The future of the EU's banking policy
European Commissioner for Internal Market and Services Charlie McCreevy speaks at last week's informal first meeting of the European Banking Committee and spells out the priorities of the EU financial services policy over 2005-2010

I want to talk to you about my priorities for the EU financial services policy over the 2005-2010 horizon. How do we ensure EU banks and investment firms in 2010 will be competitive and profitable when facing competition from global players based in New York, Tokyo or Shanghai?
Our agenda for banking and retail financial services for the coming five years will be part of the post-FSAP Green Paper that the Commission will adopt in May.
The Commission's reflection has not been conducted in an ivory tower or behind closed doors - quite the contrary. It has taken shape over time, in close consultation and dialogue with Member States, industry and consumers. If the FSAP process has taught us one thing it is that the buy-in of market participants in our legislative programme is crucial. The Green Paper on our Financial Services Policy therefore carefully reflects the many converging views expressed in the 18 month FSAP assessment process. This process was begun with the setting up of the four expert groups in October 2003.
Future financial services strategy: a new focus
We have travelled a significant distance since the adoption of the Financial Services Action Plan in 1999. The job, however, is not finished. A new phase begins with a very different focus. A phase of evaluation and consolidation of existing legislation, with fewer new initiatives. A phase in which the effective transposition of EU rules into national legislation and a more rigorous and consistent enforcement will move to the centre stage.
I intend to put into effect a more selective approach to EU regulation, based on a thorough ex-ante impact analysis and continuous ex-post evaluation. The litmus test for every new piece of legislation will be: does it benefit European businesses and consumers? Our work on Basel II sets a benchmark.
However, we should not understate the Commission's legislative programme in the banking sector. I know that this Committee is fully aware of the challenges lying ahead and that it has already set work in hand to address these. There is a lot on our plate if we want the watchwords of the FSAP - cross-border competition, market access, enhanced transparency, risk management, financial stability and efficiency - to materialise on the ground. Not necessarily new initiatives, but consolidation, further integration and strengthening of the EU banking sector.
So what does this mean in practice? I see four key priorities.

Completing the FSAP
The first priority is to complete the unfinished business from the FSAP. For us it is key that the Capital Requirements Directive be adopted in a single reading by the European Parliament in the autumn. And it must be fully implemented by Member States by the end of 2006. This Committee is discussing the Trading Book Review today. I would like it to be included in the current legislative proposal. One possible way of doing this is via amendments tabled by the European Parliament.
The Basel Committee and IOSCO expect to deliver the Trading Book work in the summer, so this should fit in with the European Parliament's timetable. We need to get this right and on time.
This is crucial for Europe since the Capital Requirements Directive also covers securities firms. In all of this CEBS has a crucial role to play, together with you, to apply this complex legislation coherently across Europe. Industry and Finance Ministries will judge CEBS on delivering this.

Efficient and effective
supervision
The second priority for the coming five year period is to deliver efficient and effective supervision. A system that supports financial stability, market confidence and consumer protection, reduces costs for banks and deepens the Single Market.
As you very well know, financial integration and cross-border penetration have increased the potential for 'spill-over effects'. This poses significant challenges for supervisors, which remain largely nationally rooted. Therefore, improving co-operation in all aspects of supervision - both day-to-day and in case of crisis - is crucial. The Commission is closely working with CEBS, which is producing home/host guidelines for consultation.
In the last 18 months, industry has given us a clear signal that more convergence of supervisory practices is needed. Some large financial institutions even go further. They are pressing the case for consolidated supervision. Under this a banking group with subsidiaries in several Member States would be subject to a single or "lead" supervisor, usually in the home country where the group is headquartered.
I hear their concerns and I take them seriously. But the current situation and rules do not allow - nor justify - a "jump" to a single European supervisory authority. Yet.
The most fundamental issue to solve is who pays the bill if a part of a banking group becomes insolvent. This has to be crystal clear before making any change to the present structures. There are still simply too many uncertainties and inconsistencies. Clearly we need an evolutionary approach. One that strikes the right balance between ensuring effective supervision and financial stability, and minimising regulatory burdens for firms. We need first to solve a number of key underlying and interrelated issues in a satisfactory manner. These are: liquidity, crisis management and lender of last resort arrangements, deposit protection schemes, and winding-up and bankruptcy rules. I know that you have already put your minds to these difficult questions.
It would be a good idea to discuss this agenda with industry, supervisors and Central Banks at your next meeting in July.
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Reducing regulatory costs and inefficiencies
The third priority is to reduce regulatory costs and inefficiencies. In this context, we plan to remove inconsistencies within and between EU Directives, paying particular attention to cross-sectoral issues. Present and programmed Directives sometimes entail overlapping or even conflicting supervisory requirements. For example, the Financial Conglomerates, Insurance Groups and future Solvency Directives. We have Basel II. How does it compare to Solvency II for insurers? Are there differences? Why? What costs are there for business? I shall see to it that my services work together with you, and all other interested parties, to ensure coherence, clarity and supervisory efficiency.
Let me also mention in this context the review of the E-Money Directive where the Commission launched a consultation in May 2004 on the application of the Directive to mobile phone operators and 3-G [third generation] service providers. We need to strike a balance between protecting e-money users, and fostering innovation and competition. Consistency also needs to be ensured with the future Directive on Payments Services in the Internal Market.

Cross-border M&A
Finally, the fourth priority is to enable cross-border consolidation in the European banking sector. Europe has specialised national banking systems. There are not many banks with specialised high-growth business lines on a European scale. So far there have been very few cross-border mergers. Despite the fact that they are the only source of potential growth for most large European banks. There are of course several reasons for this. But one certainly is what we politely call "political intervention mechanisms" that have not disappeared. Some authorities still favour "national champions" against foreign takeovers. Most national authorities remain domestically-minded.
The debate is not about the level of 'foreign' participation in individual Member States. It is rather about whether national supervisors use solely prudential criteria to assess the merits or demerits of a particular merger or acquisition. I believe that consolidation should be driven by markets and by the opportunities for business to deliver benefits to users and consumers.
We will address the issue from different angles. Following the Scheveningen discussion, the Commission is reviewing the existing rules on the supervisory approval for the acquisition of significant shareholdings in the banking sector.1 In parallel, we intend to review the application of the EC Treaty freedom of capital movements in the area of cross-border bank mergers and acquisitions. Finally, my colleague, Neelie Kroes, has announced her intention to undertake a sector enquiry in the area of retail financial services.
This leads me to my next topic, namely the importance of retail banking in our forthcoming Post-FSAP strategy.

Retail Banking in the post-FSAP strategy
While we have seen considerable progress in many areas of financial services thanks to the FSAP, the same cannot be said in the case of "Retail". The results of our consultation process indicate that more progress could be made in this area. For that reason, retail financial services issues look set to move to centre stage in the coming years.
Retail financial services constitute a major part of the financial services business. They contribute to the stability of national financial systems and bolster the EU economy as a whole. However for the time being, these markets remain strictly national: the same product offered to consumers in one market cannot, in the majority of cases, be offered in another market without undergoing substantial modification.
Integration of retail financial services markets has the potential to make a significant contribution to the achievement of our Lisbon agenda goals. But let us be under no illusions: the retail financial services market is a challenging one and we should avoid making any blanket assumptions about the potential benefits.
So let's take a look at the facts.
We are talking about a big market. We are talking about home loans, consumer loans, car insurance, household insurance, investment funds, life insurance and a host of other products. Together this sector accounts for a market worth many trillions of euros. But it is also a cake which is divided into 25 differently sized slices.
Secondly, the environment is changing. A number of new factors should cause us to re-evaluate whether the regulatory framework for financial services is still relevant for the modern banking business. The introduction of the euro has led to transparency and stability of prices. Technology, especially the Internet, is impacting on the way financial services are offered to customers, while the increased freedom of EU citizens to work and retire away from their home state brings with it new needs for well performing cross-border financial service products. And the reducing role of the welfare state makes it ever more important to stimulate competition between long term financial services products.
Finally, the outcome of efforts to integrate retail financial services is without guarantees. Product characteristics, distribution systems, differences in consumption culture and indeed other economic and structural realities play a much more prominent role in the retail sector than in the wholesale sector. We cannot assume that simply harmonising the legal rules for market access will increase the offer or indeed the take-up of cross-border financial services. Moreover opinions differ widely on the means which we should use to achieve further integration.
So in short, we are looking at a market with huge potential to generate economies of scale, backed on the one hand by some powerful drivers for change but facing on the other hand daunting obstacles and an uncertain outcome.
How do we propose to move things forward in the area of retail?
First off, the Commission cannot accept any blanket assumption that retail markets for all financial services should remain purely local. If we want to challenge this assumption and make the vision of an integrated financial services market a reality for EU citizens, we will need to clearly identify where action can bring benefits for the financial services industry and consumers.
Our general approach in the post-FSAP era will be to consult widely and carry out a thorough cost-benefit analysis before launching any policy. Of course our policy may result in some cases in EU legislation. But our intention is to intervene with very carefully crafted actions only in those areas where further integration is most likely to deliver tangible benefits to all stakeholders.
A number of areas have already been identified as requiring attention:
For mortgage credit - which, I understand, you discussed this morning - we already set up a Forum Group in 2003 to review the barriers to further integration and make recommendations to the Commission to tackle those barriers. The Forum Group performed its difficult task well, and recently delivered its report containing 48 Recommendations. We are continuing to consult on these Recommendations in the lead-up to our Green Paper, to be issued in July of this year. In parallel, we have commissioned an independent study on the 'business case' for Commission action in this area, which contributes to our on-going process of impact assessment.
In the area of retail payments, we are working to see what action might be necessary to remove the remaining legal and technical barriers hindering the creation of a single payment area. We intend to adopt a proposal for a Directive later on this year.
We are also looking at the area of asset management. The current EU legislation on collective investments (UCITS) has facilitated the cross-border offer of these products to retail investors. However the current 1985 framework is showing its limitations and if widespread retail interest in investment funds is to be encouraged then a sound regulatory framework is needed which promotes integrity, transparency and confidence.

Conclusion
To conclude, the post-FSAP Green Paper will list a number of further areas of retail financial services where our thinking is at an earlier stage, but where the prospect of further integrating initiatives may merit further attention. But let me reassure you, whatever initiatives we may undertake my watchwords will be open, transparent and thorough consultation - and new regulation only where it is strictly necessary.
The Commission's proposed new financial integration strategy will be presented in May in the form of a Green Paper. The Paper will be open for public consultation over the summer and provide the input for a 'White Paper' on our strategy for 2005-2010 - in the form of a Communication - planned for November.
1 This is the ongoing review of Article 16 of the Consolidated Banking Directive (Article 16 contains the rules on the supervisory approval process for the acquisition of so-called 'qualifying' shareholdings, i.e. above 10%).