13.3.1Regulation of the banking industry in the eu

The banking industry was one of the most highly regulated industries in the EU and

operated with widely varied regulatory practices. In general, barriers to the supply

of cross-border services were more of a problem than those related to location. In

some countries, laws and regulations restricted the right of non-resident banks and

nancial institutions to conduct business with residents. Before the SEA, there had

been two major directives relating to the banking industry: the First Banking Directive

on Co-ordination of Regulations Governing Credit Institutions of 1977; and the 1983

Directive on the Supervision of Credit Institutions on a Consolidated Basis.

The First Banking Directive required member states to establish systems for

authorising and supervising banks and other credit institutions that take deposits

and lend money. It required such institutions to be licensed. Once licensed, they

would be allowed to conduct business in other member countries provided they were

authorised to do so by the host government and complied with the conditions and

supervision applied to local banks. To be authorised, a credit institution was required

to have separate capital from its owners, to meet an initial capital requirement, and to

have at least two directors and a reputable and experienced management. However,

authorisation could not legally be withheld on the sole ground that the head ofce

was in another member state. As we have seen, the host country principle on which

the directive was based meant that a German bank in Spain, for example, could only

do what Spanish laws allowed Spanish banks to do in Spain.

The Directive on the Supervision of Credit Institutions on a Consolidated Basis

(1983) established the common principle that bank activities were to be supervised,

based on their world-wide activities. Thus, capital requirements were to relate to

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13.3 The European Union and nancial regulation

their global balance sheet position, preventing banks from seeking to avoid capital

requirements by arranging business through less strictly regulated nancial centres.

This derived from the growing international concern with the solvency of banks,

particularly at the commencement of the international debt crisis of the developing

countries.

Since the SEA, there have been a series of directives on the banking industry, most

notably the Second Banking Co-ordination Directive of 1989 (SBCD). This was based

on the strategy of home country regulation and mutual recognition. It gave the right

to banks to establish branches and to trade in nancial services throughout the EU

based on a single licence obtained from the home country authorities. The directive

included some exceptions to home country control. Host countries retained the right

to control bank liquidity for monetary policy purposes, and all banks had to comply

with host nation consumer protection and similar laws in the public interest. There

was some ambiguity in relation to the scope of the consumer protection qualication.

However, the directive eliminated the requirement for branches of foreign banks to

maintain dedicated capital for their local operations.

The directive covered much else. It set out a detailed list of bank activities to which

the directive applied. This was very broad and included much of what is generally

included under the heading of securities or investment business in addition to activ-

ities more widely considered as banking. This accepted the principle of universal

banking on which the German banking industry was organised. The directive estab-

lished the right of banks with head ofces in other EU countries to pursue all the listed

activities in a host country, including those that host country laws might forbid to

local banks. Essentially, banks were allowed to participate fully in securities business

either directly or through subsidiaries. Nonetheless, despite the apparently compre-

hensive nature of the list, difculties of interpretation remained.

The directive also included rules regarding the exchange of information between

home and host country regulators, and harmonised minimum standards of author-

isation and prudential supervision. This included setting minimum requirements

for the size of equity capital. The authorities in all countries were given the right to

supervise ownership and control to prevent cross-nancing and conicts of interest.

Hence, disclosure of the identity of a bank’s most important shareholders was required,

and limits on banks’ shareholdings in other nancial and non-nancial companies

were harmonised.

A number of other directives ancillary to the Second Banking Directive were

approved in 1989 and later years in order to meet the harmonisation requirements

for banking.