1.1. Local demand for retail banking products and services 48 1.2. Distribution of retail banking products: does retail banking become ‘less local’? 51 1.3. Competition in retail banking 54 2. Diversity: heritage and future for the European retail banking market 59 2.1. Banking practices: EU comparisons – EU diversity 60 2.2. Europe – rich in market players 63 2.3. Pluralism in the EU retail banking market 65 7
Part 3 – EU retail banking policy: ESBG contributions and recommendations 69 Setting the scene: the EU approach to financial sector policy and ESBG’s contributions on the basis of the ‘Market Model’ 71 1. Banking supervision 73 1.1. The EU institutional arrangements for supervision 74 1.2. The EU regulatory framework 80 1.3. Deposit Guarantee Schemes 87 2. Financial reporting I – Fair value accounting 91 3. Financial reporting II - IFRS and SMEs 97 4. Wholesale payments and settlements infrastructure 103 5. Capital Markets I – Securities 109 5.1. Markets in Financial Instruments Directive (MiFID) 109 5.2. Prospectus Directive 114 5.3. Market Abuse Directive 116 5.4. Transparency Directive 117 6. Capital Markets II – Asset management and investment funds 119 6.1. UCITS 119 6.2. Alternative investment fund managers 121 6.3. Packaged retail investment products 122 7. Consumer policy in the area of retail financial services 125 7.1. Consumer credit 127 7.2. Mortgage credit 129 7.3. Distance marketing of consumer financial services 133 7.4. Consumer redress 135 7.5. European contract law 137 7.6. Consumer rights 139 8. Retail payments 141 9. Anti-money laundering, counter terrorist financing and financial institutions 151 9.1. The third anti-money laundering directive 152 9.2. Compliance at group level 155 9.3. Financial action task force – FATF 156 9.4. Proliferation financing 158 9.5. Financial sanctions 160 10. SME financing 163 11. Financial inclusion 171 12. Financial education 175 Concluding remarks 179 Annex 1 181 Part 1 – Structural and financial data 181 Part 2 – EU Payments Data 197 Annex 2 203 ESBG Charter for Responsible Business 203 Bibliography 213 8
EXECUTIVE SUMMARY Who is ESBG? ESBG is the voice of Europe’s savings and regionally oriented retail banks. ESBG’s members share a long European banking tradition and form an integral and substantial part of Europe’s retail banking landscape. True to their origins, they subscribe to the principles of responsible retail banking, as summarised in the ESBG Charter for Responsible Business. The ongoing financial and economic crisis challenges many long held views on the financial sector itself and on the appropriate regulatory and supervisory framework. At the same time, the long-lasting EU debate on financial sector integration continues at both the political and the policy level. As the European voice of savings and regionally oriented retail banks, ESBG is taking this opportunity to present its contributions on the different retail banking related issues to the new European Parliament and the new European Commission. This report lays out ESBG’s views and recommendations in three broad areas. n The first part of the report addresses the current financial crisis and presents ESBG’s key messages and contributions to ongoing political debates. n The second part of the report takes a long term view and names and explains core parameters for retail banking sector integration, which are essential for any reality-based strategy for the future of Europe’s retail banking sector. n The third part of the report addresses concrete retail banking policy issues and presents ESBG’s views and recommendations in relevant areas. PART 1 The financial and economic crisis: ESBG key-messages and contributions The current financial crisis sheds a new light on Europe’s banking sector and has challenged national governments to take unprecedented action. Similarly, the crisis calls for steps in the areas of banking supervision and financial sector regulation. Crisis, banks and economy – ESBG views on lending, business ethics and state aid Maintaining access to credit for the real economy is essential. Fears of a severe Europe-wide ‘credit crunch’ and a break-down in bank lending to the real economy have not materialized. This is largely due to the stabilizing and balancing characteristics of Europe’s banking sector, and in particular to its pluralistic structure in which different bank types and business models compete and coexist. By contributing to the overall stability of the financial system, pluralism in the banking sector truly confirms its value for Europe’s economy and markets. In the retail banking area, many ESBG members have maintained or even increased lending to the real economy since the onset of the crisis. This underlines the stabilising effect of regionally active and committed retail banks and the importance of locally made banking decisions for adequate and stable financing of the local economy. 9
The crisis demonstrates that fundamental mismatches between the banking sector and the real economy are not sustainable. The suddenly exposed fragility of the financial system demonstrates that the priorities of banks need to be aligned with their true purpose in the economy. This fundamental idea is embodied in the traditional savings banks model. On a general level, banking needs to return to a realistic and sound approach, which does not lie in a race for ‘fast’ but unsustainable profits. For retail banking this implies a clear focus on the efficient, conscientious and responsible provision of financial services and products to the real economy. Correspondingly, a uniform banking sector whose behaviour imperils the wider economy can no longer be an acceptable vision for policy makers nor for some parts of the banking sector. It is the duty and responsibility of policy makers to safeguard a pluralistic sector in which the principles of comprehensiveness, responsibility and sustainability are well represented. The crisis has led to a wave of state aid to financial institutions. The efforts of European Commission and national governments to support financial institutions and to guarantee financial stability are important, necessary and adequate. Still, a central criterion is that state-aid must be granted with the clear objective to achieve or maintain the overall health of the banking sector – it may not carry a cost to sound and healthy institutions. Any state aid measure must be designed in order to fit with the national circumstances and needs to be adaptable to the challenges individual institutions are facing. Yet there remains some concern that national state-aid measures can translate into persistent competitive imbalances both across markets and within markets. Therefore policy makers need to exert all efforts to prevent state aid from affecting competition between beneficiaries and non-recipients. This is also important as it is unrealistic to expect that competition distortions and damages to the sound parts of the banking sector can be repaired at leisure after the crisis is overcome. Challenges to Europe’s regulators and supervisors The current financial crisis also challenges Europe’s policy makers to identify and correct shortcomings of the EU regulatory and supervisory framework. The analysis of the reasons and dynamics behind the current financial markets crisis has been progressing with great strides. EU policy makers have not hesitated to act on the lessons learned and to initiate corrections in those areas where they have identified the need and scope for corrections. While the ongoing approach tackles a rather wide range of policy objectives, the paramount goal of legislative initiatives is to safeguard future financial stability. Looking at the initiatives under way it is important to note that, while great efforts are being taken to improve existing legislation and institutional frameworks, a substantial part of the discussion also focuses on extending regulatory coverage to previously unregulated entities and activities. Looking at the ongoing revisions of the EU supervisory and regulatory framework, EU policy makers rightly aim to build on existing foundations and make the best use of past achievements. ESBG would like to stress that in order to adequately take account of the interlinkages between the different areas under the spot light, a holistic approach is vital. It is also important that EU policy makers keep the ambition to regulate Europe’s financial sectors in a way which promotes its strengths and takes due consideration of the diversity of its financial sector. The application of common rules under the guidance of an overarching proportionality principle would contribute to safeguarding the valuable diversity in EU’s banking markets. Yet some words of caution are necessary. The temptation of short-termism must be resisted not only by financial intermediaries, but also by regulators and policy makers. A clear distinction needs to be maintained between measures addressing immediate concerns and long-term improvements to the regulatory framework. The implementation of corrective measures needs to be carefully adjusted to the real economic environment and to the pace at which the European economy overcomes the current crisis. The current political momentum should not be lost, yet undue haste may ultimately prove counterproductive. The current expansion of regulation to previously unregulated financial actors and activities is a timely and necessary response to the lessons Europe and the world have been forced to learn in the last two years. Policy makers are rightly extending regulation to those formerly unregulated financial market participants whose actions have contributed significantly to the crisis or whose activities could pose future systemic risks to financial market stability. Especially the EU regulation of credit rating agencies is long overdue, given their fundamental role in the financial sector and the potential implications for financial stability. 10
PART 2 European retail banking market integration: core parameters for a reality-based approach The current financial crisis and the analysis of necessary lessons and responses may dominate the current political agenda. Yet, the long-run EU debate on a further integration of the retail banking sector is ongoing. In the second part of the report, ESBG presents core-parameters for a reality-based European approach. Retail banking realities and their implications for market integration Of key importance for any approach to sector integration is that retail banking is a local business: Demand for retail banking is local and the business itself builds on personal contact between banks and customers (relationship banking). With regard to SMEs the local dimension of retail banking is even more crucial, since an adequate bank-customer relationship builds on detailed knowledge of the SME and its business environment. Consequently, branch networks are essential for comprehensive retail banking. Online banking facilities are becoming increasingly wide-spread; they complement, but do not reduce, the importance of proximity. Not only does the local character of retail banking set the rules for banks’ business strategies, competition and market entry, also the financial inclusion of Europe’s regions builds on full coverage of branch networks. For the further integration of Europe’s retail banking markets the importance of proximity means that successful entry into new markets requires substantial investments in branch networks and in local knowledge. This is especially true since the essential factor for banks’ success is customer satisfaction. ‘Pure’ cross-border provision of retail financial services on a large scale is an unrealistic proposition due to lack of demand and lack of suitability for the business at hand. For these same reasons, distance marketing techniques – for example ‘direct banking’ – cannot substitute physical bank branches. Looking at the natural constraints of the ‘direct banking’ business model (with its near exclusive reliance on the internet as a basis for contact with customers), it becomes apparent that its economic benefits can be dubious – especially in a cross-border context. It neither promises comprehensive coverage in terms of retail banking services, nor is it certain that the consumers’ deposits are optimally used to fund economic actitvity. Any conscientious assessment for the scope for more sector integration needs to take into account that retail banking competition is multi-dimensional. A vital part of competition goes beyond prices (fees and interest rates) and works via customer satisfaction and trust, depth of service, and regional coverage. Therefore customer choice is always a trade-off between ‘hard’ factors and ‘soft’ factors, which in turn may be reflected in prices. For integration this means that any market entrant has to compete not only in terms of prices, but also to meet a range of wider criteria demanded by customers. Furthermore, at the national level, Europe’s banking markets are already characterized by high levels of competition. Since retail banking is local, this translates into intense competition at the EU level. Diversity in retail banking and sector integration Looking at banking practices, sector structures and market participants, the diversity and pluralism of the EU retail banking sector is striking. This richness in retail banking practices and the pluralism of market players are the results of different banking traditions and the adaptation to different economic environments. The differences in demand for retail financial services all over Europe are – to a large extent – a result of differences in cultural and socioeconomic factors, savings cultures, housing and labour market specifities and government policies. Differences in banking practices, in product design or pricing patterns consequently stem from an adaptation to specific features of demand and underlying conditions. Similarly, in each country the structure of the financial sector reflects the needs of the producing sector and citizens, and therefore the structure of the economy itself. As a logical consequence sector structures vary accordingly across Europe. ESBG has always emphasized that pluralism in the retail banking sector is an asset for Europe: it benefits the real economy, drives competition and increases financial stability. Pluralism ensures that the European banking sector is more than the ‘sum of its parts’. As regards the integration of Europe’s retail banking market, it is therefore essential for Europe to make the most of its strengths and to develop an integration strategy which respects and appreciates the diversity of market players. 11
PART 3 EU retail banking policy: ESBG contributions and recommendations Part 3 of this report presents ESBG’s views and recommendations on the retail banking related policy issues currently under debate. Banking supervision The EU debate on banking supervision has gained momentum with the outbreak of the financial crisis. The recent market events have, however, not changed ESBG’s belief that reforms in this area have to build on the strengths of the current framework – such as the strong involvement of the national supervisory authorities. Looking at the changes currently envisaged, ESBG supports the combined focus on micro and macro prudential supervision. Of particular importance is the new focus on macro-prudential aspects of financial stability. Here, the main challenge will be to ensure that the future EU macro-prudential body on financial stability will effectively and efficiently carry out its tasks. Turning to micro prudential supervision, ESBG generally supports the establishment of a European System of Financial Supervisors, which will be a decentralized network of national supervisors with coordinating roles for the envisaged three new ‘European Supervisory Authorities’. The financial crisis has also revealed weaknesses in the current prudential regulatory framework. Yet, this does not mean that it is necessary to completely overhaul the rules in place. EU policy makers should correct the identified weaknesses by building on the Basel II framework. As regards the process to be followed, repairs to the regulatory framework should observe the ‘Better Regulation’ approach. In addition, the timing for the introduction of new rules is important, as measures which would have positive effects in the long run could prove counterproductive if introduced in the current exceptional market conditions. ESBG supports the efforts to ensure the appropriateness of rules in areas such as securitization or banks’ trading book. At the same time, it has to be ensured that the new rules envisaged are a true response to the identified problems and do not endanger practices that have proven their effectiveness from a market stability or risk management perspective. ESBG welcomes the recently adopted revised version of the Deposit Guarantee Schemes Directive, which reflects the importance of Deposit Guarantee Schemes for stability in financial markets and consumer confidence. As regards the additional changes to the Directive currently envisaged, the different national Deposit Guarantee Schemes should be maintained, as they have the important advantage of attributing local responsibility and social control. Finally, no further reduction of the payout delay, which would come “on top” of the reductions introduced by the revised DGS, would be manageable. Financial reporting I – Fair-value accounting In its 1999 “Financial Services Action Plan”, the European Commission announced its intention to improve the Single Market for financial services. One of the objectives was to obtain a single set of accounting standards for all European listed companies that was better adapted to the increased use of financial instruments. The standards chosen were the International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS) which introduced the accounting notion of fair value. Fair value changed the philosophy of national accounting standards as it introduced the idea that assets and liabilities had to be re-evaluated on a regular basis according to their current market value. Fair value encountered a lot of attention from both sides of the Atlantic in light of the financial crisis. During autumn 2008, numerous changes in the standards related to the valuation of financial instruments at fair value (mostly concerning the accounting standard called IAS 39) were introduced. All of these changes aimed to provide flexibility in the application of fair value – especially concerning the measure of financial instruments in illiquid markets. In early summer 2009, proposals were issued to replace fair value guidance contained in various IFRS with a single, unified definition of fair value, soon followed by a proposal to replace IAS 39 by a new standard. The ongoing discussions concern the pro-cyclicality effect of fair value, the valuation of illiquid assets and the fair value classification rules in balance sheets. 12
ESBG strongly supports a more flexible application of fair value when it comes to illiquid financial instruments but also defends a practical approach to the relationship between fair value accounting and the economic downturn. Over-reliance on market value not only significantly increases pro-cyclicality, but also results in providing an inaccurate image of a company’s financial situation. There is a need for more user friendly, simpler and more standardised rules of fair value disclosures and calculation requirements. More coherence between American and European accounting standards is necessary. Additionally, a higher degree of harmonisation between fair value requirements is demanded by financial reports and those required by supervisory regulations. Better transparency would benefit both users and preparers of financial standards as it will diminish their workload and strengthen the European Single Market. Finally, it is very important for the EU to adopt measures on fair value that take the exceptional circumstances in the markets into account and are in line with the measures taken in the United States. Thorough reconsideration of the existing accounting practices and accounting rules is necessary in the long term. Financial reporting II – IFRS and SMEs Small and Medium-sized Enterprises (SMEs) form the backbone of the European economy and savings banks are their natural business partners. In order to improve the Single Market, the European Commission has proposed adapting accounting requirements for SMEs and for publicly traded companies. The Commission’s initiatives include a reduction of the reporting burden for SMEs and the endorsement of a common set of accounting rules for listed companies – the International Financial Reporting Standards (IFRS). The International Accounting Standards Board (IASB) took the initiative to propose an extension and a simplification of IFRS accounting rules for SMEs. This initiative raised controversial discussions amongst stakeholders and policy makers involved. In general, savings banks do not have any strong preference on the accounting standards that their SME clients apply. More specifically, ESBG members can adapt to the accounting standard used by SMEs, be it a national General Accepted Accounting Principle or on an international accounting standard specifically designed for SMEs. Therefore, ESBG’s major interest is to ensure that SMEs benefit from the best possible accounting standards both in terms of simplicity and comprehensibility. Against this background, the IFRS for SMEs should be an option. In addition, substantial reductions of disclosure requirements are still necessary. With regard to the IASB proposal to revise the standards every three years, the time frame for modifications and further developments of the standards should be extended in order to avoid additional administrative burden for SMEs. Concerning the content of the IFRS for SMEs, ESBG, being the natural business partners of SMEs, defends a practical, cash-flow and solvency oriented approach. Finally, the scope of entities obliged to report in accordance with full IFRS should not be expanded to include banks and insurance companies as being publicly accountable entities unless they are capital-market oriented. Wholesale payments and settlements infrastructure Concerning wholesale payments and settlement infrastructure, ESBG supports the continued development of central bank infrastructure that effectively enables finality and certainty. Yet the public good dimension of these initiatives should not be lost from sight, as this is one of the core factors which distinguish them from commercial initiatives. As a consequence, particular care should be paid to ensuring that the level playing field is not even inadvertently jeopardized, for example by constraints that make direct access to payment and settlement systems unattractive. Capital markets The Financial Services Action Plan (FSAP) has introduced substantial changes to the rules in place to ensure the safety, integrity and accessibility of Europe’s financial markets. Important pieces of legislation include MiFID, the Prospectuses Directive, the Market Abuse Directive and the Transparency Directive. After a phase of adoption and implementation, the time has now come to review these texts: the best should be made out of this opportunity to correct errors and assess the effects of the measures in place. 13
It is still premature to draw final conclusions on the Markets in Financial Instruments Directive (MiFID). This being said, and also due to the heavy cost associated with compliance, a period of continuity and contemplation is now necessary so that the full effects of MiFID can unfold and be assessed. This is the case not only for the conduct of business related aspects of MiFID, but also for all the provisions which will undoubtedly significantly change the shape and structure of Europe’s financial markets. A subsequent and realistic assessment of MiFID should not only aim at identifying weaknesses and reducing any excess burden; it also should honestly take stock as to whether MiFID equally benefited all market participants and whether the principles of subsidiarity and proportionality were fully respected. The Prospectus Directive has already demonstrated its viability and has brought about some improvements. Therefore, its upcoming revision should focus on further reducing burden, also taking due account of the retail banking realities and of the specificities of smaller banks. This would imply raising the size-threshold for the exemption of smaller credit institutions, given the substantial burden associated with providing a prospectus. As regards the recent developments relating to asset management and investment funds, ESBG welcomes UCITS IV, which benefits investors and further improves the internal market for collective investment in transferable securities. Looking ahead, it is of great importance to preserve the spirit of UCITS as safe products for retail investors. ESBG supports the decision to initiate regulation of Alternative Investment Funds. Yet ESBG is concerned about a number of vague elements in the Commission’s proposal for a Directive, which is currently being assessed. Furthermore, ESBG welcomes the ongoing initiative to explore how a framework for all packaged retail investment products could work in practice, anticipating already that in this area a flexible approach is necessary given the diversity in existing products. Consumer policy in the area of retail financial services In recent years, consumer protection has become one of the cornerstones of European policy in retail financial services. The European Commission aims to improve the relationship between citizens and financial market players, thereby increasing consumers’ confidence in the European Single Market and promoting a level playing field for competition within the financial sector. Yet the Commission has continuously underestimated consumers’ reluctance to purchase financial products on a cross- border basis because they prefer the face-to-face communication with their financial service providers. As regards the area of consumer credit, the recent Consumer Credit Directive aims at granting consumers with an appropriate degree of protection. However, the Directive imposes additional, unnecessary administrative burdens on financial institutions. Furthermore, the Directive causes uncertainties regarding topics such as overdrafts, pre-contractual information, the definition of the annual percentage rate of charge, early repayment and the right of withdrawal. Therefore, further clarifications of these aspects in the Consumer Credit Directive are necessary. In the area of mortgage credit, ESBG welcomes the different initiatives of the Commission to thoroughly assess possible future developments in order to increase the cross-border supply of mortgage credit. The most important initiatives being taken are, among others, the revision of European Standardised Information Sheet (ESIS), the study on the costs and benefits of different policy options for mortgage, the study on land registration, property valuation and foreclosure procedures, credit histories and the announced package on responsible lending and borrowing. Generally, ESBG welcomes the voluntary self-binding approach of the industry to meet consumers’ actual needs and notes that future mandatory rules should not aim at going beyond those needs. Against this background, the package on responsible lending and borrowing should achieve a fair spread of responsibilities between consumers and lending institutions. Concerning consumer redress, ESBG supports the Commission’s initiatives to reinforce the provisions of effective and efficient dispute resolution and redress mechanisms for consumers. ESBG favours out-of-court settlement procedures and stresses the need for the further assessment of existing redress and alternative dispute resolution systems at the Member State level. In the context of European contract law, ESBG supports in principle the initiative of a handbook to achieve a coherent and consistent European legislative framework. Nevertheless, for a future Common Frame of Reference an open exchange of views as well as an appropriate impact assessment are called for. Furthermore, there is concern about the legal basis for the Common Frame of Reference. 14
In general, ESBG supports the initiatives of the Commission to simplify and to make European consumer rights legislation consistent, but believes in the need to strike the right balance between consumer protection and the industry’s competitiveness and therewith the functioning of the retail financial market. Retail payments A strategically critical part of retail banks’ activities concerns payments. Firstly, concerning retail and commercial payments, ESBG observes that the Single European Payments Area (SEPA) will to great extent be a product of political vision and legislation. Here, the current approach to regulate a function performed by market players (payment account, payment services) rather than market players themselves on the basis of their institutional status is a major – and still untested – legislative innovation. In concrete terms, the success of SEPA, first and foremost depends on the adoption of SEPA payments instruments by national authorities. Ultimately, however, the goal of the SEPA project must be to fulfill the interests of those who are to become its beneficiaries, i.e. the retail customers. Anti-money laundering, counter terrorist financing and financial institutions In order to protect the global financial system from illicit financial activities and to enhance the integrity of financial markets, the prevention of money laundering and of the financing of terrorism is essential. In Europe, the creation of the Single Market provides advantages for business and consumers. It also increases the opportunities for money laundering and financial crime activities. Therefore, ESBG welcomes the Commission’s initiatives in this area, such as the Third Anti-Money Laundering Directive. One of the concerns is the extent of the legal obligation to identify and verify the identity of a customer and a beneficial owner which can be difficult. Credit institutions do not have access to sufficient and reliable information to carry out such an intensive identification. Moreover, there is a need for clearer guidelines on the extent of investigation which banks need to undergo in order to be considered compliant with the rules on beneficial ownership. Another related area is the fight against proliferation financing in which ESBG members are very active. At the same time, the expectations of what financial institutions are able to contribute in this fight must remain realistic. Financial institutions often do not have the insight into the underlying business transaction and details required to pass a judgement on the possibility of proliferation financing as being the underlying aim of the financial transaction. In this respect, the red-flag indicators of the Financial Actions Task Force which serve to help identify transactions with a potential proliferation background, are not suitable. Thus, ESBG calls for describing characteristics in clear and unambiguous terms, not containing elements requiring further individual assessment. During the drafting process of the financial sanctions, European regulators and international organisations should take the work of credit institutions in practice more into account in order to ensure a better and effective implementation. Looking ahead, ESBG welcomes effective regulatory initiatives in the future and will actively participate and share the industry’s experiences in order to maintain realistic expectations as to what financial institutions are able to achieve in practice. SME financing ESBG members, traditionally natural business partners of SMEs, are among the most important providers of SME finance and important partners to microenterprises. Therefore, ESBG in general welcomes the measures taken by the European Commission towards improving the business environment for SMEs. However, there is still work to be done in the area of administrative rules and regulations, access to finance in the form of financial support programmes, microcredit and lending, cross-border activities, and CSR for SMEs. In the context of the Small Business Act for Europe, ESBG agrees that the policies for SMEs need to be coordinated at the EU level and should be subject to the ‘Think Small First’ principle in order to avoid excessive administrative burdens for SMEs. 15
Furthermore, the registration procedure for setting up an SME, access to the Single Market, and the ability to operate cross- border all need to be enhanced for SMEs. Regarding the financing of SMEs, it is necessary to bring coherence, to communicate and to clearly define the aim and target groups of different existing European financial support programmes. With regards to the provision of microcredit, the EU focus should primarily be on facilitating microcredit at the national, regional or local level – as close to the client as possible. In any case, support measures in favour of microcredit on the EU level, such as the JASMINE initiative should be targeted to all intermediaries in order to reap the full benefits of microcredit in the form of growth and job creation. Financial inclusion and financial education Serving the general interest of society is the savings banks’ initial purpose and an integral part of their identity. For a stable society, economy, and well-functioning financial system, it is necessary and desirable to have knowledgeable European citizens who are well-informed in financial matters and who have access to the financial system. Therefore, ESBG generally welcomes the current discussions on financial education and financial inclusion at EU level. However, as promoters of financial inclusion for all citizens, ESBG strongly advocates for a strict application of the principle of subsidiarity and for dealing with financial inclusion at the national level. This is also the case involving access to a bank account, which is one of the most crucial parts of financial inclusion. Specific approaches tailored to different national, regional or even local contexts and traditions are needed where the problem of financial exclusion occurs. Financial institutions should offer specific adapted products and services, provide adequate information and financial education. However, initiatives to foster financial inclusion and enhance access to basic banking services should always be taken on a voluntary basis and cannot be imposed on banks by regulation. As a representative of financial institutions with a strong commitment to Corporate Social Responsibility (CSR) ensuring the empowerment of consumers, ESBG considers that the financial education of citizens is a task to be dealt with at the national level. Stakeholders have a responsibility in fostering financial education. Government and public institutions should provide policy orientation and raise awareness, while financial institutions should be involved in creating financial education programmes and schemes. Here, many savings banks play a key role in educating people on finance and budget matters, far beyond their actual clientèle. These savings banks have the necessary knowledge and expertise to share best practices. 16
WHO IS ESBG? 1. ESBG – The European voice of savings and retail banking: identity, values and tradition The European Savings Banks Group (ESBG) is the voice of savings and regionally oriented retail banks in Europe. Together, ESBG members represent about one third of the retail banking sector in Europe with total assets of EUR 6,028 billion (as of 1 January 2008). ESBG members are modern and innovative providers of retail banking services. They form a cornerstone of Europe’s pluralistic banking sector, which is distinguished by its diversity of banking traditions and business models. At the same time, ESBG members do not form one uniform block and a ‘proto-type’ savings bank does not exist. Rather the savings banks’ universe itself is very diverse. This diversity reflects differences not only in the evolution of the savings banks themselves, but also in the underlying economic and political conditions in their national markets. Overarching this diversity, however, is a shared business approach and shared values which constitute a strong common denominator. The strongest common link between ESBG members is their values. All banks and institutions represented by ESBG stand for socially responsible banking that brings a return to society. At the same time they are efficiently operated, competitive institutions. In broad terms, ESBG members are characterized by what we call the three “R”: n Retail: they are active in providing retail financial services for individual consumers, households, SMEs and local authorities; n Regional: they are often organised in broad decentralised networks providing local and regional outreach and offer their services throughout their region; n Responsible: they have reinvested responsibly in their region for many decades and are one distinct benchmark for corporate social responsibility activities throughout Europe and the world. ESBG members include savings banks, their descendants and other retail banks that subscribe to similar values. Although their organizational structure differs from country to country, they have evolved from common roots and a tradition established in many parts of Europe in the 19th century. This tradition fostered a culture of savings among the poorer classes of the population so as to create some level of financial security in times of adversity and old age. The savings that were collected in this way were reinvested in the local ‘real economy’ and also used to finance cultural and social projects for the benefit of the community. This original business philosophy continues to have a fundamental influence on the business approach of the savings and retail banks that make up the ESBG membership. 2. ESBG members in the European banking landscape As banks and providers of retail financial services, ESBG members make up a large and substantial component of their local and national economies and form an important part of Europe’s pluralistic banking landscape. This is underlined by the data presented in the following sections (all tables referred to can be found in the Annex 1 - Statistics, Part 1). ESBG members range from individual banks to national banking associations, networks and groups. ESBG’s direct members, as well as the different credit institutions represented by ESBG at the EU level are presented in Table 1. In the following, information on ESBG members is juxtaposed onto data on the EU banking sector as a whole, drawing mainly on data collected by the ECB. 17
2.1. ESBG members – integrated within the European banking sector With regard to the national banking sectors, the numbers of independent credit institutions active in Member States differ strongly.1 In part, of course, this is a result of differences in country size and in the importance of the financial sector as an industry. Nevertheless, structural differences play a role also. In several countries the banking sector is characterised by the presence of a large number of smaller banks – often organised in networks and/or operating within a limited geographical radius. In other countries the total number of credit institutions is comparatively low. The numbers of credit institutions represented by ESBG in selected countries largely reflect the structural characteristics of the national banking markets. This demonstrates that the organisation of savings banks is inherent in the evolution of national banking traditions. A remarkable development over the last decade is that the number of banks has decreased substantially in most countries. This is due mainly to a high degree of sector consolidation. This development is also reflected in the evolution of the savings banks sector. Yet, looking only at the time-span between 2005 and 2007, many Member States (and not only new Member States) have in fact experienced an increase in the number of banks. The general trend of consolidation in the national banking sectors is strong, but not persistent, also as a result of market entry by new banks. Looking at banking sector assets in the EU, it is evident that assets in the financial sector are largely driven by the total size of the economy, and also by the importance of the national financial industry as an economic and export sector.2 These factors are also reflected in the size of ESBG members in terms of assets.3 Furthermore, to grasp correctly the importance of ESBG members in the banking sector (as regards assets) it must be taken into account that they traditionally focus on retail banking, and that hence many of them may hold a smaller share of wholesale financial assets than other market participants. All in all the numbers confirm that, in terms of assets, Europe’s savings and regionally oriented retail banks are clearly important players in their economies. As regards employment within Member States, the banking sector is a significant industry.4 Furthermore, employment in the banking sector as a share of total domestic employment is comparatively stable across Member States – with the obvious exception of those markets which specialise in and ‘export’ financial services. Yet, different banking activities differ in employment terms and, compared to other forms of financial services activity, retail banking is particularly labour intensive. Therefore it is not surprising that many ESBG members are large employers in absolute terms, as well as within their national financial sectors.5 2.2. ESBG members – a substantial part of the European banking sector A central feature of retail banking is the importance of banks’ local presence and therefore of bank branches.6 Given their retail banking focus it is therefore natural that ESBG members run large branch networks.7 They also are well represented within their national markets, as indicated by their generally substantial share of total branches within the domestic banking markets. In more general terms, this demonstrates – and is inherent in – their important role in the national retail banking infrastructure. Throughout the EU as well as for ESBG members, the great relevance of branches is mirrored by the importance of ATMs.8 Here it is remarkable that the whole EU banking sector and ESBG members alike are generally distinguished by a high and steady increase in the number of ATMs. ESBG members’ often substantial shares of the total number of ATMs in a given national market are characteristic of their importance as retail banking providers. The points made above are further underlined by the number of bank branches, banking sector employees and ATMs per million inhabitants in each country.9 Such a comparison not only demonstrates the depth of national financial infrastructure (EU data), but also illustrates how deeply embedded ESBG members are in their markets. 1 See Table 2. 2 See Table 3A. 3 See Table 3B. 4 See Table 4A. 5 See Table 4B. 6 See Table 5A for the total numbers of branches in the EU, as well as their evolution. 7 See Table 5B. 8 For numbers in the EU see Table 6A, for ESBG members see Table 6B. 9 See Table 7. 18
Looking at ESBG members’ market shares, the importance of Europe’s savings banks and regionally oriented retail banks in their traditional markets is clearly reflected. In core retail banking activities like savings deposits and the lending to households, many ESBG members play a significant role in their domestic markets. Similar patterns are evident for consumer credit and residential mortgage loans.10 However, ESBG members not only perform strongly as lenders and deposit providers. True to the character of stable ‘savings’ banks, they also draw to a high degree on non-bank deposits for their funding – generally beyond the average in their national markets.11 3. ESBG and responsible banking ESBG member banks have a strong commitment to sustainable development and address their corporate social responsibility (CSR) as an integral part of their business. In this context “CSR” is defined as a concept whereby companies integrate social and environmental concerns into their business operations and their interaction with their stakeholders on a voluntary basis. The ESBG Charter for Responsible Business ESBG members’ consistent commitment to sustainable development and CSR in their local communities and regions has been formalised with the adoption of the ESBG Charter for Responsible Business by the ESBG General Assembly in May 2008. At the same time, the ESBG General Assembly adopted a Resolution on the Environment. The texts of the Charter and of the Resolution are available on the ESBG website: http://www.esbg.eu/. The ESBG Charter for Responsible Business contains a number of principles under the general headings of: n Fair and clear relations with customers; n Promotion of accessibility and financial inclusion; n Environment-friendly business; n Making a responsible contribution to the community; n Responsible employers; n Communication. The ESBG Charter serves as a rubric for the responsible banking activities of the member institutions. This does not, however, imply that it is a guide for companies. Rather, it is a compilation of overarching principles that categorise the aspirations as well as the activities already undertaken by ESBG member institutions. Below are some examples of how ESBG members apply these principles, including those related to environmentally-friendly business, in their local and regional business areas. Further examples can be found in Annex 2 “ESBG Charter for Responsible Business: Case Studies” and on the ESBG Internet site http://www.esbg.eu/. Fair and clear relations with customers ESBG members enjoy the confidence and trust of large sections of the population and nurture this position through transparency in their relations with customers. This is done in a number of different ways, such as: n Clear and honest information on the products and services on offer as well as on the terms and conditions of use; n Ensuring that this information is easily accessible to customers; n Providing advice that is tailored to the needs of customers; n Responsible advertising; n Dealing with customer complaints quickly and efficiently; n Considering cases of financial difficulty sympathetically. 10 See Table 8. 11 For the EU see Table 9A, for ESBG members see Table 9B. 19
One particularly innovative example is the following: Caja Navarra in Spain: Plan Cantera-“civic rights for customers” Caja Navarra (CAN) created a different business model in 2004, focussing on the needs of the community and its members. The concept was developed as an action plan to increase customer recognition of its “Obra Social12” projects and thus to differentiate themselves in the market. CAN decided to create an emotional link by giving its customers the rights to decide where the profits of the bank should be invested. The Plan Cantera for the period 2007-2010 was the second stage of this busines model. This plan includes the initiative “You choose, you decide”, of which civic banking is the key element. Thus, clients have been given some important rights such as the right to know how much money CAN makes from each customer and the specific contribution each customer makes to their chosen social project(s) (see Annex 2). Promotion of accessibility and financial inclusion Savings banks are by tradition important promoters of financial inclusion for all people. This commitment is part of their mission and is demonstrated in the way they conduct their daily business. ESBG is certain that access to finance can and should be increased. This can be done by offering specific products and services, by providing adequate information and by providing financial education. Many ESBG members have introduced specific, targeted schemes to ensure that the most vulnerable parts of the population also have access to necessary basic financial services. This entails offering a range of specific savings products, payment solutions and credits. This commitment is illustrated by the example below: Microcredit programme in France – “Parcours Confiance” In 2006, the French Caisses d’Epargne launched the “Parcours Confiance” (eng. “Fresh Start”) programme to prevent financial exclusion. The programme aims to help customers suffering from personal and financial problems to have a better understanding of banking products and services. This programme also allows for the possibility to provide the beneficiary with microloans backed by guarantees. Until the end of 2008 4,495 microloans have been granted since the system was launched in 2006. The breakdown was 3,275 personal microloans and 1,220 business microloans (See Annex 2). Environment-friendly business As part of their community investment activities, ESBG members have a longstanding commitment to supporting environmental projects financially and raising public and stakeholders’ awareness on the importance of pro
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