Secrétariat général de la Commission bancaire

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Sofia, 15th September, 2005Pierre-Marie ABADIECommission Bancaire Paris

SGCB

European Single Market in Banking

Convergence of supervisory practices

Seminar on Financial Services Sofia, 15th September 2005

Pierre-Marie ABADIECommission BancaireParis

Secrétariat général de la Commission bancaire


SGCB

Outline

1 • Opening banking services to competition

1 - 1 Context

1 - 2 Costs and benefits

2 • Convergence of supervisory practices

2 - 1 The reasons for convergence

2 - 2 Single market and single monetary zone

3 • The current debate on the best regulation process

3 - 1 One single supervisor for all the financial sector ?

3 - 2 One European Banking Supervisor ?

3 - 3 Independence or not from the Central Bank ?

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1-1 Context

One single banking market in EU refers to the process of opening the banking sector to competition

The process includes as preconditions : Deregulation or reducing barriers to entry for domestic banking services providers Internationalisation or allowing entry to foreign owned banking institutions Liberalization or freeing up financial movements across borders (but not necessarily)

1 – Opening banking services to competition

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Globalisation of rules

A rules-based process of globalisation is under way : development of a harmonized legal framework at European level.

Development of common : Norms Directives Principles Practices Code of conducts


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Common rules under the auspices of

International groupings of national authorities or private associations (BSBS, IOSCO, IASC…)

IMF role FSAP exercise Article IV review


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Common accounting practices used worldwide :

the accounting reform

IFRS have been adopted by EU on September 2003

IFRS is an opportunity for an European harmonization of disclosure and reporting requirements

Supervisors’ focus has been to reduce undue volatility of equity and profit and loss accounts (problem IAS 39)


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The direct effects of European Monetary Union (EMU)

Standardisation and transparency in pricing The elimination of intra European risk The unification of bank refinancing across EMU member states

(liquidity provided by ECB)

(equalize costs of capital across Europe)


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Both rules and risk management techniques are increasingly

being drawn up globally


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1- 2 Costs and benefits

An open banking sector can increase levels of growth and job creation throughout the rest of the economy as capital is allocated more efficiently

Strong competitors from overseas can exercise pressures on prices in banking services in terms of diminished spread and intermediation costs


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Greater choice among financial instruments Improvement of financial expertise in banking domestic sector (know-how, training…)

(the transfer of new skills to the domestic banks through the presence of foreign players can help disseminate better risk management practices)


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Put pressures on the labour force to adjust by raising educational standards and mobility

Painful adjustments on the part of domestic banks

The risk of a « cherry picking » process by foreign banks

Policy makers may worry about losses on some strategic decisions

(+ social disruptions)


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Large banks tend to benefit most from scale economies and technological progress

Banks first merge nationally then across borders inside restricted geographic areas

Steady steam of mergers in European banking in 90’. The trend has slowed down but the value of transactions has grown up dramatically


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2 - 2 Why more supervisory convergence ? It aims at :

Promoting a consistent and efficient implementation of EU directives in Member States ; Disseminating bank’s and supervisors’ best practices, for the sake of financial stability ; Promoting the best possible level playing field across Europe ; Avoiding supervisory arbitrage ; and Limiting undue administrative burden for banks.

For all these elements, expectations are high

2 – Convergence of supervisory practices

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2 – 2 Convergence and cooperation are even more needed in EU as we are in a single market – and, for many of us, in a single monetary zone –

Moreover, it is a long tradition in Europe : The Groupe de Contact (1972) The 1st Directive on Banking coordination (1977) The Banking Advisory Committee (1979) The 2nd Directive on banking coordination (1989) …And now CAD III

Also, MOUs and informal exchange of information have existed for long.


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2 – 3 Basel II implementation is an unique opportunity to deliver enhanced supervisory convergence in Europe for at least two reasons :

The new European Capital Directive-CAD III is more precise and more demanding than Basel II, in particular as far home/host relationships are concerned. For example, it develops further the concept of « consolidated supervisor » and helps clarify responsibilities (see, for example, art 129 in CAD III), which is consistent with the strengthening of the EU unified financial market ;

An institutional process of convergence has been initiated with the creation of the CEBS (Committee of European Baking Supervisors).


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2 – 4 The Committee of European Banking Supervisors (CEBS) is a major improvement towards convergence and the establishment of an internal market for financial services

It was established as of 1st January 2004 (Secretariat in London), It is a so-called « Level 3 Lamfalussy Committee », It is comprised of supervisory authorities and central banks.


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The institutional tasks of CEBS are the following :

To advise the Commission, in particular as regards the preparation of draft implementing measures in the field of banking activities ; To contribute to the consistent implementation of EU Directives and to the convergence of supervisory practices ; To enhance supervisory cooperation, including the exchange of information.


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The key questions

One single supervisor for all the financial sector ? One banking supervisor for all the banking sector in EU ? The banking supervisor independent from the Central Bank ?

3 – The current debate on the best regulation process

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3 – 1 One single supervisor for all the financial sector ?

An ongoing trend in favour of a FSA model

No evidence for an optimal structure

The French choice for a « Twin Peaks » model

(three principles : specialisation, cooperation, decentralisation)


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3 – 2 One European banking supervisor ?

Increasing trends of cross-border activities, conglomerat directive Single regulation entails homogeneity in rules implementation However, supervisors remain legally responsible for the supervision in their juridictions The option for a well balanced information and responsibilities sharing between home and host supervisors


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3 – 4 Banking supervisors independent from the Central Bank ?

Quite everywhere central banks are active in banking supervision area (payment systems, financial stability, preoccupations…)

The Basel Committee is composed of banking supervisory authorities and central bankers


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In such a fast changing environment maintaining a constructive dialogue with the EU financial industry and all other interested parties is key.

Conclusion

Documents

Secrétariat général de la Commission bancaire