EU retail banking integration may be delayed by politicians

Next Wednesday, the European Commission will usher in a new wave of realignment in the European banking sector that will last the next five years, according to officials in Brussels. Specifically, the Commission will announce its proposals for the complete liberalization and integration of the European Union’s financial sector, including retail banking (housing and consumer loans), which is still fragmented and protected by national laws. These proposals will be presented in the form of a «Green Paper» and, after being debated with involved parties and member states, will be presented as a White Paper toward the end of the year, before being applied in 2006 as community directives. The undertaking is great and, no doubt, crucial for the future of the European banking sector. It will bring about many changes, since it will lead, in the medium term, to the integration of the large banking groups’ networks at European level; will lead to more mergers and acquisitions, and will, inevitably, bring about a new oversight structure that will help to ensure the stability of the system and of the euro. If one wanted to foresee the state of the European banking sector, as gradually transformed by these proposals over the next 10 years, for instance, one would not be far wrong in claiming that, by that time, 10 powerful groups will dominate the European financial sector. EU policies concerning the deregulation and integration of retail banking – as happened earlier with big corporate financing, underwriting, the bond market etc, in other words what we call wholesale banking – favor the large financial groups and greater consolidation. The elimination of national restrictions and the integration of the European retail banking market will also facilitate the expansion of the big US banks. At present, they are more competitive and the lifting of obstacles will make it easy for them to gain market share on the continent. If it is certain that the forthcoming Commission proposals will bring about radical change, they will also spark a lot of opposition. The Commission is trying to impose a new strategy in the banking sector and it is far from certain that this strategy will appeal to the political leadership of the largest EU members, with the possible exception of the UK. The big banks, of course, are all for reform. They want to expand across Europe but retail banking markets remain closed. As for the Brussels bureaucrats, they believe that retail banking integration will help competitiveness and that, in any case, with Europe slowly but steadily moving toward integration, such an important sector cannot be exempt. That is why the Commission has prepared the Green Paper: The idea is, eventually, to do away with administrative, tax, legal and other obstacles to integration and to let banks sell the same kinds of products (housing and consumer loans, pension programs) throughout EU on the same terms and under the same procedures. The potential for political backlash is not to be taken lightly. One should remember how Italian authorities reacted to the prospect of two banks’ buyout, the tactics the French follow to counter any «outside threat» – including the European Court’s recent decision on interest-free demand deposits – and, finally, the fact that housing credit is controlled by about 500 savings and loans banks, all of which state or local governments have a stake in and which cannot be bought out if the government is opposed. Which government will sacrifice its prerogatives that easily? And why should politicians limit their local powers? These questions pervade all hot EU integration issues and resistance is actually growing, not only that of the political elites but popular resistance as well, as the negative polls in France on the ratification of the EU Constitution show. A new chapter will start for the banking sector in Europe and changes in the direction we described will take place sooner or later, under the pressure of global competition and capital accumulation.