The Single Licence And The Single European Market
Throughout this book we have encountered the Second Banking Directive of the European Community. It is part of the agenda for a single European market. Its aim is to create one market in banking services, with no internal barriers to EC banks establishing branches in other parts of the EC, or in providing services cross-border. The aim is achieved through 'mutual recognition': a bank based in one EC Member State has a 'passport' to establish branches, or to provide services, in other ECMember States
A 'single licence' is required, rather than licensing in each Member State. Mutual recognition is coupled with the harmonization of certain basic prudential standards, notably in relation to the capitaladequacy standards for banks.
It can be argued that, in this respect, the Directive has added little, if anything, to the rights of establishment and to provide services which were already enjoyed under the Treaty of Rome. Even if this were the case, the Directive has given certainty to these rights of banks to move across borders, without the need to wring them out of the decisions of the European Court of lustice on matters as varied as legal representation, blackcurrant-flavoured liqueurs, and insurance.
One important practical issue is what difference the single licence has made. At the time the Directive was being finalized, its proponents detected a positive stimulus from the nearness of 1992. Whatever the flurry of activity at that time, it is doubtful that there has been a significant effect on banking markets generally, and thus the increase in competition which the directive is supposed to achieve. This is partly because banks have been uncertain about what is permitted by the single licence and about domestic legal rules elsewhere.
The absence of harmonization within the European Community on tax matters has given rise to instances where banks have been hindered in providing cross-border services. But many of the examples given by the Commission are clearly expressed, legitimate, consumer-protection measures taken by Member States.
Rather, as already remarked, retail banking services do not in general travel well across cultures and nationalities. In theoretical terms banking, especially retail banking, does not fit the model of'contestabie' markets. Branch networks (including ATM systems) of existing dominant banks, their reputation for soundness, and switching costs for consumers all create non-legal barriers to entry. Consequently, while European competition in wholesale banking will continue to be strong, and competition for medium-sized firms and wealthy individuals will grow, the likelihood is of only modest changes in European retail banking.
What has occurred are certain defensive measures by banks to the potential increase in competition.
This has taken the form of limited cross-border acquisitions, and the establishment of some cross-border networks of banks. That the promise of increased competition, which the Directive holds out, is likely to be long in gestation, is not of itself objectionable.
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