1. 21 – 22 September 2006, Kuala Lumpur Globalisation and the experience of proximity banking Prof. Santiago Carbo-Valverde, University of Granada, Spanish Savings Banks Research Foundation (FUNCAS) Jose-Maria Mendez, Secretery General, Spanish Savings Banks (CECA) “Savings banks: the retail gateway to a global market. Driving sustainable development”

2. Savings banks, institutional biodiversity and social contribution Panel “Globalization and the experience of proximity banking” WSBI Congress, Kuala Lumpur, Sept. 2006 Santiago Carbó (University of Granada) José M. Méndez (CECA)

3. 3 SUMMARY 1.Institutional biodiversity around the world: the role of savings banks. 2.Regulation and savings banks growth: confronting views around the world. 3.The contribution of savings banks: instruments for growth and access to finance in a global economic environment.

4. 4 OVERVIEW: This presentation is based upon two articles: - Carbó, S. and J.M. Méndez (2006): “The relevance of the diversity of bank ownership structures in European banking”, Perspectivas del Sistema Financiero, forthcoming. - Carbó, S. (2006): “Banks and markets as mechanisms for economic growth: new perspectives”, Papeles de Economía Española, forthcoming. Both articles can be found at: http://www.funcas.eshttp://www.funcas.es and http://www.ceca.eshttp://www.ceca.es

5. 5 1. Institutional biodiversity around the world: the role of savings banks Globalization, integration and harmonization are perfectly compatible with institutional biodiversity (UN Blue Book ‘Building Inclusive Financial Sector for Development’ ) However, they are typically presented as confronting views. The few studies that deal with these issues up to date suggest a significant contribution of institutional biodiversity on the competition, efficiency and social contribution of the financial sectors around the world (Prowse, 1995, 1997; Carbó, Gardener & Williams, 2002; Crespí, García-Cestona & Salas, 2004). UN emphasizes the approach to poverty-reduction needs to be done through local development (The first UN Millennium Development Goal).

6. 6 There is an intense trend towards consolidation of large banking groups. Cross-country and national concentration –M&As- have produced what are known as (LCFI) “large and complex financial institutions”. Source: The Banker (2004-2006): "The Top One Thousand World Banks“ (estimated)

7. 7 UN, Blue Book ‘Building Inclusive Financial Sector for Development’: “Multiple types of financial services providers (private, non-profit and public) may well coexist in competitive economies” STOCK (PLC, AG, SA) - Shares, market control - Concentration and advantages in market-based systems - Governance and voting rules issues - Growth through M&As COOPERATIVES - Democratic structure, self- control - Equilibrium in profit distribution - Flexible organization - Specialization FOUNDATIONS - Built on social grounds -Credit institutions+ Foundations (solvency+social contribution) - Democratic structure, self- control - Dynamic evolution, flexibility, cooperation - Specialization OTHER STRUCTURES - A variety of institutions mixing characteristics from the other three with different degrees of public or private participation, own regional or national rules, different degrees of government protection, etc…

8. 8 Integration, financial policies and institutional diversity: the European case A progressive recognition of institutional diversity within the framework of European financial integration and harmonization policies: –European Commission (McCreevy report, FSAP): Single European Market, competition in retail activities, homogenous supervision and control. European Commission (Green Paper & White Paper of Financial Services Policy): dynamic consolidation, no barriers to entry, open European market. –European Parliament (Towards a higher consolidation on the financial services sector) and EC, DG Competition (II Interim Report on current accounts and related services): advantages of institutional diversity.

9. 9 Some advantages of institutional diversity (II Interim Report on Current Accounts and Related Services, EC, DG Competition) –Countries with higher institutional diversity exhibit the lower levels of bank concentration in relevant markets (ie. Germany, Spain, Italy). –Several countries with a higher level of institutional diversity are found among those showing the highest levels of profitability. –Institutional diversity is also related to the highest levels of efficiency (‘cost/income’ ratio around 50%). CONCLUSION: RETAIL FINANCIAL SERVICES AND TECHNOLOGY ARE BETTER PROVIDED IF THERE IS A VARIETY OF INSTITUTIONS

10. 10 2. Regulation and savings banks growth: confronting views around the world Proximity banks promote financial inclusion and social cohesion. Institutional and regulatory environments vary but the social contribution holds. Let’s compare two cases: –The European model (savings banks). –The US model (community banks). Higher performance and institutional growth in Europe (Germany, Spain) compared to the US in recent years but both develop an important role at local and regional levels. Regulatory experiences differ in their focus worldwide. For example, in Europe it is rare to find regulatory actions such as the US Community Reinvestment Act.

11. 11 US community banks promote: Local leadership on investments considered beneficial. Special lending programs. Low degree of loan default and new mechanisms of credit risk management. European savings banks typically develop these activities with less regulatory burden and also compete directly and actively with other private institutions, making a social contribution at the same time.

12. 12 3. The contribution of savings banks: instruments for growth and access to finance in a global economic environment Building an indicator of institutional diversity: Institutional diversity (1): number of (institutions) savings and cooperative banks as a percentage of total institutions. Institutional diversity (2): number of (institutions) savings banks as a percentage of total institutions. –Germany is given the value 100 and all countries are re-scaled relative to Germany. Source: Bankscope microdatabase.

13. 13 Figure 1. Institutional diversity in the EU-25 and the United States

14. 14 Some general outcomes from simple comparisons (employing the second indicator of institutional diversity that shows the relative weight of savings banks)

15. 15 Savings banks and economic growth: the variety of growing mechanisms increases with institutional diversity Source: FUNCAS (2006) Estimations for 81 countries Finance-growth channel works More variety of finance-growth mechanisms in countries with higher institutional diversity

16. 16 Social contribution of savings banks: a distinctive feature An increasing problem of financial exclusion (Peachy and Roe-WSBI, 2004) in developed countries. Globalization and commercial and financial liberalization as an opportunity. Institutional ‘quality’ involves financial institutions (Doha Agenda, WTO) and institutional diversity may help. Savings banks becoming important drivers of new financial flows for potentially excluded populations (eg. platforms for remittances in Germany and Spain, among others). Less financial exclusion in countries with higher institutional diversity.

17. 17 Some conclusions: pluralism vs. homogeneity Regulation (or deregulation) must be applied in a way that enhances biodiversity and systemic stability without compromising financial access. The pluralism has many advantages, inter alia : –Higher range of financial services for customers and, in particular, for households and SMEs. –Lower degree of financial exclusion in financial systems with a larger degree of institutional diversity. –Compatibility of institutional diversity with supervision rules harmonization. –Higher range of possibilities and products to adapt to highly global and liberalized commercial and financial environment.