Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 1 European Single Market in Banking Convergence of supervisory practices Seminar on Financial Services Sofia, 15th September 2005 Pierre-Marie ABADIE Commission Bancaire Paris Secrétariat général de la Commission bancaire

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB Outline 1 Opening banking services to competition Context Costs and benefits 2 Convergence of supervisory practices The reasons for convergence Single market and single monetary zone 3 The current debate on the best regulation process One single supervisor for all the financial sector ? One European Banking Supervisor ? Independence or not from the Central Bank ?

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 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

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 4 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 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 5 Common rules under the auspices of  International groupings of national authorities or private associations (BSBS, IOSCO, IASC…) IMF role  FSAP exercise  Article IV review 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 6 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) 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 7 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) 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 8 Both rules and risk management techniques are increasingly being drawn up globally 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 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 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB Costs and benefits  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) 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB Costs and benefits  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) 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB Costs and benefits  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 1 – Opening banking services to competition

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 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

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 14 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. 2 – Convergence of supervisory practices

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 15 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). 2 – Convergence of supervisory practices

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 16 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. 2 – Convergence of supervisory practices

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 17 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. 2 – Convergence of supervisory practices

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 18 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

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 19 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) 3 – The current debate on the best regulation process

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 20 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 3 – The current debate on the best regulation process

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 21 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 3 – The current debate on the best regulation process

Sofia, 15th September, 2005 Pierre-Marie ABADIE Commission Bancaire Paris SGCB 22 In such a fast changing environment maintaining a constructive dialogue with the EU financial industry and all other interested parties is key. Conclusion