Sovereignty versus Soundness: Cross-Border/interstate Banking in the European Union and in the United States: Similarities, Differences and Policy Issues

Article excerpt

I. INTRODUCTION

The winds of mergers and acquisitions (M&As) have again been gusting across many of the world's businesses--racing across industries and borders. The Commission of the European Communities (2007) in its annual survey of mergers worldwide noted that the number and value of transactions across the globe had crested at the turn of the century, had then declined, but had recovered to peak levels by 2006 (1). The European Union (EU) Commission also noted that while the majority of deals were domestic and were conducted within the same industry, the numbers and values of cross-border M&As were growing. Nevertheless, state preferences regarding consolidation vary on both continents, particularly with respect to acquisitions across borders. (2)

Consolidation is also under way in the financial services industry but has occurred more often within a particular branch of that industry and within a country. The European Central Bank (ECB, 2007a) has noted that financial sector deals that cross industries or cross borders, and especially those that span both borders and industries, are less common (see also Group of Ten, 2001). Again, country preferences differ. Some members of the EU have welcomed foreign acquisitions of their banks. (3) Nevertheless, the EU has expressed concern over the slow pace of cross-border consolidation (Commission, 2005b), particularly in the retail banking markets (ECB, 2007a). Similarly, states within the United States have shown different degrees of enthusiasm for entry by out-of-state banks.

When an EU bank wants to begin operating in another member country, it can do so by acquiring an existing bank that is already in business there or by establishing a de novo branch or subsidiary. Similarly, a U.S. bank, or its holding company that has its headquarters in one state can choose to acquire a bank in another state or establish a de novo branch or subsidiary there. The article explores similarities and differences in the experiences of such cross-border banks in the EU with those of interstate banks in the United States. Section II compares the banking industries in the two unions. Section III summarizes the steps they have each taken to remove barriers to cross-border activity. Section IV discusses the reasons for opposition to cross-border banking and the methods used to put that opposition into effect. Section V compares measures of progress toward integration in the two unions and finds that it has proceeded further in the United States than in the EU. Section VI discusses policy issues that arise in this regulated industry as banks cross borders. Section VII summarizes the findings and concludes that, despite progress, integration is not yet complete in either union.

II. BANKING IN THE TWO UNIONS

The United States is a mature, stable union, while the European community is more recent, having grown rapidly from the initial 6 members to the current 27. Table 1 summarizes the EU's development. Constraints on data availability cause this article to focus mainly on the EU-15-the 15 members that comprised the EU until 2004. (4)

TABLE 1

Development of the EU

1951: Treaty of Paris--Belgium, France, Germany, Italy, Luxembourg, and the Netherlands create the European Coal and Steel Community

1957: Treaty of Rome--the six countries form a European Economic Community (EEC) common market

1968: The EEC ends quotas/tariffs on EEC goods; frees capital movements "only to the extent necessary"

1973: Denmark, Ireland, and the United Kingdom join the EEC and Greece joins later, bringing membership to 10

1985: The EU Commission plans for a single market by the end of 1992

1986: Portugal and Spain join the EEC (12 members)

1987: The Single European Act aids free trade and is followed by 280 pieces of legislation within the next 5 yr to establish the single market with partially liberalized capital movements

1992: The Maastricht Treaty forms the EU single market but with exception to Free capital movements

1994: Members' economic policies are to converge: the Deposit Insurance Directive partially harmonizes

1995: Austria, Finland, and Sweden join the EU to form the EU-15

1998: Austria, Belgium, Finland, France, Germany (Green in 2001), Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain form the EMU and the EU-12, under the ECB. …