Retail Banking in Europe

Retail Banking in Europe

The Way Forward

The European Voice of Savings and Retail Banking

Retail Banking in Europe

The Way Forward

Cover concept: “The diverse landscape of bankingdrives the economy forward”.

Acknowledgements

ESBG would like to thank its members who contributed to this report.

We would also like thank the colleagues of the consulted ESBG committees and otherESBG working bodies for their input:

Coordination CommitteeEconomic Affairs CommitteePayments CommitteeSupervision and Capital Requirements CommitteeAccounting and Audit CommitteeCorporate Social Responsibility CommitteeFinancial Regulation CommitteeTask Force Capital Markets RegulationTask Force Consumer PolicyTask Force SMEs Task Force on Anti-Money Laundering and Counter Terrorist FinancingStatisticians Network

Disclaimer The opinions and views expressed in this report do not necessarily reflect the individualviews of all ESBG Members; they are the result of a consultation process involving ESBGcommittees and other ESBG working bodies.

Given current ongoing discussions with the European Commission, Lloyds TSB believesthat it is not appropriate for it to comment publicly on European regulatory issues forthe time being, and is therefore not a party to this report.

FOREWORD

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These are interesting and uncertain times, and we cannot tell yet where they will lead us. The financial world is changing and itis to be expected that banking itself – whether globally or in the EU – will undergo a significant transformation. Now is not thetime for concrete predictions, yet we look ahead with optimism and with the confidence that also in the times to come, Europe’ssavings and regionally oriented retail banks will drive economic growth and development, as indeed they always have. The aimof this report is to work towards this goal by stimulating and contributing to the various relevant debates and initiatives, whichare currently shaping the retail banking sector along various dimensions.

Firstly, fervent discussions are ongoing in the context of the financial and economic crisis. At the centre of these debates standsimproving the regulation of Europe’s financial sector in all those areas where regulatory shortcomings are now recognised ashaving contributed to – or as not having effectively prevented – the build-up to the crisis. For the same reasons, Europe’ssupervisory architecture is currently under revision. In parallel, however, it would be of similar importance to extend the ongoingpolitical discussions to Europe’s financial players themselves and to reassess the priorities of banks as regards their role in theeconomy. The events of the last two years prove that, in Europe and also in the US, such a discussion on bank priorities is longoverdue. As representatives of savings banks and regionally oriented retail banks we feel that it is our role to stimulate such adebate, since during the last two years these business models have undoubtedly reconfirmed their validity.

Secondly, the debate on the long-run integration of Europe’s banking sector and the achievability of a Single Market for retailfinancial services continues. This debate on the ‘growing together’ of Europe’s national retail banking markets and on theeconomic aspects of market integration is of greatest importance for the sector and for Europe. As a matter of fact, the currentsupervisory and regulatory revisions will reset some of the underlying conditions for this debate, in ways which cannot yet beanticipated. However, there are persisting central factors that determine the building blocks for any sound and reality-based visionor strategy for the future of Europe’s retail financial services markets. As savings banks are among the oldest and most deeplyembedded providers of retail financial services, we feel compelled to point out certain core parameters which are fundamentalfor any realistic debate on retail banking sector integration.

Thirdly, in the field of retail banking policy, continuous efforts are being undertaken to drive forward the integration of Europe’sretail financial markets in practice. This applies to areas like the core retail banking business, payments, capital markets, financialinclusion and education, and accounting. Even with the ongoing crisis, in these areas a large part of the dialogue between policymakers and industry is in fact ‘business as usual’. Consequently, we use the occasion of this report to provide ourrecommendations for the ‘retail banking’ specific policy areas currently on regulators’ agenda, and take this opportunity topresent ESBG’s expertise and views as the representative of a major part of Europe’s retail banking industry.

Without anticipating our concrete conclusions and recommendations, let us already highlight that ESBG remains true to its long-standing positions and convictions. For both banks and banking regulators, a reality based approach is essential. For banks thisreality based approach implies the need for responsible and sustainable business models; for policy makers it means recognisingand respecting business realities and fundamental market conditions. Furthermore it goes hand in hand with internalising andmaximising the value of Europe’s pluralistic banking sector, not only for the sake of Europe’s banks but even more so for the sakeof its citizens, regions and the economy as a whole. The clear and objective goal of Europe is to make the most of its strengths.

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With this insight, of course, the questions do not end. Rather, as a result of the current crisis, new questions arise, while alreadyestablished answers to old questions are being revised. Central among the new questions is whether the current economicslow-down will lead to a change in the pace and direction of the integration debate. Looking back, during the past period ofeconomic growth and prosperity until the onset of the crisis in mid-2007, the approach to European market integration taken bymost EU policy makers was very ambitious and dynamic – even bullish – but unfortunately not unbiased. However, during the lasttwo years of financial and economic crisis and the experience of fragilities in the financial system, ensuring stable nationalfinancial sectors and economies clearly has taken priority. Does it follow from this that dire economic circumstances reveal the‘real’ constraints to sector integration which previously were overlooked or not binding? Do the experiences of the last two yearsredirect market players themselves towards their home-markets or change their approach to market-entry and expansion? Issector integration, in the way previously understood and targeted by policy makers and market players, no longer a priority? Willmarket players’ and policy makers’ stance on integration turn bearish and, if yes, for how long?

Looking at the evolution of new answers for old questions, a change is clearly observable in policy makers’ visions and prioritiesfor the future of the European retail banking market. Until two years ago, the debate was dominated by the central objective ofintegration, defined as the removal of barriers to the creation of ever bigger banks. Now this approach is being counterbalancedby the recognition that financial stability cannot be taken for granted. At the same time, there are the new additional prioritiesof promoting financial inclusion, increasing consumer confidence, and achieving responsible business practices. It can thereforebe expected that regulators and policy makers will adopt – much more so than they did in the past – holistic and balancedstrategies on the basis of all these criteria. As a result, the very nature of the integration debate is likely to change and to become,indeed, more pluralistic.

For us as savings and retail bankers this change in the political trend comes as a great confirmation. Europe’s savings banks andregionally oriented retail banks have always been critical towards a one-sided approach to integration: it neither internalised thestabilising impact of Europe’s pluralistic banking landscape and its beneficial effects for competition, nor did it take sufficientaccount of the socioeconomic role of banks and the necessity of guaranteeing financial stability. The events of the last two yearshave clearly demonstrated that Europe needs a pluralistic banking sector as well as a circumspect and balanced approach by policymakers. For all these reasons the new direction in the integration debate appears promising and could ensure that the benefitsof an integrated European financial market will be more equally distributed. Furthermore, there is reason to hope that integrationwill become not only fairer, but also safer.

It is evident that the European debate on retail banking integration is nearly as diverse, dynamic and multidimensional as the retailbanking sector itself. Both bankers and policy makers are learning necessary lessons. By building on realistic foundations, Europeand its banks will move forward carefully, but also with confidence.

Heinrich Haasis Chris De NooseESBG President Managing Director WSBI/ESBG

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TABLE OF CONTENT

Foreword 5

Executive Summary 9

Who is ESBG? 171. ESBG – The European voice of savings and retail banking:

identity, values and tradition 172. ESBG members in the European banking landscape 17

2.1. ESBG members – integrated within the European banking sector 182.2. ESBG members – a substantial part of the European banking sector 18

3. ESBG and responsible banking 19

Part 1 – The financial and economic crisis: ESBG key-messagesand contributions 23

Setting the scene: the current financial and economic crisis –an unprecedented experience 25

1. Crisis, banks and economy – ESBG views on lending, business ethicsand state aid 271.1. Retail banking and the real economy – bank lending during the crisis 281.2. Views on banks revisited – back to the roots of the business? 311.3. State support to the banks and related trade-offs – which approach should be taken? 33

2. Policy responses at the EU Level – ESBG views on the chosen approaches 372.1. EU actions as part of the global approach to crisis prevention – revision of existing regulatory and supervisory frameworks 382.2. EU actions as part of the global approach to crisis prevention – widening regulatory outreach 40

Part 2 – European retail banking market integration:core parameters for a reality-based approach 43

Setting the scene: the long-run debate on the integration of Europe’sretail banking markets 45

1. Retail banking realities and their implications for market integration 471.1. Local demand for retail banking products and services 481.2. Distribution of retail banking products: does retail banking become ‘less local’? 511.3. Competition in retail banking 54

2. Diversity: heritage and future for the European retail banking market 592.1. Banking practices: EU comparisons – EU diversity 602.2. Europe – rich in market players 632.3. Pluralism in the EU retail banking market 65

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Part 3 – EU retail banking policy: ESBG contributions and recommendations 69Setting the scene: the EU approach to financial sector policy andESBG’s contributions on the basis of the ‘Market Model’ 71

1. Banking supervision 731.1. The EU institutional arrangements for supervision 741.2. The EU regulatory framework 801.3. Deposit Guarantee Schemes 87

2. Financial reporting I – Fair value accounting 913. Financial reporting II - IFRS and SMEs 974. Wholesale payments and settlements infrastructure 1035. Capital Markets I – Securities 109

5.1. Markets in Financial Instruments Directive (MiFID) 1095.2. Prospectus Directive 1145.3. Market Abuse Directive 1165.4. Transparency Directive 117

6. Capital Markets II – Asset management and investment funds 1196.1. UCITS 1196.2. Alternative investment fund managers 1216.3. Packaged retail investment products 122

7. Consumer policy in the area of retail financial services 1257.1. Consumer credit 1277.2. Mortgage credit 1297.3. Distance marketing of consumer financial services 1337.4. Consumer redress 1357.5. European contract law 1377.6. Consumer rights 139

8. Retail payments 1419. Anti-money laundering, counter terrorist financing and financial institutions 151

9.1. The third anti-money laundering directive 1529.2. Compliance at group level 1559.3. Financial action task force – FATF 1569.4. Proliferation financing 1589.5. Financial sanctions 160

10. SME financing 16311. Financial inclusion 17112. Financial education 175

Concluding remarks 179

Annex 1 181Part 1 – Structural and financial data 181Part 2 – EU Payments Data 197

Annex 2 203ESBG Charter for Responsible Business 203

Bibliography 213

EXECUTIVE SUMMARY

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Who is ESBG? ESBG is the voice of Europe’s savings and regionally oriented retail banks. ESBG’s members share a longEuropean banking tradition and form an integral and substantial part of Europe’s retail banking landscape. True totheir origins, they subscribe to the principles of responsible retail banking, as summarised in the ESBG Charter forResponsible Business.

The ongoing financial and economic crisis challenges many long held views on the financial sector itself and on the appropriateregulatory and supervisory framework. At the same time, the long-lasting EU debate on financial sector integration continues atboth the political and the policy level. As the European voice of savings and regionally oriented retail banks, ESBG is taking thisopportunity to present its contributions on the different retail banking related issues to the new European Parliament and thenew European Commission.

This report lays out ESBG’s views and recommendations in three broad areas.

n The first part of the report addresses the current financial crisis and presents ESBG’s key messages and contributions toongoing political debates.

n The second part of the report takes a long term view and names and explains core parameters for retail banking sectorintegration, which are essential for any reality-based strategy for the future of Europe’s retail banking sector.

n The third part of the report addresses concrete retail banking policy issues and presents ESBG’s views and recommendationsin relevant areas.

PART 1 The financial and economic crisis: ESBG key-messages and contributions

The current financial crisis sheds a new light on Europe’s banking sector and has challenged national governments to takeunprecedented action. Similarly, the crisis calls for steps in the areas of banking supervision and financial sector regulation.

Crisis, banks and economy – ESBG views on lending, business ethics and state aid

Maintaining access to credit for the real economy is essential. Fears of a severe Europe-wide ‘credit crunch’ and a break-downin bank lending to the real economy have not materialized. This is largely due to the stabilizing and balancing characteristics ofEurope’s banking sector, and in particular to its pluralistic structure in which different bank types and business models competeand coexist. By contributing to the overall stability of the financial system, pluralism in the banking sector truly confirms its valuefor Europe’s economy and markets. In the retail banking area, many ESBG members have maintained or even increased lendingto the real economy since the onset of the crisis. This underlines the stabilising effect of regionally active and committed retailbanks and the importance of locally made banking decisions for adequate and stable financing of the local economy.

The crisis demonstrates that fundamental mismatches between the banking sector and the real economy are notsustainable. The suddenly exposed fragility of the financial system demonstrates that the priorities of banks need to be alignedwith their true purpose in the economy. This fundamental idea is embodied in the traditional savings banks model. On a generallevel, banking needs to return to a realistic and sound approach, which does not lie in a race for ‘fast’ but unsustainable profits.For retail banking this implies a clear focus on the efficient, conscientious and responsible provision of financial services andproducts to the real economy. Correspondingly, a uniform banking sector whose behaviour imperils the wider economy can no longerbe an acceptable vision for policy makers nor for some parts of the banking sector. It is the duty and responsibility of policy makers tosafeguard a pluralistic sector in which the principles of comprehensiveness, responsibility and sustainability are well represented.

The crisis has led to a wave of state aid to financial institutions. The efforts of European Commission and nationalgovernments to support financial institutions and to guarantee financial stability are important, necessary and adequate. Still, acentral criterion is that state-aid must be granted with the clear objective to achieve or maintain the overall health of the bankingsector – it may not carry a cost to sound and healthy institutions. Any state aid measure must be designed in order to fit with thenational circumstances and needs to be adaptable to the challenges individual institutions are facing. Yet there remains someconcern that national state-aid measures can translate into persistent competitive imbalances both across markets and withinmarkets. Therefore policy makers need to exert all efforts to prevent state aid from affecting competition between beneficiariesand non-recipients. This is also important as it is unrealistic to expect that competition distortions and damages to the sound partsof the banking sector can be repaired at leisure after the crisis is overcome.

Challenges to Europe’s regulators and supervisors

The current financial crisis also challenges Europe’s policy makers to identify and correct shortcomings of the EU regulatoryand supervisory framework. The analysis of the reasons and dynamics behind the current financial markets crisis has beenprogressing with great strides. EU policy makers have not hesitated to act on the lessons learned and to initiate corrections inthose areas where they have identified the need and scope for corrections. While the ongoing approach tackles a rather widerange of policy objectives, the paramount goal of legislative initiatives is to safeguard future financial stability. Looking at theinitiatives under way it is important to note that, while great efforts are being taken to improve existing legislation andinstitutional frameworks, a substantial part of the discussion also focuses on extending regulatory coverage to previouslyunregulated entities and activities.

Looking at the ongoing revisions of the EU supervisory and regulatory framework, EU policy makers rightly aim to build onexisting foundations and make the best use of past achievements. ESBG would like to stress that in order to adequately takeaccount of the interlinkages between the different areas under the spot light, a holistic approach is vital. It is also important thatEU policy makers keep the ambition to regulate Europe’s financial sectors in a way which promotes its strengths and takes dueconsideration of the diversity of its financial sector. The application of common rules under the guidance of an overarchingproportionality principle would contribute to safeguarding the valuable diversity in EU’s banking markets.

Yet some words of caution are necessary. The temptation of short-termism must be resisted not only by financialintermediaries, but also by regulators and policy makers. A clear distinction needs to be maintained between measures addressingimmediate concerns and long-term improvements to the regulatory framework. The implementation of corrective measures needsto be carefully adjusted to the real economic environment and to the pace at which the European economy overcomes the currentcrisis. The current political momentum should not be lost, yet undue haste may ultimately prove counterproductive.

The current expansion of regulation to previously unregulated financial actors and activities is a timely and necessaryresponse to the lessons Europe and the world have been forced to learn in the last two years. Policy makers are rightly extendingregulation to those formerly unregulated financial market participants whose actions have contributed significantly to the crisisor whose activities could pose future systemic risks to financial market stability. Especially the EU regulation of credit ratingagencies is long overdue, given their fundamental role in the financial sector and the potential implications for financial stability.

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PART 2European retail banking market integration: core parameters for a reality-based approach

The current financial crisis and the analysis of necessary lessons and responses may dominate the current political agenda.Yet, the long-run EU debate on a further integration of the retail banking sector is ongoing. In the second part of thereport, ESBG presents core-parameters for a reality-based European approach.

Retail banking realities and their implications for market integration

Of key importance for any approach to sector integration is that retail banking is a local business: Demand for retail bankingis local and the business itself builds on personal contact between banks and customers (relationship banking). With regard toSMEs the local dimension of retail banking is even more crucial, since an adequate bank-customer relationship builds on detailedknowledge of the SME and its business environment. Consequently, branch networks are essential for comprehensive retailbanking. Online banking facilities are becoming increasingly wide-spread; they complement, but do not reduce, the importanceof proximity. Not only does the local character of retail banking set the rules for banks’ business strategies, competition andmarket entry, also the financial inclusion of Europe’s regions builds on full coverage of branch networks. For the furtherintegration of Europe’s retail banking markets the importance of proximity means that successful entry into new markets requiressubstantial investments in branch networks and in local knowledge. This is especially true since the essential factor for banks’success is customer satisfaction. ‘Pure’ cross-border provision of retail financial services on a large scale is an unrealistic propositiondue to lack of demand and lack of suitability for the business at hand.

For these same reasons, distance marketing techniques – for example ‘direct banking’ – cannot substitute physical bankbranches. Looking at the natural constraints of the ‘direct banking’ business model (with its near exclusive reliance on theinternet as a basis for contact with customers), it becomes apparent that its economic benefits can be dubious – especially in across-border context. It neither promises comprehensive coverage in terms of retail banking services, nor is it certain that theconsumers’ deposits are optimally used to fund economic actitvity.

Any conscientious assessment for the scope for more sector integration needs to take into account that retail bankingcompetition is multi-dimensional. A vital part of competition goes beyond prices (fees and interest rates) and works viacustomer satisfaction and trust, depth of service, and regional coverage. Therefore customer choice is always a trade-off between‘hard’ factors and ‘soft’ factors, which in turn may be reflected in prices. For integration this means that any market entrant hasto compete not only in terms of prices, but also to meet a range of wider criteria demanded by customers. Furthermore, at thenational level, Europe’s banking markets are already characterized by high levels of competition. Since retail banking is local, thistranslates into intense competition at the EU level.

Diversity in retail banking and sector integration

Looking at banking practices, sector structures and market participants, the diversity and pluralism of the EU retail bankingsector is striking. This richness in retail banking practices and the pluralism of market players are the results of different bankingtraditions and the adaptation to different economic environments.

The differences in demand for retail financial services all over Europe are – to a large extent – a result of differences in culturaland socioeconomic factors, savings cultures, housing and labour market specifities and government policies. Differences inbanking practices, in product design or pricing patterns consequently stem from an adaptation to specific features of demandand underlying conditions.

Similarly, in each country the structure of the financial sector reflects the needs of the producing sector and citizens, andtherefore the structure of the economy itself. As a logical consequence sector structures vary accordingly across Europe.

ESBG has always emphasized that pluralism in the retail banking sector is an asset for Europe: it benefits the real economy,drives competition and increases financial stability. Pluralism ensures that the European banking sector is more than the ‘sum ofits parts’. As regards the integration of Europe’s retail banking market, it is therefore essential for Europe to make the most of itsstrengths and to develop an integration strategy which respects and appreciates the diversity of market players.

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PART 3EU retail banking policy: ESBG contributions and recommendations

Part 3 of this report presents ESBG’s views and recommendations on the retail banking related policy issues currently under debate.

Banking supervision

The EU debate on banking supervision has gained momentum with the outbreak of the financial crisis. The recent market eventshave, however, not changed ESBG’s belief that reforms in this area have to build on the strengths of the current framework –such as the strong involvement of the national supervisory authorities.

Looking at the changes currently envisaged, ESBG supports the combined focus on micro and macro prudential supervision.Of particular importance is the new focus on macro-prudential aspects of financial stability. Here, the main challenge will be toensure that the future EU macro-prudential body on financial stability will effectively and efficiently carry out its tasks.Turning to micro prudential supervision, ESBG generally supports the establishment of a European System of Financial Supervisors,which will be a decentralized network of national supervisors with coordinating roles for the envisaged three new ‘EuropeanSupervisory Authorities’.

The financial crisis has also revealed weaknesses in the current prudential regulatory framework. Yet, this does not mean thatit is necessary to completely overhaul the rules in place. EU policy makers should correct the identified weaknesses by buildingon the Basel II framework.

As regards the process to be followed, repairs to the regulatory framework should observe the ‘Better Regulation’ approach.In addition, the timing for the introduction of new rules is important, as measures which would have positive effects in the longrun could prove counterproductive if introduced in the current exceptional market conditions.

ESBG supports the efforts to ensure the appropriateness of rules in areas such as securitization or banks’ trading book. At thesame time, it has to be ensured that the new rules envisaged are a true response to the identified problems and do not endangerpractices that have proven their effectiveness from a market stability or risk management perspective.

ESBG welcomes the recently adopted revised version of the Deposit Guarantee Schemes Directive, which reflects theimportance of Deposit Guarantee Schemes for stability in financial markets and consumer confidence. As regards the additionalchanges to the Directive currently envisaged, the different national Deposit Guarantee Schemes should be maintained, as theyhave the important advantage of attributing local responsibility and social control. Finally, no further reduction of the payoutdelay, which would come “on top” of the reductions introduced by the revised DGS, would be manageable.

Financial reporting I – Fair-value accounting

In its 1999 “Financial Services Action Plan”, the European Commission announced its intention to improve the Single Market forfinancial services. One of the objectives was to obtain a single set of accounting standards for all European listed companiesthat was better adapted to the increased use of financial instruments. The standards chosen were the International FinancialReporting Standards (IFRS)/International Accounting Standards (IAS) which introduced the accounting notion of fair value. Fair value changed the philosophy of national accounting standards as it introduced the idea that assets and liabilities had to bere-evaluated on a regular basis according to their current market value. Fair value encountered a lot of attention from both sidesof the Atlantic in light of the financial crisis. During autumn 2008, numerous changes in the standards related to the valuationof financial instruments at fair value (mostly concerning the accounting standard called IAS 39) were introduced. All of thesechanges aimed to provide flexibility in the application of fair value – especially concerning the measure of financial instruments in illiquidmarkets. In early summer 2009, proposals were issued to replace fair value guidance contained in various IFRS with a single,unified definition of fair value, soon followed by a proposal to replace IAS 39 by a new standard. The ongoing discussions concernthe pro-cyclicality effect of fair value, the valuation of illiquid assets and the fair value classification rules in balance sheets.

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ESBG strongly supports a more flexible application of fair value when it comes to illiquid financial instruments but also defends apractical approach to the relationship between fair value accounting and the economic downturn. Over-reliance on market value notonly significantly increases pro-cyclicality, but also results in providing an inaccurate image of a company’s financial situation.

There is a need for more user friendly, simpler and more standardised rules of fair value disclosures and calculation requirements.More coherence between American and European accounting standards is necessary. Additionally, a higher degree of harmonisationbetween fair value requirements is demanded by financial reports and those required by supervisory regulations. Better transparencywould benefit both users and preparers of financial standards as it will diminish their workload and strengthen the EuropeanSingle Market.

Finally, it is very important for the EU to adopt measures on fair value that take the exceptional circumstances in the markets intoaccount and are in line with the measures taken in the United States. Thorough reconsideration of the existing accountingpractices and accounting rules is necessary in the long term.

Financial reporting II – IFRS and SMEs

Small and Medium-sized Enterprises (SMEs) form the backbone of the European economy and savings banks are their naturalbusiness partners. In order to improve the Single Market, the European Commission has proposed adapting accountingrequirements for SMEs and for publicly traded companies. The Commission’s initiatives include a reduction of the reportingburden for SMEs and the endorsement of a common set of accounting rules for listed companies – the International FinancialReporting Standards (IFRS). The International Accounting Standards Board (IASB) took the initiative to propose an extensionand a simplification of IFRS accounting rules for SMEs. This initiative raised controversial discussions amongst stakeholders andpolicy makers involved.

In general, savings banks do not have any strong preference on the accounting standards that their SME clients apply. More specifically,ESBG members can adapt to the accounting standard used by SMEs, be it a national General Accepted Accounting Principle oron an international accounting standard specifically designed for SMEs. Therefore, ESBG’s major interest is to ensure that SMEsbenefit from the best possible accounting standards both in terms of simplicity and comprehensibility.

Against this background, the IFRS for SMEs should be an option. In addition, substantial reductions of disclosure requirementsare still necessary. With regard to the IASB proposal to revise the standards every three years, the time frame for modificationsand further developments of the standards should be extended in order to avoid additional administrative burden for SMEs.Concerning the content of the IFRS for SMEs, ESBG, being the natural business partners of SMEs, defends a practical, cash-flowand solvency oriented approach.

Finally, the scope of entities obliged to report in accordance with full IFRS should not be expanded to include banks and insurancecompanies as being publicly accountable entities unless they are capital-market oriented.

Wholesale payments and settlements infrastructure

Concerning wholesale payments and settlement infrastructure, ESBG supports the continued development of central bankinfrastructure that effectively enables finality and certainty. Yet the public good dimension of these initiatives should not be lostfrom sight, as this is one of the core factors which distinguish them from commercial initiatives. As a consequence, particular careshould be paid to ensuring that the level playing field is not even inadvertently jeopardized, for example by constraints that makedirect access to payment and settlement systems unattractive.

Capital markets

The Financial Services Action Plan (FSAP) has introduced substantial changes to the rules in place to ensure the safety, integrity andaccessibility of Europe’s financial markets. Important pieces of legislation include MiFID, the Prospectuses Directive, the MarketAbuse Directive and the Transparency Directive. After a phase of adoption and implementation, the time has now come to reviewthese texts: the best should be made out of this opportunity to correct errors and assess the effects of the measures in place.

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It is still premature to draw final conclusions on the Markets in Financial Instruments Directive (MiFID). This being said, andalso due to the heavy cost associated with compliance, a period of continuity and contemplation is now necessary so that the fulleffects of MiFID can unfold and be assessed. This is the case not only for the conduct of business related aspects of MiFID, butalso for all the provisions which will undoubtedly significantly change the shape and structure of Europe’s financial markets. Asubsequent and realistic assessment of MiFID should not only aim at identifying weaknesses and reducing any excess burden; italso should honestly take stock as to whether MiFID equally benefited all market participants and whether the principles ofsubsidiarity and proportionality were fully respected.

The Prospectus Directive has already demonstrated its viability and has brought about some improvements. Therefore, itsupcoming revision should focus on further reducing burden, also taking due account of the retail banking realities and of thespecificities of smaller banks. This would imply raising the size-threshold for the exemption of smaller credit institutions, given thesubstantial burden associated with providing a prospectus.

As regards the recent developments relating to asset management and investment funds, ESBG welcomes UCITS IV, whichbenefits investors and further improves the internal market for collective investment in transferable securities. Looking ahead, itis of great importance to preserve the spirit of UCITS as safe products for retail investors.

ESBG supports the decision to initiate regulation of Alternative Investment Funds. Yet ESBG is concerned about a number ofvague elements in the Commission’s proposal for a Directive, which is currently being assessed. Furthermore, ESBG welcomes theongoing initiative to explore how a framework for all packaged retail investment products could work in practice, anticipatingalready that in this area a flexible approach is necessary given the diversity in existing products.

Consumer policy in the area of retail financial services

In recent years, consumer protection has become one of the cornerstones of European policy in retail financial services.The European Commission aims to improve the relationship between citizens and financial market players, thereby increasingconsumers’ confidence in the European Single Market and promoting a level playing field for competition within the financialsector. Yet the Commission has continuously underestimated consumers’ reluctance to purchase financial products on a cross-border basis because they prefer the face-to-face communication with their financial service providers.

As regards the area of consumer credit, the recent Consumer Credit Directive aims at granting consumers with an appropriatedegree of protection. However, the Directive imposes additional, unnecessary administrative burdens on financial institutions.Furthermore, the Directive causes uncertainties regarding topics such as overdrafts, pre-contractual information, the definition ofthe annual percentage rate of charge, early repayment and the right of withdrawal. Therefore, further clarifications of theseaspects in the Consumer Credit Directive are necessary.

In the area of mortgage credit, ESBG welcomes the different initiatives of the Commission to thoroughly assess possible futuredevelopments in order to increase the cross-border supply of mortgage credit. The most important initiatives being taken are,among others, the revision of European Standardised Information Sheet (ESIS), the study on the costs and benefits of differentpolicy options for mortgage, the study on land registration, property valuation and foreclosure procedures, credit histories andthe announced package on responsible lending and borrowing. Generally, ESBG welcomes the voluntary self-binding approachof the industry to meet consumers’ actual needs and notes that future mandatory rules should not aim at going beyond thoseneeds. Against this background, the package on responsible lending and borrowing should achieve a fair spread of responsibilitiesbetween consumers and lending institutions.

Concerning consumer redress, ESBG supports the Commission’s initiatives to reinforce the provisions of effective and efficientdispute resolution and redress mechanisms for consumers. ESBG favours out-of-court settlement procedures and stresses theneed for the further assessment of existing redress and alternative dispute resolution systems at the Member State level.

In the context of European contract law, ESBG supports in principle the initiative of a handbook to achieve a coherent andconsistent European legislative framework. Nevertheless, for a future Common Frame of Reference an open exchange of viewsas well as an appropriate impact assessment are called for. Furthermore, there is concern about the legal basis for the CommonFrame of Reference.

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In general, ESBG supports the initiatives of the Commission to simplify and to make European consumer rights legislationconsistent, but believes in the need to strike the right balance between consumer protection and the industry’s competitivenessand therewith the functioning of the retail financial market.

Retail payments

A strategically critical part of retail banks’ activities concerns payments. Firstly, concerning retail and commercial payments,ESBG observes that the Single European Payments Area (SEPA) will to great extent be a product of political vision andlegislation. Here, the current approach to regulate a function performed by market players (payment account, payment services)rather than market players themselves on the basis of their institutional status is a major – and still untested – legislativeinnovation. In concrete terms, the success of SEPA, first and foremost depends on the adoption of SEPA payments instrumentsby national authorities. Ultimately, however, the goal of the SEPA project must be to fulfill the interests of those who are tobecome its beneficiaries, i.e. the retail customers.

Anti-money laundering, counter terrorist financing and financial institutions

In order to protect the global financial system from illicit financial activities and to enhance the integrity of financial markets, theprevention of money laundering and of the financing of terrorism is essential. In Europe, the creation of the Single Market providesadvantages for business and consumers. It also increases the opportunities for money laundering and financial crime activities.

Therefore, ESBG welcomes the Commission’s initiatives in this area, such as the Third Anti-Money Laundering Directive.One of the concerns is the extent of the legal obligation to identify and verify the identity of a customer and a beneficial ownerwhich can be difficult. Credit institutions do not have access to sufficient and reliable information to carry out such an intensiveidentification. Moreover, there is a need for clearer guidelines on the extent of investigation which banks need to undergo inorder to be considered compliant with the rules on beneficial ownership.

Another related area is the fight against proliferation financing in which ESBG members are very active. At the same time,the expectations of what financial institutions are able to contribute in this fight must remain realistic. Financial institutions oftendo not have the insight into the underlying business transaction and details required to pass a judgement on the possibility ofproliferation financing as being the underlying aim of the financial transaction. In this respect, the red-flag indicators of theFinancial Actions Task Force which serve to help identify transactions with a potential proliferation background, are not suitable.Thus, ESBG calls for describing characteristics in clear and unambiguous terms, not containing elements requiring furtherindividual assessment.

During the drafting process of the financial sanctions, European regulators and international organisations should take the workof credit institutions in practice more into account in order to ensure a better and effective implementation.

Looking ahead, ESBG welcomes effective regulatory initiatives in the future and will actively participate and share the industry’sexperiences in order to maintain realistic expectations as to what financial institutions are able to achieve in practice.

SME financing

ESBG members, traditionally natural business partners of SMEs, are among the most important providers of SME finance andimportant partners to microenterprises. Therefore, ESBG in general welcomes the measures taken by the European Commissiontowards improving the business environment for SMEs. However, there is still work to be done in the area of administrative rulesand regulations, access to finance in the form of financial support programmes, microcredit and lending, cross-border activities,and CSR for SMEs. In the context of the Small Business Act for Europe, ESBG agrees that the policies for SMEs need to becoordinated at the EU level and should be subject to the ‘Think Small First’ principle in order to avoid excessive administrativeburdens for SMEs.

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Furthermore, the registration procedure for setting up an SME, access to the Single Market, and the ability to operate cross-border all need to be enhanced for SMEs. Regarding the financing of SMEs, it is necessary to bring coherence, to communicateand to clearly define the aim and target groups of different existing European financial support programmes. With regards tothe provision of microcredit, the EU focus should primarily be on facilitating microcredit at the national, regional or local level– as close to the client as possible. In any case, support measures in favour of microcredit on the EU level, such as the JASMINEinitiative should be targeted to all intermediaries in order to reap the full benefits of microcredit in the form of growth andjob creation.

Financial inclusion and financial education

Serving the general interest of society is the savings banks’ initial purpose and an integral part of their identity. For a stable society,economy, and well-functioning financial system, it is necessary and desirable to have knowledgeable European citizens who arewell-informed in financial matters and who have access to the financial system. Therefore, ESBG generally welcomes the currentdiscussions on financial education and financial inclusion at EU level.

However, as promoters of financial inclusion for all citizens, ESBG strongly advocates for a strict application of the principle ofsubsidiarity and for dealing with financial inclusion at the national level. This is also the case involving access to a bank account,which is one of the most crucial parts of financial inclusion. Specific approaches tailored to different national, regional or evenlocal contexts and traditions are needed where the problem of financial exclusion occurs. Financial institutions should offerspecific adapted products and services, provide adequate information and financial education. However, initiatives to fosterfinancial inclusion and enhance access to basic banking services should always be taken on a voluntary basis and cannot beimposed on banks by regulation.

As a representative of financial institutions with a strong commitment to Corporate Social Responsibility (CSR) ensuring theempowerment of consumers, ESBG considers that the financial education of citizens is a task to be dealt with at the nationallevel. Stakeholders have a responsibility in fostering financial education. Government and public institutions should provide policyorientation and raise awareness, while financial institutions should be involved in creating financial education programmes andschemes. Here, many savings banks play a key role in educating people on finance and budget matters, far beyond their actualclientèle. These savings banks have the necessary knowledge and expertise to share best practices.

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1. ESBG – The European voice of savings and retail banking: identity, values and tradition

The European Savings Banks Group (ESBG) is the voice of savings and regionally oriented retail banks in Europe. Together, ESBG membersrepresent about one third of the retail banking sector in Europe with total assets of EUR 6,028 billion (as of 1 January 2008).

ESBG members are modern and innovative providers of retail banking services. They form a cornerstone of Europe’s pluralisticbanking sector, which is distinguished by its diversity of banking traditions and business models. At the same time, ESBG membersdo not form one uniform block and a ‘proto-type’ savings bank does not exist. Rather the savings banks’ universe itself is verydiverse. This diversity reflects differences not only in the evolution of the savings banks themselves, but also in the underlyingeconomic and political conditions in their national markets. Overarching this diversity, however, is a shared business approach andshared values which constitute a strong common denominator.

The strongest common link between ESBG members is their values. All banks and institutions represented by ESBG stand forsocially responsible banking that brings a return to society. At the same time they are efficiently operated, competitive institutions.In broad terms, ESBG members are characterized by what we call the three “R”:

n Retail: they are active in providing retail financial services for individual consumers, households, SMEs and local authorities; n Regional: they are often organised in broad decentralised networks providing local and regional outreach and offer their

services throughout their region;n Responsible: they have reinvested responsibly in their region for many decades and are one distinct benchmark for corporate

social responsibility activities throughout Europe and the world.

ESBG members include savings banks, their descendants and other retail banks that subscribe to similar values. Although theirorganizational structure differs from country to country, they have evolved from common roots and a tradition established inmany parts of Europe in the 19th century. This tradition fostered a culture of savings among the poorer classes of the populationso as to create some level of financial security in times of adversity and old age. The savings that were collected in this way werereinvested in the local ‘real economy’ and also used to finance cultural and social projects for the benefit of the community.This original business philosophy continues to have a fundamental influence on the business approach of the savings and retailbanks that make up the ESBG membership.

2. ESBG members in the European banking landscape

As banks and providers of retail financial services, ESBG members make up a large and substantial component of their local andnational economies and form an important part of Europe’s pluralistic banking landscape. This is underlined by the data presentedin the following sections (all tables referred to can be found in the Annex 1 - Statistics, Part 1).

ESBG members range from individual banks to national banking associations, networks and groups. ESBG’s direct members, as well asthe different credit institutions represented by ESBG at the EU level are presented in Table 1. In the following, information onESBG members is juxtaposed onto data on the EU banking sector as a whole, drawing mainly on data collected by the ECB.

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WHO IS ESBG?

1 See Table 2.2 See Table 3A.3 See Table 3B.4 See Table 4A.5 See Table 4B.6 See Table 5A for the total numbers of branches in the EU, as well as their evolution.7 See Table 5B.8 For numbers in the EU see Table 6A, for ESBG members see Table 6B.9 See Table 7.

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2.1. ESBG members – integrated within the European banking sector

With regard to the national banking sectors, the numbers of independent credit institutions active in Member States differstrongly.1 In part, of course, this is a result of differences in country size and in the importance of the financial sector as anindustry. Nevertheless, structural differences play a role also. In several countries the banking sector is characterised by thepresence of a large number of smaller banks – often organised in networks and/or operating within a limited geographical radius.In other countries the total number of credit institutions is comparatively low. The numbers of credit institutions represented byESBG in selected countries largely reflect the structural characteristics of the national banking markets. This demonstrates thatthe organisation of savings banks is inherent in the evolution of national banking traditions.

A remarkable development over the last decade is that the number of banks has decreased substantially in most countries.This is due mainly to a high degree of sector consolidation. This development is also reflected in the evolution of the savings bankssector. Yet, looking only at the time-span between 2005 and 2007, many Member States (and not only new Member States) havein fact experienced an increase in the number of banks. The general trend of consolidation in the national banking sectors isstrong, but not persistent, also as a result of market entry by new banks.

Looking at banking sector assets in the EU, it is evident that assets in the financial sector are largely driven by the total size ofthe economy, and also by the importance of the national financial industry as an economic and export sector.2 These factors arealso reflected in the size of ESBG members in terms of assets.3 Furthermore, to grasp correctly the importance of ESBG membersin the banking sector (as regards assets) it must be taken into account that they traditionally focus on retail banking, and thathence many of them may hold a smaller share of wholesale financial assets than other market participants. All in all the numbersconfirm that, in terms of assets, Europe’s savings and regionally oriented retail banks are clearly important players in their economies.

As regards employment within Member States, the banking sector is a significant industry.4 Furthermore, employment in thebanking sector as a share of total domestic employment is comparatively stable across Member States – with the obviousexception of those markets which specialise in and ‘export’ financial services. Yet, different banking activities differ in employmentterms and, compared to other forms of financial services activity, retail banking is particularly labour intensive. Therefore it is notsurprising that many ESBG members are large employers in absolute terms, as well as within their national financial sectors.5

2.2. ESBG members – a substantial part of the European banking sector

A central feature of retail banking is the importance of banks’ local presence and therefore of bank branches.6 Given their retailbanking focus it is therefore natural that ESBG members run large branch networks.7 They also are well represented within theirnational markets, as indicated by their generally substantial share of total branches within the domestic banking markets. In moregeneral terms, this demonstrates – and is inherent in – their important role in the national retail banking infrastructure.

Throughout the EU as well as for ESBG members, the great relevance of branches is mirrored by the importance of ATMs.8

Here it is remarkable that the whole EU banking sector and ESBG members alike are generally distinguished by a high and steadyincrease in the number of ATMs. ESBG members’ often substantial shares of the total number of ATMs in a given national marketare characteristic of their importance as retail banking providers.

The points made above are further underlined by the number of bank branches, banking sector employees and ATMs permillion inhabitants in each country.9 Such a comparison not only demonstrates the depth of national financial infrastructure(EU data), but also illustrates how deeply embedded ESBG members are in their markets.

10 See Table 8.11 For the EU see Table 9A, for ESBG members see Table 9B.

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Looking at ESBG members’ market shares, the importance of Europe’s savings banks and regionally oriented retail banks in theirtraditional markets is clearly reflected. In core retail banking activities like savings deposits and the lending to households,many ESBG members play a significant role in their domestic markets. Similar patterns are evident for consumer credit andresidential mortgage loans.10

However, ESBG members not only perform strongly as lenders and deposit providers. True to the character of stable ‘savings’ banks,they also draw to a high degree on non-bank deposits for their funding – generally beyond the average in their national markets.11

3. ESBG and responsible banking

ESBG member banks have a strong commitment to sustainable development and address their corporate social responsibility(CSR) as an integral part of their business. In this context “CSR” is defined as a concept whereby companies integrate social andenvironmental concerns into their business operations and their interaction with their stakeholders on a voluntary basis.

The ESBG Charter for Responsible Business

ESBG members’ consistent commitment to sustainable development and CSR in their local communities and regions has beenformalised with the adoption of the ESBG Charter for Responsible Business by the ESBG General Assembly in May 2008. At thesame time, the ESBG General Assembly adopted a Resolution on the Environment. The texts of the Charter and of the Resolutionare available on the ESBG website: http://www.esbg.eu/.

The ESBG Charter for Responsible Business contains a number of principles under the general headings of:

n Fair and clear relations with customers;n Promotion of accessibility and financial inclusion;n Environment-friendly business;n Making a responsible contribution to the community;n Responsible employers;n Communication.

The ESBG Charter serves as a rubric for the responsible banking activities of the member institutions. This does not, however,imply that it is a guide for companies. Rather, it is a compilation of overarching principles that categorise the aspirations as wellas the activities already undertaken by ESBG member institutions. Below are some examples of how ESBG members apply theseprinciples, including those related to environmentally-friendly business, in their local and regional business areas. Further examplescan be found in Annex 2 “ESBG Charter for Responsible Business: Case Studies” and on the ESBG Internet site http://www.esbg.eu/.

Fair and clear relations with customers

ESBG members enjoy the confidence and trust of large sections of the population and nurture this position through transparencyin their relations with customers. This is done in a number of different ways, such as:

n Clear and honest information on the products and services on offer as well as on the terms and conditions of use;n Ensuring that this information is easily accessible to customers;n Providing advice that is tailored to the needs of customers;n Responsible advertising;n Dealing with customer complaints quickly and efficiently;n Considering cases of financial difficulty sympathetically.

One particularly innovative example is the following:

Promotion of accessibility and financial inclusion

Savings banks are by tradition important promoters of financial inclusion for all people. This commitment is part of their missionand is demonstrated in the way they conduct their daily business. ESBG is certain that access to finance can and should beincreased. This can be done by offering specific products and services, by providing adequate information and by providingfinancial education. Many ESBG members have introduced specific, targeted schemes to ensure that the most vulnerable parts ofthe population also have access to necessary basic financial services. This entails offering a range of specific savings products,payment solutions and credits.

This commitment is illustrated by the example below:

Environment-friendly business

As part of their community investment activities, ESBG members have a longstanding commitment to supporting environmentalprojects financially and raising public and stakeholders’ awareness on the importance of protecting and preserving the environment.

In practical terms this means:

n Introducing environmental criteria into lending policies: e.g. carrying out environmental impact assessments, complying withrecognized external environmental and social standards, certification with ISO 14001 (the international environmentalmanagement standard), etc;

n Supporting national and international initiatives in favour of a greener financial sector: e.g. through the United NationsEnvironment Programme Finance Initiative, the Carbon Disclosure Project, subscribing to the Equator principles, etc.;

Caja Navarra in Spain: Plan Cantera-“civic rights for customers”

Caja Navarra (CAN) created a different business model in 2004, focussing on the needs of the community and its members.The concept was developed as an action plan to increase customer recognition of its “Obra Social12” projects and thus todifferentiate themselves in the market. CAN decided to create an emotional link by giving its customers the rights to decidewhere the profits of the bank should be invested. The Plan Cantera for the period 2007-2010 was the second stage ofthis busines model. This plan includes the initiative “You choose, you decide”, of which civic banking is the key element.Thus, clients have been given some important rights such as the right to know how much money CAN makes from eachcustomer and the specific contribution each customer makes to their chosen social project(s) (see Annex 2).

Microcredit programme in France – “Parcours Confiance”

In 2006, the French Caisses d’Epargne launched the “Parcours Confiance” (eng. “Fresh Start”) programme to preventfinancial exclusion. The programme aims to help customers suffering from personal and financial problems to have a betterunderstanding of banking products and services. This programme also allows for the possibility to provide the beneficiarywith microloans backed by guarantees. Until the end of 2008 4,495 microloans have been granted since the system waslaunched in 2006. The breakdown was 3,275 personal microloans and 1,220 business microloans (See Annex 2).

12 Scheme by which all Spanish savings banks allocate their net surplus (after paying taxes and allocating provisions and reserves) to the management and financingof community investment programmes (social, cultural, environmental, health, research, etc).

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n Developing specific lines of financing for environmental projects for both private and business clients: e.g. for improvinginsulation and heating efficiency for homes and business premises;

n Offering environmentally-friendly products and services such as bonds to finance renewable energy projects: e.g. “ClimaticAwareness Bonds” issued by the European Investment Bank that the Spanish savings banks sell to their clients as anenvironmental product and the issue of bonds to finance wind power plants in Galicia;

n Offering socially responsible investment (SRI) products for institutional and private investors that reconcile ecological and socialobjectives, using independent sustainability ratings;

n Partnership with specialised organisations to support engagement in sustainable development;n Last but not least, a commitment to reduce the direct use of energy and resources – in particular in office buildings and

business travel in order to reduce corporate induced CO2 emissions. Efforts are also being made to reduce indirect emissions,by bringing in environmental considerations in the choice of suppliers and through environmental awareness raising actionswith employees and customers.

Further case study examples of the commitment of ESBG members in the area of environmentally friendly business can be foundin Annex 2.

Making a responsible contribution to the community

Savings banks traditionally embody a “stakeholder” model – seeking to bring value and return to the entire community ofstakeholders which surrounds them, and not only to their financial partners. Stakeholders therefore include investors, suppliers,customers, employees and more generally the local community in which savings banks operate. Savings banks constantly interactwith the various categories of stakeholders, ensuring that their views are sought and given consideration at the various stages ofa given project, enabling them to make balanced and fully informed long-term strategic decisions.

Historically, savings banks have been the first intermediaries to secure the savings and investments of the local population, whichthey have mobilised to reinvest and develop their surrounding communities. Building on their proximity network and their deepknowledge of local needs, they evolved naturally to become privileged financial partners for local and regional economic projectsand have built business relationships with major actors for local development and growth. Thus, they have become the drivers oflocal economic dynamism – both for the financing of infrastructure through partnership with the local authorities and for microprojects aimed at creating jobs and reducing social exclusion. Over time, savings banks have strengthened their relationship withlocal development actors by upgrading their services to adapt them to their evolving needs.

Some Facts and Figures

n The Spanish savings banks contributed over EUR 2,000 million to “Obra Social13” in 2008, an increase of almost 13%over 2007. EUR 112 million of this amount went to environmental initiatives.

n As part of their common welfare engagement, the German Sparkassen-Finanzgruppe invested some EUR 445 million invarious community projects, including environmental projects, in 2008.

n The Austrian Savings Banks Group is a market leader with a 45% share of the total market of core socially responsibleinvestment (SRI) in Austria, which totalled EUR 1.17 billion at the end of 2007.

n Groupe Caisse d’Epargne has laid out the following objectives:- to cut direct CO2 emissions by 3% per year; - to finance 1,000 projects for the environment;- to grant 10,000 microcredits;- to dedicate 1% of the net banking income to solidarity.

13 See definition in the previous footnote.

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Responsible employers

The 870 institutions which ESBG represents in 25 countries employ just over 970,000 people. One of the defining characteristicsof these institutions is their role as responsible employers. As such, ESBG member banks:

n Are equal opportunity employers that do not discriminate on any grounds;n Provide high-quality jobs and good working conditions for their employees;n Promote a corporate culture of staff identification with the employer and a strong sense of shared values among the staff

oriented towards the responsible role of the savings bank;n Provide employees with the opportunity to achieve a good work-life balance;n Promote training and life-long learning opportunities in order to facilitate career advancement;n Pursue a responsible relocation and redundancy policy towards employees in case of reorganisation or restructuring.


Communication

Transparency and consistent communication with customers and other stakeholders is a key component of the savings and retailbanking sector. The communication of activities and policies plays an important role for responsible business. Therefore, ESBGand its members are committed to communicating with the public and stakeholders regarding their activities as sociallyresponsible companies and the implementation of the Charter principles.

Since 2006, ESBG/WSBI has communicated publicly on the implementation of the United Nations Global Compact Principlesthrough regular reports on the socially responsible activities of its members.

This work will now be enhanced by reporting on the implementation of the Charter principles based on the CSR reports of theindividual members as well as on reports on conformity with other international reporting initiatives such as the Carbon DisclosureProject (For more: see Annex 2 and http://www.esbg.eu/).

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Savings banks in Germany – Business Angels and Information Centres

In recent years over half of all start-up businesses in Germany were financed by institutions belonging to the Germansavings banks group – the Sparkassen-Finanzgruppe. Entrepreneurial success often hinges not just on creativity, but also onexperience. Therefore, savings banks are increasingly assigning “business angels” to new companies via Business AngelsNetzwerk Deutschland (BAND). These knowledgeable business managers have a wealth of experience to offer to new companies,as well as a network of contacts amassed over a long period of time which they can use to help them on their way.

In addition, the Sparkassen-Finanzgruppe has launched a central back-up service called EuropaService to provide support,advice and information to corporate customers with regard to conducting business in the European market (See Annex 2).

Swedbank in Sweden – Supporting Employees with the “55+Concept”

To develop the competence and well-being of its staff, Swedbank has developed a programme for staff aged 55 years andabove. The programme aims to improve efficiency, preserve competence throughout the company, and make Swedbank anattractive employer for all ages. The programme involves keep-fit and competence development activities for employeesaged 55 and above and the opportunity to “Ease Down” by working less after the age of 58. This initiative has had asignificantly positive impact on the way these employees find their working life conditions (See Annex 2).

Part 1The Financial and

Economic Crisis:ESBG Key Messages

and Contributions

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SETTING THE SCENEThe current financial and economic crisis –an unprecedented experience

The current financial markets crisis is approaching its second anniversary. It has longoutgrown its original nature as a ‘subprime’ crisis, and has developed into a globalfinancial and economic crisis, which many have come to call the worst economic crisissince the Great Depression. For two years, central bankers and policy makers around theworld have been making unprecedented efforts to stabilize national financial systems andto prevent an economic downturn of unpredictable depth. Furthermore, large-scaleeconomic plans and fiscal programmes were initiated in order to pave the way toeconomic recovery. By any standard, these interventions have reached a scale whichpreviously would have been beyond imagination.

In this report, ESBG does not aim to provide a comprehensive overview of the reasonsand developments behind the current crisis.14 Rather, the focus is on the immediate andlong-term consequences as seen from a retail banking perspective and as far as theyconcern ESBG’s members. Therefore the key messages brought forward will mainly addressmarket structures, competition aspects and changes in regulation and the supervisoryarchitecture. ESBG’s contributions on these issues need, of course, to be seen in contextof the current fast-changing environment and the general unpredictability of events.

For the financial sector, the precise consequences of the crisis and of governments’reactions to the crisis are still uncertain. The general expectation is that the globalfinancial sector will significantly shrink in scope and scale, though banks will neverthelessplay an even more important role in financial intermediation than at present. In manyarenas such a trend is considered part of the necessary correction of past excesses and ofthe over-stretching of many banks regarding their activities and size. However, it isnecessary to distinguish between retail banking on the one hand and investment bankingand wholesale banking on the other. In fact, comparing the extent of the mismatchbetween financial sector and real economy, as well as considering the ensuing problems,it is evident that in the retail banking area the imbalances between financial sector andreal economy are much smaller. Also, the market dynamics which contributed to thecurrent crisis were largely driven by developments and practices in wholesale financialmarkets. It is therefore the wholesale financial market and related areas on whichregulators are now focusing – and rightly so – in order to guarantee that such a crisis willnot repeat itself.

14 ESBG, however, would refer to the following reports as insightful investigations into origins and nature of the crisis:• The “Geneva Report” (M. Brunnermeier, A. Crockett, C. Goodhart, A. Persaud and H. Shin 2009.

The Fundamental Principles of Financial Regulation. London, Centre for Economic Policy Research.) • The “de Larosiere Report” (J. de Larosière, L. Balcerowicz, O. Issing, R. Masera, C. Mc Carthy, L. Nyberg,

J. Pérez, and O. Ruding 2009. Report by the High Level Group on Financial Supervision in the EU), and • “The Turner Review” (Financial Services Authority. 2009. The Turner Review – A Regulatory Response to the

Global Banking Crisis”).

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In this context it is also necessary to take full account of the fact that one of the trendscontributing to this crisis was excessive trust in a financial market where the leadingbanks were those who followed the ambitious goal of continuous ‘over-performance’.This led to a self-propagating culture of aiming at excessively high returns while acceptingexcessively high risks and relying excessively on smooth wholesale markets for funding.In retrospect the risks associated with such strategies appear obvious, yet, at the time,many considered this philosophy of banking superior to more conservative bankingpractices. This view was also taken by several policy makers valuing extraordinary returnsas signs of greater efficiency and progress. For these reasons it is now time to reassessthe purpose and performance of credit institutions in particular and of the financial sectorin general.

Looking ahead, the way in which Europe redefines its ‘vision of banking’ will stronglydrive the stabilization measures used and the way in which they will ultimately beimplemented at both the national and the European level. Such a vision will alsosubstantially shape the trade-offs Europe will still be willing to make in order to return tofinancial and economic stability. Given that Europe will have to live with theconsequences of those trade-offs for the unforeseeable future, such decisions are notmade easily. However, it is of utmost importance that those parts of the financial sectorwhich have proved stable and sustainable are not disadvantaged or unduly burdened byany of the schemes and actions under way or already implemented.

In parallel to political discussions and immediate stabilisation measures, steps are beingtaken towards forward looking and corrective regulation initiatives. The current regulationinitiatives strongly draw on an ongoing analysis of the role played by financial sectorregulation, inter-institutional dynamics and intra-institutional decision making. On thebasis of these insights, regulators and policy makers strive to correct the weaknesses andshortcomings of the financial regulatory framework. Furthermore it has become a declaredgoal to improve the supervisory structures in place in order to ensure that supervisors willkeep abreast of the developments in the financial sector and are in the position to takeeffective measures if they deem it necessary. In this context it also is a key priority toachieve even more stability for the integrated European financial market. Here, thedifferences between large banks (with potentially systemic risks and cross-borderactivities) and regionally oriented institutions (involved in retail banking) need to beacknowledged and given due consideration notably via the principles of proportionality.

All these are big challenges. In order to overcome them, it is necessary to develop a clearand consistent vision of the future priorities of the European financial sector. It is on thisbasis that ESBG contributes its views to the current discussions. Chapter 1 will explain andassess the need for ‘revisiting’ expectations of the banking sector. Also addressed are thecurrent trade-offs Europe is currently making, in particular regarding competition on andthe structure of financial and banking markets. Chapter 2 summarizes ESBG’s contributionson the currently ongoing policy measures and the discussions on the Europeansupervisory architecture.

1. CRISIS, BANKS AND ECONOMY –ESBG VIEWS ON LENDING,BUSINESS ETHICS AND STATE AID

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The financial and economic crisis is inextricably linked with the role of banks in the realeconomy. This relationship is highly complex and for the present purpose ESBG would liketo focus on the following issues:

First, a differentiated view on the banking sector is particularly important when it comesto assessing banks’ ability to maintain lending in economically difficult times. Since lastautumn the spectre of a European ‘credit crunch’ as a result of the crisis has beenomnipresent. While such a credit crunch – had it occurred – would indeed have had graveconsequences, the approach taken in the general political debate was overly simplistic inits treatment of banks. At least initially it was widely overlooked that different bank typesare not only affected differently by financial market events, but also have differentpriorities and business orientations. Furthermore, the special characteristics of Europe’sretail banking market deserve greater recognition since they play an important role inmaintaining stability in lending to the real economy (See Section 1.1).

Second, it is necessary to reassess views on retail banks and on the banking sector ingeneral. In a large part of the ongoing debates it is neglected that, especially in Europe,the ‘financial sector’ consists of a very heterogeneous group of financial actors, whosevalues and orientation differ significantly. Especially in the case of banks, objectives andpositioning within the real economy drive their behaviour as lenders and their long-runstrategies. The crisis has only confirmed the values and business approaches of Europe’ssavings and regionally oriented retail banks, which should urgently be taken into accountin the ongoing public debate on the banking sector (See Section 1.2).

Third, globally and in Europe, state-interventions into the financial sector are taking placein an unprecedented manner and scale. At the EU level, these interventions are necessaryfor the stabilisation of Europe’s financial system and are being coordinated based uponguidelines laid out by the European Commission. Yet, these interventions may alter orcreate new conditions for sector integration and competition for the years to come.Therefore, a differentiated approach is necessary given the effect the large-scaleinterventions may have on national financial sectors (See Section 1.3).

1.1. Retail banking and the real economy – bank lending duringthe crisis

Background: dramatic developments after the Lehman Brothers Collapse andthe fear of a ‘credit crunch’

Between autumn 2008 and winter 2009, following the collapse of Lehman Brothers,conditions in the already strained financial markets deteriorated and market confidencetumbled to new depths. In Europe, renewed concerns arose regarding the soundness ofseveral banks, which had strongly relied on financing from financial markets. Indeed, thevery future of several systemically important European banks suddenly seemed uncertain.Under these circumstances it was questioned to what extent Europe’s financial sectorwould still be able to fulfil one of its key functions – the provision of credit to the realeconomy – at a time when the economic downturn had already become a reality.As a result there was a general fear of a Europe-wide ‘credit crunch’ for enterprisesand industry.

In this environment several things happened: First, Europe’s national policy makersundertook efforts on an unprecedented scale in order to support the financial sectordirectly and in a coordinated manner, while following guidelines issued by the EuropeanCommission. Second, the Commission extended the possibility for governments toundertake interventions in the form of state aid to SMEs, also including measuresdesigned to stimulate bank lending to SMEs.

Yet, in spite of these measures, the fear of a wider credit crunch and the ensuing greatdamage to the real economy remain prominent in the public discussion. However, thereare different interpretations of what exactly would constitute a credit crunch. For someparties, a tightening in banks’ lending standards or a rise in interest rates already is equivalentto a crunch scenario; others expect unaffordable loans and credit-lines, a shrinking ofoverall lending volumes or even a widespread and outright denial of credit.

A verdict on whether such a credit crunch became reality depends on how a credit crunchis defined. Equally, it is important to differentiate between the potential victims of thecredit crunch. Actors in the real economy are of great diversity, which leads to differentexposure to economic downturns as well as to differences in financing needs. In addition,also determined by the size and structure of an enterprise, great differences prevail intheir relationship with banks or other creditors.

Key messages

n Fears of a severe European ‘credit crunch’ to the real economy have, as such, not become reality.n Relationship-banking, proximity and knowledge are key-factors for sustainable lending.n The overall stability of bank lending is largely due to the diversity of market participants who were not all

equally affected by the crisis. This underlines the stabilizing and balancing effect of the pluralism in Europe’sbanking sector: Pluralism is risk diversification.

n Observed decreases in lending or tightening of lending standards need to be seen in context of a recessionwhich affects overall demand for credit and increases the economic risks associated with lending.

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A severe Europe-wide creditcrunch has not materialised.

Pluralism is risk diversificationand contributes to financialstability.

Regionally committed banksmake regional and localdecisions: less chances ofa credit crunch.

15 This observation is also backed, for example, by the June 2009 ECB Financial Stability Review, stating that “…the marked slowdown in bank lending to non-financial corporations appears to be dominated by demand-sidefactors reflecting the impact of the crisis on the real economy. According to the euro area bank lending survey,the main drivers are a decline in firms’ financing needs for fixed investment, mergers and acquisitions, andcorporate restructuring.” (European Central Bank. 2009. Financial Stability Review June 2009. pp 56-57).

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This being said, over the last year ESBG members’ experience is clear: A severe case of aEurope-wide credit crunch (i.e. a wide supply-driven breakdown of lending to the realeconomy) has not materialised.15 Indeed, especially as concerns the retail financial area,ESBG finds that the European banking sector has shown a remarkable degree ofresilience. Also, the interpretation of an observed tightening in lending standards as a‘lighter’ form of a credit crunch, needs to be assessed with caution and differentiation.

ESBG explanation: EU retail banking sector resilience – a result of its pluralisticstructure

The non-manifestation of a severe ‘credit crunch’ is, of course, partially an achievementof the decisive actions by governments to support the financial sector and to promoteSME lending. Fundamentally, however, the observed stability in lending stems from theresilience of the European banking system in the retail banking area and at the local level.This resilience is due first to the fact that, in Europe, the financial markets crisis did notturn into a retail banking crisis, given that for Europe’s retail banking sector wholesalefunding plays a less decisive role than in other parts of the world. Rather, for many retailand savings banks, customers’ bank deposits are the dominant source of funding.Secondly, looking more closely at European market realities, it is evident that the stabilityof the sector is a consequence of its pluralistic structure, characterised by the competitionof banks with different business models on one level playing field.

The past events show that Europe’s pluralistic market culture is a great asset: the pluralismand the diversity of Europe’s banking sector are key-reasons why aggressive and – nowevidently short-lived – business strategies were not the prevalent banking practice inEurope. In fact, pluralism is risk diversification, as the diversity in business models and inmarket players’ priorities has protected Europe’s economy against a uniform and‘thundering herd-like’ bank race over the edge of reason and sustainability. It is thereforealso due to the pluralistic market culture that there are many banks which are able tomaintain and even to increase lending to the economy. Hence it is the pluralism ofEurope’s banking sector which gives Europe’s economy the necessary balance and thelong breath it will need for recovery.

Another distinguishing feature of Europe’s pluralistic retail banking sector is that a largepart of the sector consists of regionally focused credit institutions, which sometimes formnetworks at a national level. This structure has a direct impact on bank lending as crucialdecisions are taken locally, according to local responsibility and judgement. Drawing oninput from its members, but also by observing national banking trends, ESBG firmlybelieves that ultimately Europe was also spared a severe credit crunch because locallyactive and locally informed retail banks were able and willing to maintain or increaselending – in particular if they had access to strong and stable funding through localdeposits. It is therefore evident that traditional banking elements like proximity,sustainability and relationship-banking are critical factors to ensure that credit institutionsare able to fulfil their functions as robust lenders to the real economy in a crisis situation.

ESBG members maintainor even increase lending.

Real economic factorshave an ambiguous effect

on demand for loans.

Lending standardsare driven by wider

economic conditions.

Ultimately banks’ abilityto lend is tied to

the ‘real’ economy.

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ESBG’s members have proved able and willing to continue and even extend lending.This is a result of their long-standing relationships with their clients which have earnedthem a competitive advantage in the correct appraisal of risks. In concrete terms, ESBGmembers, who value their relationships with their SME clients, consider it their responsibilityto support them with appropriate liquidity and funding for running their business. Of coursethis applies also – and especially – in the current difficult economic situation.

ESBG explanation: the impact of the crisis on bank lending to the real economy

Europe’s pluralistic market structure helps secure a supply of credit, but observed banklending still depends on real economic conditions and prospects which influence demandfor credit, lending standards and mid-term lending policy. Therefore a differentiatedapproach is necessary when assessing banks’ lending behaviour.

Based on real economic prospects, established entrepreneurs decide on profitableexpansion strategies or future entrepreneurs assess the expected success of start-ups.Also the timing of mergers and acquisitions – which generally both need financing –depends on growth prospects and stability in demand. On this basis the ongoingrecession and the low levels of optimism mean that demand for credit will remain lowuntil an economic recovery is clearly on the horizon. All these factors contribute to lowerobserved levels of bank lending. On the other hand, of course, entrepreneurs may needbridge loans, other forms of liquidity provision, or loans from banks in order to endurethe current adverse economic conditions and slumps in demand for their products.This shows that the effect of the economic crisis on credit demand, and therefore onobserved bank lending, is difficult to identify.

Regarding lending standards, it is necessary to appreciate the impact of wider economicconditions on credit risk. As banks have a responsibility towards their depositors, they haveto maintain the quality of the loans they make, base their decisions on sound assessmentsand price risk soundly. Therefore, lending or pricing decisions which may at first appearas a tightening in lending or credit standards are in reality a reaction to greater credit riskas a result of deteriorating economic circumstances. Naturally, it is also incompatible withbanks’ responsibility towards their depositors and their other creditors to lend to clientswho even in pre-crisis days could not be considered an acceptable credit risk. In general,a bank’s knowledge of its clients is a key factor for adequate and sustainable lending andfor banks to correctly assess credit worthiness, to grant loans, and to price risk.

Due to the very nature of banking, banks’ performance is inextricably linked with theeconomy, and therefore the business of banks contracts in a prolonged recession. Of course,a bank’s business model and business outlook are decisive factors for the smoothness ofa contraction and the bank’s sensitivity to economic downturns. In particular, a strongdeposit base, a strong focus on relationship banking (i.e. close ties with clients), theimportance of long-term objectives, and the regional commitment of a bank all givegreater continuity to banks’ lending. In this sense, traditional banking models arecharacterised by comparatively little pro-cyclicality. Yet, in general retail bank performancecannot decouple from the state of the real economy.

1.2. Views on banks revisited – back to the roots of the business?

Background: Why is a mismatch between banking sector and real economyproblematic?

The current crisis shows that banks are not like any other industry. First, the consequences ofa failure of the banking system for the entire economy can turn disastrous.Second, the financial sector’s possibilities for growth and profits are ultimatelyconstrained by underlying economic conditions – yet, due to pricing bubbles, the limitsto sustainable growth of the financial sector may not be recognized in time. Indeed, it iswidely recognized that the current crisis is a consequence of an over-stretching of thefinancial sector beyond what the real economy could support. For both reasons thepriorities of credit institutions need to be realigned with their true role in the economy.

Furthermore, from its very onset the financial crisis has highlighted that manyinternational and European banks’ business models are much less stable than originallythought. By now it is universally acknowledged that many banks’ strategies were drivenby excessively ambitious short-term objectives combined with excessive risk taking.Simultaneously, excessive risk taking was supported by excessive trust in the ability ofmathematical models and sophisticated innovation to correctly assess and eliminate assetrisk. As a result many banks did not sufficiently strive for stability and sustainability.

ESBG recommendation: return to realism

In retrospect it is obvious that the developments in a large part of the banking sector werenot sustainable. They were not compatible with realistic long-term perspectives and didnot reflect the very purpose of financial services provision – which is to serve the realeconomy. In fact, solely pressing for ever higher returns and only focussing on short-termprofits led to business and investment strategies which rather served the banksthemselves, but not necessarily the real economy. ESBG members have never shared thisphilosophy and the last two years confirm their long-standing apprehensions regardingthe practice of ‘myopic banking’.

The fundamental role of banks in the economy implies that, in the medium and long-term,the business of banks is determined by real economic demand. The returns and profits ofretail banks are the result of ‘real’ economic factors. As a result any long-lasting mismatchbetween the goals of the banking sector and the needs of the real economy will correctitself, but the pain of such corrections will reach far beyond the financial sector.Therefore it is reassuring to observe that policy makers and market participants recognizethat the purpose of retail banking does not lie in a race for ‘fast’ and unsustainableprofits, but in the efficient and conscientious provision of financial services and productsto the real economy.

Neglecting stabilityand sustainabilityproves costly.

A realistic approach tobanking is based on realeconomic possibilities.

Key messages

n Priorities of banks need to be realigned with their fundamental role in the economy – an excessive mismatchbetween financial sector and real economy has to be counteracted.

n Traditional savings banks values like responsibility and sustainability are core values for sound and realistic banking.n Europe needs a pluralistic banking sector in which the principles of comprehensiveness, responsibility and

sustainability are well represented.

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Retail banking needsa reorientation of values.

Differentiation withinthe banking sector

is crucial.

Unfettered competitioncarries a cost and cannot be

a goal for Europe.

32

The current crisis has laid bare weaknesses of several banking practices and businessphilosophies. However, it also has proven the validity of selected banking approaches andin particular the validity of the underlying principles of the savings banks sector.Soundness, sustainability and responsibility have proven not only to protect customers,but also to protect banks. Also it has become evident that banks cannot afford notto know and understand their customers. Yet, successful relationship banking is aknowledge-intensive business and takes time to build. Therefore, leaning on savingsbanks’ core values, two lessons can be drawn from the crisis: It is time to give up a‘fast-profit’ mentality and it is necessary to return to sustainable and responsible banking.This shift in values not only has to take place in the heads of bankers, it also needs to beinternalised and encouraged by policy makers.

Looking at Europe’s retail banking sector, the need for a differentiated approach to retailbanks is evident. This also means recognizing the importance of Europe’s pluralisticbanking tradition. In fact, the diversity in business models is an integral part of theEuropean banking landscape and ensures the comprehensive provision of retail financialservices throughout Europe, while driving competition in the banking sector. Here, it isreassuring that some policy makers’ bias towards one particular banking model seems tohave vanished. Also the precariousness of an over-reliance on aggressive short-termstrategies has finally been recognised. In fact, the crisis at last demonstrates that auniform banking sector whose behaviour imperils the rest of the economy can no longerbe acceptable. It is therefore the duty and responsibility of policy makers to safeguard apluralistic banking sector in which the principles of comprehensiveness, responsibility andsustainability are well represented.

Policy makers also need to take a more critical view of unfettered competition in the retailbanking sector. While competition without a doubt has great benefits, it should certainlynot take a form which could endanger the profitability of sound and comprehensivebusiness models. This, for instance, can be the case if entrants aggressively target onlythe least costly and most rewarding products or services, but do not offer a wider,more cost-intensive, spectrum of retail banking services. In such a scenario competitivepressure in the form of “cherry picking” does not reflect greater efficiency of thecompetitor. Rather it is the result of a narrow business focus which does not incur thecosts associated to offering all-round services. While such competition legally is not‘unfair’, it certainly is not the kind of competition which will ultimately benefit customersand the economy. On the contrary, greater losses to economy and society could occur ifthe pressured ‘all-round’ banks are no longer able to continue providing the same leveland quality of services because their possibilities of doing so are systematicallyundermined. Such possible undesirable consequences are neglected by an uncritical andexclusive focus on the immediate price-effects arising from unfettered competition.

1.3. State support to the banks and related trade-offs –which approach should be taken?

Background: Widespread national state aid to financial institutions

Since autumn 2008, when the situation on financial markets deteriorated further as aconsequence of the Lehman Brothers bankruptcy, EU Members States have undertakencoordinated steps in order to restore confidence between citizens and banks, as well asamong banks themselves.16 These steps were designed in order to prevent bank-runs andto restore the functioning of inter-bank markets – in short, to maintain and secure thefunctioning of the national banking sectors.

As the various support measures to the financial industry constitute state aid, theEuropean Commission, DG Competition, provided guidelines17 in order to ensure thecompatibility of such actions with the existing EU competition rules. These guidelines setout the acceptable measures national governments can take and establish criteria for theapplicability, necessity and size of such interventions. They aim to prevent distortions tocompetition between beneficiaries of state aid and banks which are not drawing onstate-support. Looking ahead, the guidelines also seek to ensure that the beneficiaries ofstate-aid return to viability in the mid to long term.

Between October 2008 and mid-July 2009, the Commission has assessed and approvedstate aid schemes as well as ad-hoc interventions at individual institutions in a majority ofMember States. The large majority of the national state aid schemes are guaranteeschemes (16) and recapitalisation schemes (11) – in five cases a combination of bothmeasures was approved. Furthermore, outside these schemes, over 40 additional measuresdirected at individual institutions were approved.18

Key messages

n ESBG welcomes and appreciates efforts to support financial institutions and guarantee financial stability.n State aid must be granted with the clear objective of achieving or maintaining the overall health of the

banking sector. It may not carry a cost to sound and healthy institutions.n With a view towards future developments, differences in size and scope of national state aid measures can

translate into persisting imbalances.n All efforts need to be made to prevent state aid from creating undue competitive advantages for its recipients.

16 European Union’s Council of Ministers for Economy and Finance (ECOFIN) conclusions of October 7th 2008.17 European Commission. 2008. Communication from the Commission – The application of State aid rules

to measures taken in relation to financial institutions in the context of the current global financial crisis.OJ C 270, 25.10.2008.European Commission. 2008. Communication from the Commission – The recapitalisation of financialinstitutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards againstundue distortions of competition. OJ C 10, 15.01.2009.European Commission. 2009. Commission Communication on the Treatment of Impaired Assets in theCommunity Banking Sector, OJ C 72, 26.03.2009. European Commission. 2009. Commission Communication – The return to viability and the assessment ofrestructuring measures in the financial sector in the current crisis under the State aid rules.

18 European Commission, DG Competition. 2009. DG Competition’s review on guarantee and recapitalizationschemes in the financial sector in the current crisis.

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Banks receiving state aidcompete with banks

without state-support.

It is necessary to differentiateamong beneficiaries

of state aid.

The central goal of state aidmust be to achieve a healthy

banking sector.

34

Given the different national situations, the sizes of the rescue and support packages varysignificantly across markets. Furthermore, while some countries establish very largenational support schemes, others spend significant amounts on the support of selectedlarger financial institutions. In addition, even if state-wide support schemes exist, if giventhe choice, many healthy banks so far decided not to draw on such support, mainly dueto its stringent conditions and out of a preference for keeping their independence intact.

ESBG views: state aid to financial institutions – the need for balance anddifferentiation

ESBG members appreciate the efforts undertaken to maintain the stability andfunctioning of the European financial system which remains a top priority and is of theutmost importance for general economic stability. The speed and decisiveness of theactions of national governments and EU policy makers alike are truly impressive and it isto their great merit that Europe’s financial system has escaped the acute danger it facedover the past year. The European Commission has played a central role in these efforts bydevising different sets of state aid guidelines which capture core principles according towhich state aid shall be carried out. On the basis of these guidelines, ESBG would like tounderline the importance of a differentiated approach and undiscriminating objectives.

When it comes to state aid, banks can be roughly divided into four categories:

1. Banks which – due to their own prudence, quality of risk management, operations instable economic environments etc. – neither need nor desire state aid but may acceptstate support in order to increase their capital base;

2. Banks with business models which in itself are sound and sustainable, but which havebeen – or could soon be – affected by the economic repercussions of the financial crisisand whose timely support contributes to the stability of their respective economies;

3. Banks where the crisis has raised a red flag calling into question the sustainability oftheir business model;

4. The (rare) case of banks, which are affiliated with other sectors of industry (such as theauto industry) and whose recourse to state aid needs to be considered against thebackground of potential problems their parent companies may be facing.

The different characteristics of the national financial sectors are fundamental for the waynational schemes and individual interventions are designed, implemented and maintained.In examining the different recipients of state-aid it is essential that unviable banks berestructured or wound-down, that viable and sound banks are supported adequately, andthat healthy banks not drawing on state aid do not have any reason to regret theirdecision. Looking at the fourth group – those banks affiliated with other sectors ofindustry – opportunism must be counteracted and the subsidisation of parent companiesmust be avoided. No disadvantages should be allowed to arise for the ‘real’ bankingindustry. The governing objective of state aid must be a healthy banking sector, not thecure of selected banks at the cost of others.

State aid strikesa fragile balance.

Restructuring needs tofollow economic principles.

Differences in national stateaid schemes are necessarybut may affect the level-playing field.

Distortions to competitionneed to be counteracted.

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State aid therefore has to strike a fragile balance. On the one hand, it needs to effectivelyand lastingly help the affected financial institutions or pre-emptively signal a bank’sstability in order to prevent any upcoming disturbances. On the other hand, when stateaid measures are taken, it must be ensured that taxpayers are not taken advantage of,that the recovery of beneficiaries does not come at the cost of competitors, and that thefinancial services markets are not reorganised at the cost of those banks which haveproven functional and necessary.

The Commission also seeks to ensure that state aid does not prevent necessarycorrections to banks’ business models or the winding-down of unviable institutions.These are important principles and the restructuring of unsustainable banks can haveadvantages for the sector as a whole. Nevertheless it is important that restructuring isonly imposed where there is a clear necessity for a change in business model. Also,restructuring plans need to build on economic and business relevant criteria; restructuringshould not be imposed or dictated by political goals.

ESBG views: concerns on ‘state aid reality’

Precisely because the danger of an imminent financial sector meltdown has largely abated,it is now the time to assess the effectiveness of implemented measures. Looking ahead,there remain some concerns related to state aid, calling for vigilance and caution.

Not only have governments and policy makers succeeded in stabilizing Europe’s financialsector, they also have striven to reduce to the minimum the undesirable consequences ofstate intervention. As part of these efforts, the national state aid measures rightly avoida ‘one-size-fits-all’ approach and reflect the national market conditions and therequirements of the afflicted banks. On the downside, a substantial heterogeneity inscope and size of state aid measures can bring about greater inequality among nationalbanking sectors in the mid and long term. National differences in state aid schemes maytherefore impair the European level playing field for competition.

The state aid guidelines by the European Commission spell out several provisions in orderto prevent distortions to competition arising from that aid. Still, within national bankingsectors, abuses of state aid – when they occur – need to be counteracted strongly.Especially problematic are situations where state aid is granted to banks seeking accessmainly in order to achieve competitive advantages (hence, in cases where it is notmotivated solely by reasons of guaranteeing stability or of strengthening the capitalbase). Such distortions can occur immediately due to strategic decisions to abuse grantedaid, for example by outbidding competitors in the retail deposit area or by advertisingbank safety as a result of government guarantees. In the longer run, recapitalizationmeasures may lead to competitive advantages for benefiting banks (in terms of marketfunding, granting of loans, development of future plans), or pave the way towardsaggressive expansion once balance sheets are repaired. While such distortions graduallyunfold over time, they can cause lasting change in the competitive landscape and needto be limited wherever possible.

In the public debate Europe is often made out to be a hospital full of financial institutions.However, it is important not to forget that a large number of – often smaller – creditinstitutions are in good health and sound enough not to need taxpayers’ help. This mustremain so. Therefore it is unacceptable that healthy and prudent credit institutions shouldsuffer due to aggressive competition by other banks, which do not draw theircompetitiveness from their own merits but instead profit from external help. It is the dutyof governments and competition authorities to counteract and minimize such distortionsdecisively and without bias. It cannot become a European principle that excessive risktaking or overstretching of balance sheets by banks will be ultimately rewarded bygovernment support with the effect to strengthen the bank’s competitive position.Furthermore, it cannot be that this should happen at the cost of precisely those bankswhich did not need rescuing in the first place. This would not only lead to unjustdistortions to competition and incentives, but also to distortions in the very balance of thebanking sector and the weakening of inherently sound and prudent institutions.

It is extremely myopic to assume that the damage to competition and to the balance ofthe financial system would be a fair price to pay in order to ensure short-term financialstability of the system. It is equally wrong to assume that Europe can only choosebetween a financial meltdown and an uncritical support of all imperilled institutions.Furthermore, it is unrealistic to expect that competition and damages to the sound partsof the banking sector can be repaired at leisure after the crisis is overcome. Such a hopealso unduly postpones facing the consequences of important decisions when they aremade. All these are reasons why the trade-offs Europe makes now between the leewaygiven to supported banks and the overall and long-term consequences for competition needto be made consciously and with full efforts to minimize the damages they can cause.

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Sound banks maynot be undermined.

Long-term consequencesfor competition are

determined now.

37

The clear consensus between policy makers, regulators and the financial sectorworldwide is that a crisis like the current one must not repeat itself. Accordingly greatefforts are being taken to identify the factors and dynamics which led to the build-up ofthe crisis. Drawing on these insights, the general aim is to devise the most suitable andeffective actions and responses in order to correct problematic weaknesses.

The global dimension of the crisis also implies that international bodies play a significantrole. Not only do they serve as important platforms for exchange and for a coordinatedoutlook into the future, but they also are important in their own right as economic actorsand contributors to global solutions. The creation of the G20 as a political force and thesteps taken to increase the role of the IMF are part of the global effort not only to combatthe current crisis but also to improve the political ability to act in order to prevent futurecrisis or to meet such a global challenge should it occur again.

Regarding financial sector regulation at the global level, the Basel Committee on BankingSupervision will continue its central work as initiator of globally applicable guidelines onbanking supervision, also on the basis of a substantially extended membership base.Furthermore, the newly created Financial Stability Board (established in April 2009 as thesuccessor to the Financial Stability Forum) has the mandate to promote financial stability.This mandate includes serving as a mechanism for national authorities, standard settingbodies and international financial institutions in order to address vulnerabilities anddevelop and implement strong regulatory, supervisory and other policies in the interest offinancial stability.

While ultimately the unifying goal of politicians worldwide is to improve the safety offinancial markets on a global scale, it is the current initiatives at the EU level with whichESBG is most immediately concerned. In the EU, too, the central objective of regulatorsand policy makers is to increase financial safety and stability. With this goal, policy makershave set out to correct malfunctions in existing market regulation, to strengthensupervision, and to extend the range of financial actors subject to EU regulation.The political decision was also made to reduce the vulnerability to financial marketsevents of depositors and investors – thus assuring citizens that they will be sheltered fromfinancial market developments beyond their control. Looking at the most importantcurrent developments from a political vantage point,19 there are a number ofobservations and recommendations that are made in the remainder of this chapter.Section 2.1 focuses on the revision of existing regulatory and supervisory frameworks;Section 2.2 addresses the widening of regulatory outreach.

2. POLICY RESPONSES ATTHE EU LEVEL – ESBG VIEWSON THE CHOSEN APPROACHES

19 Concrete policy contributions on banking supervision and capital requirements regulation can be found in Part3 Chapter 1.

2.1. EU actions as part of the global approach to crisis prevention –revision of existing regulatory and supervisory frameworks

Background – central ongoing regulatory efforts

At the time of writing, among the central efforts to improve EU regulation for financialinstitutions stands the revision of the Capital Requirements Directive (CRD), whichtransposes the Basel II Framework on capital requirements into EU law. The ongoingdiscussions on the CRD reflect EU policy makers’ approach for addressing the weaknessesrevealed by the crisis. It is therefore not surprising that the measures recently adopted andthe proposals currently under consideration address issues such as the ‘originate todistribute’ model, the prudential treatment of complex financial products (includingresecuritisations), capital requirements for banks’ trading books, remuneration (andhence incentives linked to compensation policies), pro-cyclicality and leverage.

Also at the centre of the ongoing debates is the question of the most appropriate EUsupervisory architecture, which considers improvements as regards the prudentialsupervision of individual entities (‘micro-prudential supervision’) and its adaptation todealing with the macro-economic dimension of financial sector risk (‘macro-prudentialsupervision’). At the time of writing, the recommendations of ‘de Larosière Report’,published in February 2009, have been firmly established as the guiding principles for aEuropean supervisory architecture. True to the evolutionary approach pursued in allefforts to address the supervisory needs arising at EU level, the recommendations of thede Larosière Report build on the existing supervisory bodies and practices, targetinggreater cooperation and coordination among national authorities, with the help of 3 newlycreated ‘Authorities’. Furthermore, it recommends extending EU-level supervision to amacro-prudential dimension, notably through the establishment of a new ‘EuropeanSystemic Risk Board’. EU policy makers are currently working on concrete legislativeproposals on the basis of these recommendations, with the objective to have theproposed changes implemented and working by 2010.

Furthermore, as a direct response to the sudden deterioration of the situation in financialmarkets in autumn 2008 (as a consequence of the Lehman Brothers bankruptcy),a number of EU Members States – initially without coordination – decided to increasethe level of protection for bank deposits. At EU level it was subsequently decided to revisethe EU Deposit Guarantee Schemes Directive to take account of these developments(the revised Directive was adopted in February 2009). The direct objective was to reassuredepositors, also as to prevent spiralling deposit withdrawals by retail clients and to securethe system against bank-run dynamics.

Key messages

n In their efforts to correct perceived weaknesses in the existing frameworks, EU policy makers need to take dueaccount of the inter-linkages between the issues at hand. A holistic approach is crucial.

n EU policy makers’ corrective actions rightly build on existing foundations. n Diversity is an important asset for Europe – applying the proportionality principle in regulation and supervision

is the correct choice.n The implementation of corrective measures needs to be carefully adjusted to the ‘real’ economic environment

and the pace at which the European economy overcomes the current crisis. n The banking industry should be adequately involved in policy repair and any future supervisory structure.

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EU policy makers needto take a holistic approachwhen making corrections.

EU policy makers’ correctiveactions rightly build onexisting foundations.

Valuable diversity inthe EU banking marketcan be protected via theproportionality principle.

39

ESBG observations: which path does the EU choose?

The concrete ESBG views on the above-mentioned developments will be presented indetail in the third part of this report. Yet the current initiatives and efforts also have abroad political dimension and direction, on which ESBG would like to share someobservations, which may capture new trends for future developments.

The crisis is the result of interconnected problems, where substantial inadequacies wereunveiled in regulation, supervision, as well as in crisis management and crisis resolution.These areas are largely interwoven, and they all carry a considerable weight in theworking of the banking market. Neglecting the important inter-linkages and aiming atself-contained solutions in isolation of the surrounding environment carries the risk ofproving more harmful than helpful. Most important therefore is the awareness thatindividual amendments to regulation, supervision or crisis management and resolutionwill inevitably have an impact in each of these areas, whilst their very effectivenessultimately depends on their interaction. Therefore, concrete policy measures in one fieldshould consistently consider the potential impact in other areas. Regulatory or policy repairshould duly address concomitantly the entire policy framework for banking in the EU.

The EU regulatory and supervisory framework is the outcome of an evolutionaryapproach, which, over time, has carefully balanced and calibrated common interestswhile duly considering national specificities. For the consistency of our EU-level policymaking it is of great importance to not take drastic overhauls that risk creating undesireddisruptions. The damages of any drastic overhaul may easily outweigh its intendedbenefits, as the possibilities for ‘collateral’ damage are simply too manifold.Consequently, it is particularly important that regulatory repair builds on the prudentialphilosophy underlying the Basel II Accord/the CRD. It should reinforce the three pillarstructure and the risk-sensitive approach, whilst appropriately addressing shortcomingsunveiled by the crisis. Equally, it is most welcomed that the proposed supervisory repairrelies on the central role of the national competent authorities in day-to-day supervision,whilst strengthening their coordination. Last but not least, it is essential that any EUproposal on crisis management and resolution observes the distribution of fiscalresponsibilities among Member States.

Among the strengths of the European banking sector is its considerable diversity and thecoexistence of a large variety of financial actors with different business policies and ofdifferent sizes. This diversity also counts among the assets which mitigated the danger ofa collapse of the financial system. It is therefore of paramount importance that the parts ofthe European banking sector which have demonstrated their viability and their necessityshall not be put at a disadvantage. This means that any re-regulation must be compatiblewith Europe’s pluralistic banking sector and must take full account of the essentiality ofEurope’s regional banks and banking networks. Any other approach will erode the basisfor Europe’s economic strength and financial stability, and thereby also undermine the basisfor recovery and future growth. A tried and tested way for regulators and supervisors toaccount for such diversity is to apply proportionality as an overarching principle.Accordingly the concrete application of EU rules and the effective supervision of banksare proportionate to the size, complexity, business strategy and riskiness of an institution.

At the peak of the current crisis, the political and economic pressure for policy makers tointervene in and stabilize the financial sector, but also to address the reasons behind themarket malfunctioning was substantial. Therefore, for a time there was the danger thatthese two very different challenges would be perceived as one task. While this danger hasabated, now the main risk is the paradox that a premature implementation of some ofthe envisaged corrective measures (designed to increase stability for the future) will lead togreater current instability. For instance imposing drastically higher capital requirements forbanks before the crisis is safely overcome would be counterproductive to any efforts tostimulate bank lending and to revive the economy. The implementation date for anyrevised measures must therefore be carefully calibrated and timed with ‘real’ economicdevelopments.

The banking industry can contribute with precious input to the design of quality financialregulation, given its valuable concrete expertise and first-hand insights. Furthermore, theacceptability and effectiveness of regulatory measures is substantially enhanced if theaddressees of regulatory measures are involved at an early stage in the regulatory process.These are the very same considerations that have underpinned the EU institutions’ effortstowards more open and participatory rule-making and that motivate their commitmenttowards better regulation. It is crucial that this established and well-functioning approachbe not abandoned. Urgency considerations in the legislative process should not besystematically invoked to reduce drastically the possibility of the industry to effectivelycontribute to the regulatory outcome. Furthermore, in view of the ongoing reforms of theEU supervisory architecture, it is of utmost importance to integrate industry experts’practical insights with regard to both macro- and micro-prudential developments.

2.2. EU actions as part of the global approach to crisis prevention –widening regulatory outreach

Background – central efforts to regulate the unregulated

The initiatives by European policy makers are not limited to those financial actors whichalready were subject to regulation before the onset of the crisis in 2007. In fact, asignificant feature of the political and regulatory response has been to extend the reachof regulation to those previously unregulated parties whose actions have in the meanwhilebeen identified as contributing to the crisis.

EU policy makers mustseparate short-term priorities

from long-term corrections.

The banking industryneeds to be in a position to

contribute to the discussionson the policy repair.

Key messages

n Policy makers rightly extend regulation to those formerly unregulated financial market participants whoseactions have contributed to the crisis or whose activities could endanger financial market stability.

n The recent EU regulation of credit rating agencies is especially overdue, given their fundamental role inthe financial sector and their implication for financial stability.

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20 Regulation 2009/x/EC of the European Parliament and of the Council on credit rating agencies, awaitingpublication in the Official Journal.

Extending regulatorycoverage is a straightforwardand consistent reaction tothe lessons learned.

CRAs needed to be regulatedgiven their central role inthe financial system.

41

One of the first actions taken at the EU level was to initiate and adopt a new Regulation onCredit Rating Agencies (CRAs), whose responsibility related to the pervasive mis-pricingand misperception of risk had been early established. Concerns were exacerbated notonly by their central position in the financial markets, but also by the role they have beengranted by regulation as regards the determination of banks’ capital requirements.The EU Regulation20 not only seeks to eliminate conflicts of interest affecting creditratings, but also includes provisions which will improve the quality of ratings. In addition,it ensures the registration and surveillance of CRAs in the EU.

Furthermore, the entire shadow financial system has been under close scrutiny andimportant actors, like hedge funds, are now in the process of being subjected to bindingrules and oversight at EU level for the first time. In particular, the potential pro-cyclicalrole of hedge funds was found to be a risk to the stability of the financial system, implyingthat closer prudential oversight is warranted. Accordingly, the Commission proposal for aRegulation on Alternative Investment Fund (AIF) Managers (issued on 30 April 2009),captures all non-UCITS (Undertakings for Collective Investment in Transferable Securities)funds. It foresees that all managers of non-UCITS funds above a certain size shall besubject to an authorisation procedure and have to fulfil further requirements (e.g. capital,organizational, and transparency requirements).

ESBG views: promises of extended regulation to formerly unregulated players

The concrete ESBG views on the above-mentioned developments will be presented indetail in the third part of this Report. Yet the current initiatives and efforts also have abroad political dimension and direction, described below.

The current steps being taken to extend regulatory reach are important and reflect thelessons which Europe and the world have been forced to learn in the past two years.They are an integral part of tightening the safety belt of the global financial system,even if this means putting a regulatory leash around those actors which formerly wereconstrained only by market forces. Especially as regulation for the already regulated partsof the financial industry is becoming stricter, it could not be an acceptable decision toallow the results of these financial soundness and safety increasing measures to beendangered by omissions in other relevant areas.

The formal regulation of CRA’s is indeed overdue. The central character – combined withthe lack of accountability – of CRAs means that they are too important to operatewithout rules and to remain without oversight. It has been demonstrated thatconsistently erroneous ratings – in particular in relation to complex structured products –present a danger to financial stability. Furthermore, mis-priced risks undermine the correctassessment of the trade-off between risk and return by individual investors.

Part 2European Retail Banking

Market Integration: Core Parameters for

a Reality-based Approach

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SETTING THE SCENEThe long-run debate on the integration of Europe’s retailbanking markets

At the time of writing, overcoming the current financial and economic crisis still is animmediate priority. Yet, the long term integration of Europe’s markets into one ‘SingleMarket’ remains at the heart of all political debates. Indeed it is part of, and evensynonymous for, the wider quest for a European identity, where two central questionsdominate: the first question is which goals Europe ultimately should aim for; the secondquestion is how they should be achieved. Just as the integration of Europe’s marketsadvances, both questions are constantly debated and the proposed answers undergo acontinuous evolution.

As the financial sector is an integral part of any economy, the integration of the Europeanfinancial markets is an important part of the work programme of the European andnational authorities. Here too, while the EU is undoubtedly approaching the state of aSingle Market, the integration process does not follow a straight political line with apredetermined result. Instead, policy makers and stakeholders are engaged in a constantdialogue about the concrete realisation of the Single Market as well as on the path andmeasures to be taken to induce the desired outcome.

Among the important topics in this area is the future and further integration of Europe’sretail banking sector, which has dominated the political agenda following the completionof the Financial Services Action Plan (FSAP – 1999-2005). Undoubtedly, for the timebeing, the ongoing financial crisis has pushed this debate in the background.Nevertheless, discussions on market integration certainly will be revived as soon ascircumstances permit, and will also be influenced by the lessons learned from the currentcrisis – which are already changing the way in which Europe regards its banking sector.

The current status quo of the debate can be summarized as follows: As compared to theinitial stages of the discussions, there has been great convergence in the positions on whatthe integration of the retail banking sector should and could achieve. This convergencehas contributed to the fact that the diversity of Europe’s banking markets is nowintegrated into any credible vision for further market integration – even if this diversityhad been condemned initially by some parties as an obstacle to achieving a ‘true’ internalmarket. Hand in hand with these developments, there has been an increasedunderstanding of the retail banking market and a nearly unanimous recognition thatretail banking as a business is local and driven by customer demand.

The most recent manifestations of these trends are the reports by the EuropeanParliament such as the Pittella Report1 and the Karas Report2 (both adopted in 2008),which clearly underline the European Parliament’s recognition of the fundamentalcharacteristics of retail banking and the Parliament’s strong interest that plans for thefuture of the European retail banking market firmly build on its existing foundations.

1 European Parliament. 2008. European Parliament resolution on competition: sector inquiry on retail banking(A6-0185/2008 / P6_TA-PROV(2008)0260). Committee on Economic and Monetary Affairs of 5 June 2008,Rapporteur: Gianni Pittella.

2 European Parliament. 2008. European Parliament resolution on the Green Paper on retail financial services inthe Single Market (A6-0187/2008 / P6-TA-PORV(2008)026). Committee on Economic and Monetary Affairs of5 June 2008, Rapporteur: Othmar Karas.

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Due to its richness and its far reaching outlook, the debate on retail banking sectorintegration takes place along different dimensions. Among these the most important arethe political dimension concerned with a ‘vision’ of the sector as a whole, and the policydimension, where the regulation of the concrete aspects of the common markets takesplace. The political and the policy dimensions are, of course, closely interwoven. Yet forthe purpose of this report it is necessary to separate them in order to best address theissues under concern. Therefore this part of the report focuses on core parameters for thewider integration debate, while Part 3 will present ESBG’s views and recommendationsregarding the concrete relevant policy areas.

With a view towards the longstanding political integration debates, the present part ofthe report focuses on core parameters of the European retail banking market and theirimplications for the scope of further sector integration. ESBG does not set out to developa ‘vision’ of an (even more) integrated EU retail banking sector. Rather, the highlightedparameters are important sector specific features which any realistic and appropriatevision of a further integrated market should incorporate. They also form the basis for ajudicious and fair appreciation of the past achievements and of the degree of sectorintegration already reached.

Chapter 1 lays out and explains the essentially local character of retail banking and itsimplications for the provision with retail financial services as well as the complexity ofcompetition in the market for retail banking products. Chapter 2 highlights the diversityof retail banks as a heritage of and future for the European retail banking market. It alsodescribes the benefits of a pluralistic banking sector for Europe’s economy.

1. RETAIL BANKING REALITIESAND THEIR IMPLICATIONSFOR MARKET INTEGRATION

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Retail banking traditionally is a local business. Its core activities are:

1. The intermediation between those who wish to save and those who wish to borrow;and

2. The facilitation of payment flows.

As such, retail banks provide local agents with access to financing and investment possibilitiesand with a local access point to payments systems. The key groups of customers of retailbanks are consumers, local small and medium-sized enterprises (SMEs) and municipalities.

Retail banking is omnipresent and a core part of real economic activity. It is evident thatat the local level, retail banks are the most visible part of the financial infrastructure.In the payments area, the use of cheques, debit cards and credit cards rivals or exceedscash payments, where cash itself usually can only be obtained from retail bank branchesand ATMs. In most economic centres there is a great density of branches and ATMs areomnipresent. In more remote areas the presence of bank branches and ATMs mirrors thelevel of economic activity and prosperity, and is furthermore determined by the structureof the national banking community.

One of the reasons for re-emphasising that retail banking is a local business lies in thetechnical developments observed in recent years. At first glance, these developmentsseem to indicate that retail banking is becoming ‘less local’. In fact, at least since the ITrevolution, the times when there was no alternative to physical presence for any businesshave clearly passed. Such a gradual and partial disappearance of physical constraints impliespotential for a great widening of the geographical outreach of credit institutions. It istherefore logical that, in particular at the EU level, greater potential outreach was initiallyfound to promise a boost in market integration in retail banking, as in many other areas.

However, such a perception is misguided and does not take into account the prevalentbusiness realities of retail banking as will be explained in this Chapter. Likewise it is wrongto conclude from the observation of generally declining numbers of bank branches thatlocal retail banking has lost importance. Such an interpretation would be incorrect sincethe dominant reasons for the decline in branch numbers are largely found in structuralchanges in the banking sector and not in the loss of importance of branches as primaryaccess, sales and communication points.

Against the background of these developments and also with view towards current andfuture integration debates, the following sections lay out underlying reasons for thepersistence of the local factor in retail banking. Equally, it is evident that the localorientation of retail banking neither indicates the presence of hidden inefficiencies nor ofbarriers in the market. Instead, the essentially local character of retail banking comes fromthe very nature of the business itself (as explained in Section 1.1).

Furthermore, local demand and the necessity of local presence make branch networksthe central distribution channel for comprehensive coverage with retail banking facilities;‘internet banking’ can therefore not be considered a substitute for physical presence(Section 1.2). In addition, as a result of the complexity of retail banking as a business,banks compete based on many factors, essentially with the goal to gain and maintaincustomer satisfaction and loyalty (Section 1.3).

1.1. Local demand for retail banking products and services

Motivation: Why does the local dimension matter for retail banking?

Policies aimed at the further integration of Europe’s retail financial services market mustbe based on market realities. For example, plans to advance integration must incorporatethe fact that retail-banking is a business in which the proximity between provider andcustomer is a key-factor. Indeed, even in the age of the unprecedented communicationpossibilities, retail banking ‘at a distance’ is an exception. For any market integrationstrategy to be realistic, it needs to be developed on the basis of the local character ofretail banking.

At first glance the local character of retail banking may indeed not be obvious since theessence of retail banking activity is generally the same in all markets. Also for ESBGmembers, there is a high degree of communality in their core business. One of the keyreasons why retail banking is nevertheless predominantly a local business that takes placeon local markets is the strong local component of the demand for the bulk of retailbanking products and services.

Looking more closely at two main groups of retail banking customers, it becomes clearthat, while the demand by consumers generally incorporates the need for direct contactwith their bank, this is even more so the case for the demand by SMEs. The followingparagraphs apply to consumers and SMEs equally; factors specific to SMEs’ demand arelaid out further below.

ESBG explanation: local components of demand for retail banking productsand services

While there is significant communality across Member States, for consumers and SMEsdemand is nevertheless shaped by national economic conditions, traditions and prevalentpublic-private trade-offs (for more details, please refer to Part 2, Section 2.1). This meansthat the business of retail banks differs across countries, and that strategies which maybe successful in one national market are not necessarily successful in another.

Key messages

n Demand for retail banking products and services is local.n Proximity and personal contact between customers and banks is vital – relationship banking is key for

retail banking.n Market integration takes place on the local level: it is always conditional on domestic demand and the level

of local competition.

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Relevant knowledgeoften is local.

Proximity and trustgo hand in hand.

Customers demandrelationship banking.

Local does not alwaysmean national.

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Partly because of such differences, the number of ‘homogeneous’ products is ratherlimited (of course, this is also due to differences in national regulation/legislation).Therefore, demand is primarily local in the sense that the qualities and properties ofproducts and services demanded are driven by local circumstances. In addition, theimportance of proximity is a result of the following:

As significant players – and sometimes market leaders – in the national retail bankingsectors, ESBG members have always experienced that the demand for retail bankingproducts and services reaches beyond the need for a product and willingness to pay acertain price. Instead of a simple provider of products and services, most customers wantan accessible financial partner. Here, customers are fully aware that banks’ competenceand knowledge of their circumstances ultimately determine the quality of advice theyreceive and hence the suitability of the financial decisions they make. Customers are alsoaware that personal contact with bank staff is a prerequisite for advisers to becomeknowledgeable about customers’ circumstances to begin with. In addition, the moreimportant a decision is in the ‘economic career’ of a customer, the more customers seeka dialogue with bank staff to identify the best offer. Customers therefore know that theproximity and accessibility of banks are conditions for a satisfactory and successfulbusiness relationship.

By choosing a bank, customers also put their trust in this bank. Especially for new customers,confidence depends on their expectation whether and how much a bank will justifyand deserve this trust. A bank’s reputation and approachability are important factorsreducing the customer’s perceived gamble. Demand may focus on locally present actorsbecause a bank’s reputation needs to be known on the local level and since proximitymeans approachability.

To sum up, customers generally demand ‘relationship banking’, which – being based onpersonal contact and knowledge – has a strong local component. In light of the currenteconomic developments, and the overall observed decrease in economic confidence, it is veryprobable that the importance of relationship banking will become even more prominent.

However, it would be wrong to presume that local is automatically equivalent to national,or that a local market is always confined or limited by national borders. Indeed, a significantproportion of EU citizens live in border areas and may therefore consider “local” bankson each side of the border. Such “local cross-border” phenomena are particularly likelywithin the European Monetary Union and in geographic areas which share a commonlanguage and cultural/historic background.

ESBG explanation: SMEs and the local factor of financing

SMEs are among the most important drivers of the European economy and serve as maincreators of innovation and jobs. Therefore, the supply of high quality and reliable financialservices to SMEs is of crucial importance even beyond the wellbeing of the sector.ESBG members are stable providers – and often among the market leaders – of SME finance.This is a natural continuation of a long tradition of partnership and of savings banks’underlying raison d’être.

Credit institutions needto know their SME clients

to make the best offers.

Relationship banking meanssolving problems together.

Local SME bankingis not locally constrained.

Local demand determines howsector integration ‘can work’.

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Furthermore, the close ties between SMEs and savings banks or regionally oriented retailbanks reflect the local character of SMEs’ demand for financial services. The strong localcomponent in SME banking is predominantly a result of the importance of financialdecisions for SMEs, where a functioning, consistent and close relationship with its bankis crucial for an SME’s wellbeing. There are two main reasons why a strong local presenceplays a key role for a bank’s ability to be the financial partner required by SMEs.

First, for banks to correctly appreciate an SME’s business risks and to adequately price andstructure credit and credit lines, they need a sound knowledge of the SME’s business andof the sector in which it is active. Furthermore they must have a well-foundedunderstanding of an SME’s growth potential and features such as the need for cash. It isalso necessary to understand the age structure of employees in order to offer suitable‘outside’ investment possibilities for retirement provisions. Such knowledge then givesbanks the freedom to react to an SME’s financing needs flexibly and comprehensively.

Second, demand for retail financial services goes beyond the product or service itself.Among retail banking customers, this point applies most strongly to SMEs. SMEs do notmerely demand products or services at a good price. They need a bank’s expertise andknowledge to decide on the best solution – and in many cases they need banks’ expertisein order to create such a solution in the first place. Ultimately, for SMEs, their banks’advice, identification of financing needs, and ability to help develop solutions to theSME’s problems are at least as important for an SME’s success as ‘pure’ price factorsalone. Therefore, in the ideal case, an SME’s success is a joint success of the SME and itsbank, built on a consistent relationship with a long-term perspective.

However, the following misconception should be avoided: while SME banking is a localactivity, this does not mean that the relationship between banks and clients is ‘locallyconstrained’. Especially for SMEs seeking to expand into new markets or for SMEs whichare active exporters, credit institutions seek to accompany and support their SME clientswherever their business takes them. Here, the challenge for banks is to support theirclients outside the bank’s traditional local radius. According to ESBG Members’ experiences,while relationships between banks and SMEs are ‘locally founded’, they neverthelessreach beyond the local level.

What does local retail banking imply for European integration dynamics?

The local nature of demand and the importance of ‘relationship banking’ have thefollowing important implications for market integration:

n If ‘cross-border’ banking is defined such that branches and customers will be indifferent countries, market integration via ‘cross-border’ provision of retail financialservices is and will remain a rare phenomenon (in some exceptional cases SMEs andconsumers may bank in neighbouring countries, but this is a long established andlocally confined practice).

n Integration via market entry (i.e. the establishment of branches or subsidiaries of aforeign bank) is only successful if there is demand for the entrant’s products andservices, if the entering bank can sufficiently adapt to the local business/culturalenvironment and if the entering bank can fulfil local expectations.

n The local character of retail banking requires great investments for successful marketentry – for mature and competitive markets the possible benefits for the entrant maynot merit such investments.

1.2. Distribution of retail banking products: Does retail bankingbecome ‘less local’?

Motivation: How do distribution channels enter the debate on integration?

Retail banks can make use of different channels to distribute their products and servicesto customers. The standard approach to distribution – also practiced by ESBG members– is via a branch network. Distribution via branch networks reflects the strong localcharacter of retail banking and implies a dominant focus on the banks’ original marketsand on those markets into which they have subsequently expanded. Typically banksoperating branch networks, and in particular ESBG’s members, target and cover theentire population in the relevant area. They offer the full range of retail banking services,fulfil the requirement of direct contact with customers and enable bankers and clients tocultivate a close business relationship.

Alternatively, retail banks can function as ‘pure internet banks’, or ‘direct banks’,3 as theydistribute their products and services solely via the internet and do not foresee directpersonal contact between bank staff and customers. It is this kind of business model whichin the recent past has attracted the hopes of some parties who took it as an indicator thatphysical constraints no longer stand in the way of retail banking market integration.

These two approaches are very different, not only regarding the role of local representationbut also in view of the customer segments targeted and the range in products andservices offered. Another question is whether, even for traditional banking models,the IT revolution has fundamentally changed the communication between retail banksand their customers. Such a clarification is also important in order to understand thepotential of technical progress to drive market integration.

ESBG overview: Branches and the IT revolution

Branches traditionally serve as direct sales points and as centres for advice and consultation.They generally meet customers’ need for explanations and dialogue – for example whenit comes to investment decisions or larger credit applications. Retail banks’ continuedlarge investments in their branch networks underline the persistent importance ofproximity banking. In short, retail banks would not succeed without giving customers theopportunity to actively take part in the process of identifying the best possible solution,to ask questions and to – in general – have a familiar contact person at the bank.

Key messages

n Branch networks go hand in hand with comprehensive retail banking: technological progress does not changethe local character of retail banking.

n Financial inclusion of Europe’s regions builds on the full coverage of retail financial infrastructure in form ofbranch networks.

n Implication for integration: ‘direct banking’ does not drive market integration. It only provides selectedservices to selected clients – with uncertain economic consequences.

3 An additional alternative is distribution via intermediaries, which, however, is of less relevance in the light ofthe present debate.

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Branches are becoming lessimportant for the daily useof retail banking facilities.

Branches remain the centralplatform for the relationshipbetween customer and bank.

‘Direct banking’ onlyserves selected customers

with selected productsand services.

‘Direct banking’ outsidethe home-market is restricted

to simple products.

4 For a good summary of developments, ESBG suggests to refer to the 2008 survey by the Fraunhofer Institute(Fraunhofer Institute Arbeitswirtschaft und Organisation and Equens.2008. European Trend Survey – Banks andthe Future 2008.).

5 ‘Know your customer’ (KYC) is part of the due diligence which financial institutions and other regulatedcompanies must perform to identify their clients and ascertain relevant information pertinent to doing financialbusiness with them. Regarding the opening of bank accounts, in many countries this entails the personalpresentation of a valid ID at the bank – as an alternative, albeit sometimes cumbersome, there are possibilities ofaccreditation by recognized third parties, should a personal presentation by the customer not be feasible.

6 Civic Consulting. 2009. Analysis of the Economic Impact of Directive 2002/65/EC concerning the distancemarketing of consumer financial services on the conclusion of cross-border contracts for financial servicesbetween suppliers and consumers within the Internal Market. Final Report to the European Commission,DG Health and Consumer Affairs.

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Though conditional on technological possibilities, the distribution of retail banking productsis essentially driven by customer demand. As especially younger customers increasinglydemand faster and effortless access to services, means of payment and administration ofaccounts, banks have reacted by offering alternatives to a physical visit to the branch.This has taken place notably via online accounts and more recently via ‘mobile phonebanking’. As a consequence, branches are therefore less necessary for simple tasks such as,for example, the pure administration of a current account or for conducting payments.

However, this does not imply that online banking facilities are replacing branches.Instead, the current trend is to utilise the freed capacities in the branches in order tosatisfy the growing demand for in-depth information and advice on more sophisticatedbanking products. In the branch model, new communication channels complement – butdo not replace – the distribution of products and services via bank branches.4

ESBG views: ‘Direct banking’ – what is the scope for ‘banking at a distance’?

Retail banks can also function as ‘pure internet banks’, or ‘direct banks’, distributing theirproducts and services solely via the internet without foreseeing direct personal contactbetween bank staff and customers.

The business approach of ‘pure internet banks’ or ‘direct banks’ is far less comprehensivethan the traditional branch based approach. First, ‘direct banks’ do not operate a physicalbranch network and thereby naturally focus on a smaller segment of the population.Second, they mainly offer savings accounts, which are particularly suitable for distancemarketing, and less frequently credit cards; in some cases standardized consumer loansare also offered. Among the key characteristics of these products are the low associatedcosts and that they are sold without consultation and advice to customers.Approachability is low and direct contact with customers is not foreseen; for the bank,problems from the latter may arise in complying with the due diligence requirement to‘know your customer’.5

Regarding the nature of ‘direct banks’, they are usually subsidiaries or branches of universalbanks with established branch networks in their home markets; indeed free-standing‘direct banks’ are a comparatively rare phenomenon. In particular, during recent years ithas become a strategy of some larger European banks to establish ‘direct banks’ with afocus on ‘high interest rate’ savings accounts outside their traditional markets. Here theproduct offer is largely restricted to ‘high return’ savings accounts and, less frequently,credit-cards. Among the chief advantages of this tactic are an increase in market shareand the possibility to raise funds without incurring large physical investments in the formof a branch network. The technical possibility of offering ‘direct banking’ directly cross-border is rarely made use of – which is confirmed by the findings of the recent Commissionreport on the impact of the Distance Marketing Directive.6

Distribution strategieshave socio-economicconsequences: ‘directbanking’ is not a substitutefor branch presence.

Distribution strategies affectthe economy: aggressive‘direct banking’ can raisewider economic problems.

‘Direct banking’ – a mixedblessing for the bank itself?

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ESBG views: Economic consequences of distribution strategies

Given the strong link between retail banking and real economic activity, the distribution ofretail banking products needs to be assessed and considered in view of the wider economy.

In a socio-economic context the distribution strategies of retail banks have importantimplications for the provision of retail products and services across the population. In fact,the distribution of retail banking products is a key factor determining the very access tofinancial services and a driving force for financial inclusion. It is evident that distributionvia distance marketing can only address a small range of the services and productsdemanded by the overall population and targets only a limited segment of the population.Therefore, ‘direct banking’ cannot be regarded as a substitute for physical presence. As aresult, in order to guarantee full local coverage and full accessibility of financial services,branch networks remain without alternative. A dense network of branches (be it fixedbranches or, exceptionally, mobile branches) is hence not only the dominant distributionstrategy and vital from a competition point of view. It is also fundamental from asocio-economic perspective since the proximity to consumers is key to the comprehensiveprovision of financial services. Looking at the roots of most savings banks, theseconsiderations form an important part of the ‘raison d’être’ of ESBG’s members.

The broader economic consequences of distribution strategies cannot be disregarded.For example, the restricted product range of foreign owned ‘direct banks’ implies thatusually the funds deposited on online savings accounts are not converted into lending tothe domestic economy. This may imply that a significant proportion of funds are notreinvested in the domestic economy. The resulting de-facto outflow of capital can triggera competitive race among remaining banks, which, in order to maintain domesticlending, need to replace such funds by using more aggressive fund-raising strategies.While competition as such is a necessary and positive feature in banking as in any otherindustry, excessive competition among unequal market players may have grave repercussionsby undermining the profitability and sustainability of sound and all-encompassingbusiness models – in particular when combined with an overall outflow of funds.

Furthermore, for the bank operating a ‘direct bank’ abroad the question remains how touse the additional funds from the foreign market. Unless the bank encounters greatdemand for credit from the ‘real economy’ in its home market – or in other marketswhere the bank is an active lender – it will make use of high yield investment possibilities,for example high-yield assets acquired on wholesale financial markets. The risks inherentin such strategies – notably in terms of increasing pro-cyclicality and liquidity risk –became painfully obvious in the current crisis.

What are the implications of distribution channels for market integration?

The differences in the roles and possibilities of banks working via branches or as ‘directbanks’ determine the possibilities of retail banking market integration:

n Retail banking remains local. New technologies offer new possibilities forcommunication between customers and banks, which complement branch networksbut do not reduce their importance. Given the limitations of their business model, anyhypothesis that ‘direct banks’ could be (or become) an equivalent alternative totraditional banks overestimates the potential of ‘direct banks’ and underestimates theimportance of direct contact between customers and banks on a local level.

n From an economic and socio-economic point of view, ‘direct banks’ may even be oflimited desirability – especially if their market share in one segment of the marketbecomes disproportionate to their overall contribution to the economy. At the veryleast, the fate and performance of European ‘direct banks’ in the context of thecurrent crisis does not suggest that – in its current form – the business model itself isstable or conducive to financial and economic stability.

n Regarding market integration, it is therefore apparent that the local nature of retailbanking remains a core parameter determining which kind of integrated market willbe ultimately feasible and desirable. This needs to be taken into account in any futurediscussions and actions directed at promoting market integration.

1.3. Competition in retail banking

Motivation: Competition and the debate on sector integration

In the European debate and especially in the view of the ongoing discussions on furthersector integration it is vital to clearly understand competition in the retail banking sector.In particular it is necessary to avoid any overly simplistic approach towards assessing marketcompetition, not only given its potentially harmful direct implications, but also in order toprevent the debate on sector integration from losing its perspective on market realities.

Attempts to deduce a need for further – politically precipitated – market integration byway of simplistic competition assessments need to be met with extreme caution, as theycan easily yield misleading and distorted results. Also, it is important to keep in mind thatalready now ‘real’ market competition is very high within most national markets, andtherefore – given the local character of retail banking – also on a European scale. In partat least, the intense competition among retail banks in the different national markets isa result of the well-established and functioning level-playing field for competition, whichis a great achievement of the European Union.

New distribution channels donot lift the physical constraints

for market integration.

Key messages

n Competition is multidimensional: banks compete based on prices, customer satisfaction, depth of service andregional coverage – Customer choice is a trade-off between ‘hard’ factors and ‘soft’ factors.

n Competition on Europe’s national retail banking markets is high – as retail banking is local, this translates intohigh competition at the EU level.

n Implications for integration: Given that competition levels are high already, forced market integration is notnecessary from a competition point of view. Instead, real market integration is demand driven.

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Competition among retailbanks has a strong nationalcomponent.

Price competition is visible butby far not the whole story.

7 European Commission, DG Competition. 2007. Report on the retail banking sector inquiry. Commission StaffWorking Document, SEC(2007) 106.

8 European Commission. 2009. European Financial Integration Report. Commission Staff Working Document,SEC(2009) 19 final.

9 For a more exhaustive treatment of these issues, please also refer to the ESBG Response to the EuropeanCommission’s Consultation on the Interim Report II: Current Accounts and Related Services, in context of theEuropean’s sector inquiry into retail banking (completed in 2007). The ESBG Response can be downloaded fromhttp://www.esbg.eu/uploadedFiles/Position_papers/2006-02588.pdf.

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On this basis and in order to yield truly meaningful contributions for the European debateon market integration, the comprehensiveness of competition assessments needs to besignificantly enhanced. This being said, capturing and assessing retail bankingcompetition on a European level is indeed a genuine challenge for policy makers andresearchers. For any sector or industry it holds that market characteristics shape theconcrete terms of competition and make it difficult for an observer to capture the sector’scompetitiveness. Yet, as documented, for example, in the Commission’s recent sectorinquiry into retail banking,7 for the retail banking sector this challenge appearsparticularly great.

ESBG insights: competition on retail banking markets

Looking back at recent efforts to assess the competitiveness of Europe’s retail bankingmarkets (namely the European Commission’s sector enquiry of 2007 and the lastEuropean Financial Integration Report 20088) and drawing on ESBG members’ ownexperience, ESBG has identified the primary challenges for a comprehensive and wideoverview of competition in the European retail banking markets. They are due to the verynature of retail banking as a business and should be taken into consideration for futuremarket assessments.

Competition among retail banks has a strong national component, as banks competedifferently in the different markets. National modalities differ for pricing, interest ratesetting and structuring of fees. All in all national banking markets are a product ofunderlying economic conditions, of macro-economic growth and industrial development.Furthermore, depending on a country’s economic situation, markets have differentdegrees of maturity. As a consequence, products and services which are comparablewithin markets are not necessarily comparable across markets – and neither are theirprices or other relevant conditions. Consequently, observed price differences acrossmarkets are not reliable indicators for national differences in intensity of competition.9

Undoubtedly, for many products, the most visible competition between retail banks isprice competition, where prices are interest rates and fees/charges. Concretely, bankscompete via cheaper loans and via higher interest rates on deposits and on the basis ofthe management fees of accounts. Prices are the most direct channel for competition inthe sense that consumers can compare banks’ offers according to their prices and giventhat price advertisements are a central competition strategy. For these reasons, pricecompetition is the most tangible feature of competition between banks. The price aspectalso receives the most attention in the political debate on competition at the EU level– and indeed, if banks and banking products are otherwise identical, price differenceswill be the decisive factor for consumer decisions. Only if these conditions hold true is itvalid to assume that intense competition eliminates price differences. However, reality ismore complex.

Competition in retailbanking is multidimensional.

Prices reflect banks’ decisionsto compete on ‘soft’ factors.

Competition reflects trade-offs by banks and customers.

The recipe ‘more integrationfor more competition’ needs

to be viewed with care.

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From the experience of ESBG members, ‘soft factors’ are at least as important indetermining a customer’s choice of bank, and may even take precedence over priceswhen it comes to gaining and maintaining customer satisfaction and loyalty. These ‘soft’factors cover a wide range of bank characteristics: quality of service, bank staff’sknowledge of the customer and his/her circumstances, staff’s general competence, rangeof offers and flexibility, quality of assessment and adequacy of products, suitability ofrecommendations/advice, accessibility of branches and direct contact with staff, proximityto consumers, innovation in offers and speed of improvements.

To summarize, retail banks compete for customer satisfaction essentially via:

n Prices; n Products and services – specific features/variation/ flexibility/ security;n Confidence – trust in the bank’s reliability and soundness, as well as its safety,

experience of smooth processing and competence;n Proximity and accessibility.

For banks, a competition strategy is a trade-off between these different factors and thecosts involved. Indeed, most ‘soft’ factors are connected with expensive investments bythe bank and may push up overall costs. Consequently banks’ costs differ not only dueto differences in efficiency but also due to differences in the quality of service or in themaintenance of branch networks (proximity banking). As costs translate into prices,the observed price differences hint not so much at a lack of competition as at differencesin the depth of the banks’ service. Furthermore, as retail-banking is a local business,competition in retail banking is also local.

Banks’ competition profiles are influenced by the type of customers they choose totarget. In general, the broader a banks’ customer base and range of offer, the lessextreme are its competition strategies. For example, to compare traditional savings bankswith a strong focus on proximity banking and SME clients with ‘direct banks’ offering onlysavings accounts, is like comparing the proverbial apple and orange. Yet, such differenttypes of banks do compete, and each customer makes his/her preferred trade-off.

Implications of competition for the scope for further market integration

Competition in the retail banking sector is heterogeneous across markets because bankscompete differently according to market practices and national conditions. In addition,competition itself is multidimensional and reflects the different facets of retail banking asa business. For the use of competition assessments as well as for the scope of furthermarket integration, this has the following implications:

n Restricting a competition assessment to a simplistic comparison of an overly narrowset of indicators can affect – or even negate – the usefulness of the investigation andlead to misleading conclusions. The complexity of competition implies that extremecare needs to be taken when competition assessments are used to investigate theneed and scope for further market integration.

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n Looking at the current situation, the European retail banking market has alreadyachieved a high and increasing degree of competitiveness. On this basis, only verymarginal benefits (if any) would arise from aggressive steps towards more marketintegration directed predominantly at remedying perceived competitive deficits.

n Retail banking competition is multidimensional. As market integration is demanddriven, integration via market entry or cross border provision ultimately depends onthe ability of the entrant to fulfil domestic demand in an already very competitive andcomplex environment, where competitive pricing is only one element of many.

2. DIVERSITY: HERITAGE AND FUTUREFOR THE EUROPEAN RETAILBANKING MARKET

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Europe’s banking sector is distinguished by its great diversity – a consequence ofdifferences between and within national markets which lead to a richness in bankingpractices and market players. At the EU level, Europe’s heritage of diversity in the bankingsector should receive the appreciation it deserves.

Appreciating diversity is synonymous with aiming for the right balance between differentgoals and for the adaptability of policies to the different institutions in Europe’s diversebanking environment. In fact this is a condition for high-quality European policy making.

Furthermore, it is necessary to recall that diversity is a result of a process of adaptation todiverse and heterogeneous market environments and therefore the natural consequenceof different legal, economic and cultural developments. Unless national (local)environments converge naturally, banking practices will maintain a distinctly national(local) character. Indeed, as retail banking is determined by both demand and externalconstraints, the role of banks is to fulfil the needs of the economy as adequately andefficiently as possible. Diverging banking practices therefore are a consequence ofdifferences in demand and market environments (Section 2.1).

However, not only do banking practices differ throughout the EU, the banking sectorsand market players themselves are also of very diverse. This is a consequence of differentnational developments and the adaptation of banks or their founders to nationaleconomic and legal environments. The diversity is first apparent from the substantialdifferences in the number and size of banking institutions in the different nationalmarkets. Second, the observed diversity in bank types implies diversity in banks’ objectivesand orientation, which drives the overall performance and efficiency of the Europeanbanking sector (Section 2.2)

Given the variety of national banking models and practices, the conclusion is that– instead of a ‘European banking model’, there is a ‘European model of a banking sector’which is best summarized as ‘Pluralism’. Indeed, pluralism is one of Europe’s great assets:it implies equal competition and freedom of choice and approach to the benefit of theEuropean economy. In concrete terms, pluralism drives competition in the bankingsector and contributes to financial stability by preventing sector-wide ‘herd behaviour’(Section 2.3).

2.1. Banking practices: EU comparisons – EU diversity

Motivation: the changing goal of a Single Market in the political debate

In the past, policy makers’ interpretation of the Single Market and of what it shouldachieve appeared narrow and even dogmatic in its reliance on a very abstract economicdefinition. Such adherence to the motto ‘identical prices, identical services, identical markets’is dangerous for two reasons. First, an overly simplistic approach to assessing the SingleMarket would not only blind us to its achievements which are directly in front of our eyes,but may even negate and misinterpret its promises. Second, this approach gives impetusto misguided policy interventions which, on top of being harmful, also are wasteful inchasing the wrong goal.

Over time these problems became increasingly recognised, while the importance ofunderlying economic conditions as a driving force for retail banking product offers,fees and prices gained more and more acceptance. Against this background, policymakers have adopted a more differentiated approach and by now take distance from thedogmatic interpretation of a Single Market in their efforts to advance the integration ofthe European retail banking sector. Furthermore, it can be observed that there is agrowing recognition at the EU level that, while the essence of retail banking is the samein all markets, a forced generalization of the actual business aspects neither contributesto understanding the sector, nor does justice to its diversity.

ESBG explanation – reasons for diversity in European retail banking practices

The observed evolution in the political debate – away from a dogmatic approach towardsa practical recognition and appreciation of reality – certainly goes in the right direction.In order to support this trend, the reasons behind the diversity in European retail bankingpractices are further explained.

To be successful retail banks have to meet the needs and preferences of the localeconomy. These needs and preferences, however, are to a large extent endogenous.They reflect and derive from a wide range of national specificities ranging from habitsand traditions to economic conditions as well as policy factors. Demand patternstherefore differ for national markets, and even within countries regional differences indemand can be reflected in regionally diverse retail banking practices.

Key messages

n Europe’s banking sector is distinguished by its great diversity as a result of Europe’s diverse heritage.n Diversity in banking practices is the result of diverse demand, diverse constraints and diverse environments.

Banking practices aredetermined by broader

demand patterns.

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Banking practices are drivenby savings culture.

Banking practicesare driven by cultural factors,economic traditions andeven the labour market.

Payments methods area result of habits, preferencesand technology.

Banking practices react togeneral government policy.

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In addition, savings culture as such is an important factor. Comparisons of national savingsrates and time trends in savings patterns yield striking differences across counties.10

Partly these differences reflect underlying macroeconomic conditions; however, to a largeextent they are the result of diverging national savings cultures and economic values.In retail banking, national savings patterns matter for the following reasons: First, theoverall savings rate is important since domestic savings determine the availability ofdomestic funding for banks. In addition, the stability of the savings rate and its cyclicalityinfluence banks’ planning horizon regarding deposit funding. Secondly, households’preferences concerning savings deposits versus investments in capital markets determinethe funding possibilities for banks (i.e. funding via deposits or wholesale funding).Of course, household savings preferences also drive banks’ offers in retail investmentproducts and savings deposits.

Deeper cultural factors, economic traditions, and labour market characteristics also havegreat influence on banking practices. This is particularly the case for the demand forcredit and mortgages. For example, overall borrowing patterns are driven by ‘national’attitudes towards debt and the role of the family as a lender, for instance as consumersmay choose to borrow within the family instead of applying for consumer loans at abank. In addition, the relative social importance of home-ownership and the depth ofrental markets for housing influence the demand for mortgages: They determine thevolume of the market and influence the overall age and wealth profile of mortgageborrowers. Labour mobility and permanence in housing decisions may also influence thefrequency of mortgages and consumers’ preferences regarding mortgage conditions.

In the payments area, an important factor is customers’ readiness to use the newesttechnologies, which is mainly driven by existing technological literacy and the satisfactionwith existing payments methods. Therefore payments preferences have a strongdemographic component. Furthermore, national traditions and habits are importantfactors in determining the use of cash vs. debit cards vs. credit cards, or the popularity ofrevolving credit cards.11 Even among countries where, for applicable types of transactions,payments by direct debit have largely replaced cash payments and cheques, the modusof payments can differ according to whether they are executed in debtor driven mandateflows or creditor driven mandate flows. This not only determines the organization of thepayments operation, but also influences the banks’ obligations regarding storage of dataand potential follow-ups to payments.

Apart from national regulation, general government policy is influential for both supplyand demand for retail financial services. Public-private trade-offs can determine banks’business opportunities, for instance in the area of retirement provision. Examples includeretail investment products tailored to support household saving and in line withgovernment programs promoting private initiative to increase retirement income.Other prominent examples concern the financing of university education, where, as analternative to government provided (tax financed) education facilities, public and privateeducation draws on tuition fees, which often are financed by banks in the form of privatestudent loans.

10 As demonstrated by Table 10 in Annex 1 - Statistics, Part 1.11 Differences in payments modalities are demonstrated in Annex 1 - Statistics, Part 2, Table 1 and Figure 1).

EU level legislation focuseson selected areas.

Diversity in practicesdetermines the viability

of the “simple” SingleMarket idea.

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While many aspects of the legislation applicable to credit institutions are defined at theEU level (see Part 3 of this report), for some aspects, legislation originates in the nationalenvironment. National legislation plays a lesser role for wholesale banking than for retailbanking, where issues such as taxation and social policies of Member States are of greatrelevance. This influences retail banking practice via the supply of retail banking servicesand products

To sum up, the list of factors determining national demand patterns is long, and theexamples given here are in no way exhaustive. Yet they clearly illustrate the wide rangeof national factors which influence product offers, prices and fee structures.

Implications for market integration

As a result of the national character of retail banking, hardly any two European retailbanking markets look the same. Directly comparing prices and offers across Europeancounties can yield to misleading conclusions, all the more so as the different factors areclosely interlinked. Diversity in national practices has also implications for the integrationdebate itself:

n Any assessment or comparison across national borders needs to take into accountthe national context and be based on the retail banks’ business strategy as a whole.This is an important point, which, however, is missed by any narrow definition of a‘Single Market’.

n For the nature of integration of the European retail financial market, the nationaldifferences between the different banking sectors also have important implications. Inparticular, in addition to the obvious ‘natural’ hurdles such as different languages,national differences in demand and environment can present a challenge for marketentry. This is not because they constitute a barrier, but simply because the enteringbank has to adapt to different national conditions and position itself in the face ofdifferent demand patterns.

n For expanding banks, substantial sunk costs will thus be combined with initial or evenpermanent difficulties in achieving synergies between their operations in the differentmarkets. Hence, especially for mature markets, entry may be less attractive or evenoutright unattractive. Similar hurdles exist for cross-border banking, which in additionis faced with the challenge to overcome customers’ preference for locally providedproducts and services.

n Against this background, policy makers need to take a patient and circumspectapproach to integration.

2.2. Europe – rich in market players

Background: diversity in the European retail banking sector

Just like the European markets for retail banking products and services, the Europeanretail banking landscape as such is distinguished by its diversity. Given the relevance ofthis diversity in any comprehensive discussion on market integration, it is important toillustrate its effect on market structures and its importance for a thorough understandingof the current situation on the European retail financial services market.

The main provider of retail financial services in the EU are banks, and hence creditinstitutions according to EU law12 which therefore comply with all applicable EU bankingregulation. This being said, however, there is no ultimate ‘European banking model’ asbanks vary strongly according to their orientation, size, organizational structure andownership. Rather, instead of a ‘European banking model’, there is a ‘European modelof a banking sector’ which is best described as a pluralistic market culture.

Banks providing retail financial products and services are either ‘pure’ retail banks oruniversal banks, which alongside their retail banking business also operate as investmentbanks. In recent decades the trend has been that most ‘pure’ retail banks eitherparticipate in the ownership of or have a partnership with an investment bank or havesome other (indirect) access to investment banking facilities.

ESBG description: diversity in business models and its effect on market structures

In examining the different options for banking, the variety of market players is impressiveand reflects the richness of European banking traditions.

In the retail banking area the three main models are commercial banks, cooperative banksand savings banks. The different main categories, however, are not mutually exclusive.For example, savings banks can have various owners or supporting entities, includingfoundations and municipalities, but they can also be organized as cooperative structures.On the level of the entire banking sector, the three main models (commercial banks,savings banks and cooperative banks) represent three different approaches to banking.

In the retail banking areathree general bank typesprevail.

Key messages

n Europe’s retail banking sector incorporates a great variety of national players and business models. n Differences in national banking sectors result from the adaptation to different economic environments.

12 EC Capital Requirements Directive 2006/48/EC, Article 4. “Credit institution means an undertaking whosebusiness is to receive deposits or other repayable funds from the public and to grant credit for its own account”.

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National market structuresdiffer according tobanking traditions.

Sector evolutiontakes different pathsin different market.

Market concentrationis determined by

banking traditions.

Performance of differentbank types is not always

directly comparable.

13 See Annex 1 - Statistics, Part 1 Table 2.14 See Annex 1 - Statistics, Part 1 Table 1.15 See Annex 1 - Statistics, Part 1, Table 11.

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Already when looking at the sheer number of credit institutions throughout the EU,the importance of the characteristics of the national banking sector becomes obvious.13

In general, national banking sectors with a strong presence of cooperative banks andsavings banks are distinguished by a higher number of individual banks, alwaysconditional, of course, on the overall market size. Clearly this goes back to the traditionalstructure of such bank types, their strong regional orientation, and their less developedtendency to pursue growth via mergers and acquisitions.

Even within categories of banks different developments take place, depending onnational trends and banks’ own preferences and orientation. For instance from thestructure of ESBG members in different Member States, different paths of evolution inthe organization of savings banks are evident.14 Indeed, ESBG’s membership includes arange of possible configurations, reaching from savings banks forming one commonbanking group, to savings banks organized in decentralized networks, to savings banksoperating completely independently.

Furthermore, differences in the composition of national banking sectors also are reflectedin the degree of market concentration in terms of banks’ share in asset holdings.15

In particular, in countries with a large number of banks and a strong presence of savingsand cooperative banks, the market share (measured in assets) of the ‘top five’ creditinstitutions is comparatively low. Divergences in market concentration also hint atpotential differences in the way competition works in the different retail banking sectors.In addition, these divergences underline that national banking culture and banking sectorcomposition determine the systemic importance of the largest players in a market.

Regarding the comparability of banks, the variety in banking sectors and business modelshas the additional effect of making comparisons between banks’ efficiency andprofitability extremely difficult. The most obvious difficulty lies in the comparison of ‘pure’retail banks and universal banks even within markets, given the differences in businessfocus and hence in revenue and associated costs. Banks’ business models also determinetheir direct and indirect objectives and planning horizon. While profitability is a key elementfor all banks, it is not necessarily the only objective for all credit institutions. Here, ESBGmembers serve as examples of banks taking a wider approach in the form of ‘stakeholder-return oriented’ banking.

Similarly, banks face trade-offs between short-run profits and long-run returns as well asbetween growth and sustainability. Banks’ choices on these trade-offs, of course, feedinto their measured profitability and efficiency. Therefore, any differentiated approach tomeasuring bank performance needs to ask what the different types of banks ultimatelyseek to achieve.

These caveats to cross-market sector comparisons are similar to, and connected with theobservations previously made on competition between banks (See also section 1.3).They highlight the importance of understanding the banks and the business undercomparison, as well as the composition of and orientations within the national bankingsectors. Another crucial issue for any cross-European assessment of prices and bankperformance is, of course, that markets differ in maturity and hence in the very scope forbank profitability.

Implications for the discussions on market integration

The diversity reflected within Europe’s retail banking markets underlines that there is notone superior market structure, but that many kinds of market structures are viable,feasible and thriving. This has implications for a reality-based debate on market integration:

n There is no recipe for the composition and structure of the European integrated retailbanking sector apart from that it should combine the advantages of its differentsectors to form a harmonic entity.

n It is important to refrain from any hastened value judgments regarding the nature orperformance of the different market players, as many seemingly straightforwardcomparisons can in fact be misleading. The over-reliance on a narrow set of indicatorsto draw conclusions on the merits of different banks or business models can unjustlyneglect important factors and lead to false impressions among policy makers on therole of banks in different markets.

2.3. Pluralism in the EU retail banking market

Motivation: Pluralism needs to be taken into account when regulating Europe’smarkets.

The diversity in market players is an important factor for regulators and policy makers, since,for Europe to make the best of its strengths, regulation and policies need to be compatiblewith the different business approaches. However, gaining a comprehensive overview overthe richness of the European retail banking sector certainly is a demanding task.

In Europe’s pluralistic environment, EU policy makers’ recognition of the necessity ofproportionality in market regulation is of great importance. The principle of proportionality isan essential guideline to ensure that regulatory requirements are not to the detriment of(especially smaller) market players or place a disproportionate burden on market playerswhose activities do not entail the same risk as those who could be systemically importantin a certain area. Therefore, proportionality plays a crucial part in ensuring fairness andcompatibility of regulation with market realities in a pluralistic and diverse sector.

ESBG explanation: Principles of pluralism of Europe’s retail banking sector

Given the central role of pluralism in Europe’s retail banking sector and the opportunities,as well as challenges it presents to policy makers and regulators, it is important to explaincertain principles of pluralism, and to address and eliminate potential misperceptions.

Europe should uniteits diverse markets ina harmonic entity.

Proportionality is keyfor regulating the pluralisticbanking sector.

Key messages

n Pluralism is an asset for the European economy – it benefits the real economy, drives competition and increasesfinancial stability.

n Pluralism ensures wide presentation of stakeholder interest.n Pluralism ensures that the European banking sector is more than the ‘sum of its parts’.

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Within the pluralisticbanking sector,

market players competeon a ‘level playing field’.

Pluralism is part ofmarket evolution.

All ownership models entailcompromises and trade-offs.

Pluralism reinforcesthe link between banks

and the real economy.

Pluralism reinforcescompetition.

16 In this context ESBG nevertheless feels the need to warn against the frequent confusion between competitionon the market for retail banking products and competition on the market for retail banks.Such a misconception could wrongly suggest that for competition between banks it is necessary that banksshould being for sale at any point in time to the highest bidder.

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It has been a great achievement of EU law-makers to ensure that all market participantsare competing on a level playing field according to the principle ‘same business,same risk, same rules’. This means that all regulation applies equally to all market playersengaging in the same activities. Consequently, from an EU regulation point of view,savings banks compete on equal terms with cooperative banks and commercial banks,large banks compete on equal terms with small banks (in a given market) and foreignbanks compete on equal terms with domestic banks.

Europe’s retail banking markets are shaped by history and economic development overcenturies. Therefore the respective business models have grown with and adapted tothe economies of the different Member States: they are endogenous and fully integratedin their economic system. It is therefore impossible to define a ‘starting position’ for aEuropean retail banking market, but it would be equally wrong to consider the currentsituation as static or to even fear stagnation.

All ownership models entail compromises and trade-offs. For example, banks organizedas joint-stock companies have the advantage of relatively easy access to external capitalvia the issuance of shares, which enables them to pursue more expansionary strategies.On the downside, shareholder pressure for fast and high returns leads to a strong focuson short-term goals. Additional disadvantages are the strong exposure to developmentson capital markets and a vulnerability to share price fluctuations, the potential severity ofwhich was underappreciated until recently. Non-listed banks, on the other hand, face capitalconstraints in that they largely have to rely on retained earnings. On the upside, in situationsof stress they are relatively unaffected by stock market pressure or share price fluctuations.

Benefits of pluralism for the real economy, competition and stability

The benefits of pluralism need to be fully appreciated in order to realize the strengths ofthe European banking sector. Indeed pluralism is an asset in many dimensions.

From a socio-economic point of view, pluralism implies wide stakeholder representationand reinforces the link between banks and the real economy. For example, cooperativeownership or ownership/sponsorship by municipalities or foundations ensures that a bank’sbusiness activities are compatible with stakeholders’ economic interests. For ‘stakeholder-return oriented’ banks return implies profits and quality of service, depth of regionalpresence and regional development.

Regarding competition, pluralism implies a large and stable number of competitors,whose diversity drives innovation and intensifies competition while simultaneouslyensuring complementarities in offers and strategies among banks. One could even go sofar as to conclude that pluralism guarantees competition and adds an additionaldimension along which banks compete.16 Pluralism gives customers the option to choosenot only between competing banking products and services, but also among competingbusiness models with different approaches to banking.

Pluralism contributes tofinancial sector stability.

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Around the time of the completion date of this work, the financial and economic crisishas reached its second anniversary. The lessons we could draw so far are manifold, andundoubtedly many more lessons will follow. However, one of the most important lessonsis that the pluralistic nature of the European banking market has most likely protected itfrom far greater instability and damage. Indeed, events up to date confirm that pluralismhas contributed to financial stability during the crisis, as the diversity of market players withdifferent business orientations balances out the effects of problems at individual banks.

Part 3EU Retail Banking Policy:

ESBG Contributionsand Recommendations

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SETTING THE SCENEThe EU Approach to Financial Sector Policy and ESBG’s Contributionson the Basis of the ‘Market Model’

The integration of Europe’s retail banking sector is one of the important topics on policymakers’ agenda. Yet the ‘vision’ of what the integrated market should look like is subjectto changes in policy makers’ perception of the sector and in their views on what wouldbe desirable developments. The question of how to achieve integration has undergone asimilar evolution. Starting from a conviction by many policy makers that full integrationneeds to be built on full harmonization in market regulation, recent years have shown anincreasing preference for targeted or minimum harmonization and mutual recognitionacross countries. Hand in hand with these developments, there has been an increasedunderstanding of the retail banking market and a nearly unanimous recognition thatretail banking as a business is local and driven by customer demand.

The central effort to bring about an integration of the EU financial services sectors isthe Financial Services Action Plan (FSAP – 1999-2004). The FSAP is a substantial set oflegislative measures covering all aspects of financial services with the result of greaterintegration in particular of the wholesale financial sector. In the post-FSAP period,numerous initiatives covered by the FSAP were brought to a conclusion. During that time,the retail banking area was identified as a priority for future efforts towards marketintegration. In addition, in the context of the current financial markets crisis, regulatoryand policy efforts are already being taken (or envisaged for the future) in order to addressthe revealed shortcomings of the existing framework.

ESBG takes the present report as an opportunity to put forward its views andrecommendations on the Commission’s current individual initiatives concerning thebanking area, with a particular focus on retail banking relevant issues.

While, naturally, these contributions are made from a retail banking angle, it is alsonecessary to view the issues at hand in the context of the working of the economyoverall. One of the generally accepted ways to look at the link between financialauthorities, the financial sector and the wider economic system is the ‘market model’.The market model provides a structure to understand the process by which monetarypolicy and standard setting for risk management feed through the financial system inorder to generate price stability and public confidence. For this purpose, the marketmodel distinguishes between ‘markets’ and their respective ‘support systems’.

From a retail banking perspective, the most important aspects of the market model are:

n financial sector supervision and risk management standard setting; n wholesale financial markets and capital markets on the one side and high value,

foreign exchange & securities settlement systems (as far as they have implications forretail banking activities) on the other;

n financial services markets; n goods and services markets on the one side and on the other side retail and

commercial clearing systems.

The structure of this section and the way in which ESBG’s contributions are orderedreflects how the issues at hand concern the different levels of this model:

Chapter 1 outlines ESBG’s views on banking supervision. This is followed by recommendationson financial reporting, with contributions on fair value accounting (Chapter 2) and IFRSand SMEs (Chapter 3).

ESBG then gives its views on retail banking relevant topics in the wholesale financialand capital markets area, covering wholesale payments and settlements infrastructure(Chapter 4), securities (Chapter 5), and asset management and investment funds(Chapter 6).

Turning to the core activities of retail banks, ESBG gives its comments and contributionsas regards consumer policy (Chapter 7), the retail payments area (Chapter 8) and the fightagainst money laundering and terrorist financing (Chapter 9).

Regarding the real economy and important issues concerning ESBG’s customers, ESBGpresents its views on SME financing (Chapter 10), as well as financial inclusion (Chapter 11)and financial education (Chapter 12).

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Setting the scene

Banking supervision broadly refers to the rules and processes that aim to ensure theindividual safety and soundness of financial institutions and the broader financial stabilityof the markets. Within the framework of banking supervision, all banks are subject toprudential rules and to controls and interventions from supervisory authorities.

In the EU, prudential regulation has been largely harmonised at the European level throughextensive and detailed directives, which to a large extent are designed to implementinternationally agreed standards. Prudential supervision, on the other hand, is conductedprimarily by the national competent authorities, with some cooperation and coordinationagreements in place to address cross-border situations.

During recent years, a series of reforms have been adopted which affected variousaspects of the EU prudential framework. These have concerned:

n The substance of the prudential rules – e.g. the introduction of the three pillarsapproach of the Basel II framework in the Capital Requirements Directive (CRD);

n The institutional framework for regulation – e.g. the establishment of the four-levelLamfalussy regulatory framework;

n The organisation of supervision in the EU – e.g. the extension of the powers of the‘consolidating supervisor’ in the CRD; and

n The cooperation arrangements between national supervisors – e.g. the adoption ofMemoranda of Understanding and the setting-up of various cooperation platforms fornational authorities.

The financial crisis has provided a new impetus for discussions on an appropriatesupervisory architecture in the EU and led to concrete proposals for amending theregulatory framework in view of addressing various shortcomings revealed.

In this chapter two equally important dimensions of banking supervision in the EU areexplored: the institutional arrangements for supervision and the regulatory framework.The focus is on the main issues at stake, especially as concerns the ongoing reforms.The last part of this chapter will address the specific question of the review of the DepositGuarantee Schemes Directive.

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1. BANKING SUPERVISION

1.1. The EU institutional arrangements for supervision

Background on EU banking supervision: the European debate

The question of the appropriate supervisory framework in the EU has been discussed byEU regulators, politicians and policy makers for many years. Traditionally, there have beentwo motivating factors for EU-level involvement in banking supervision:

n First, there is the objective of creating an effective EU internal market (i.e. a commonbanking market) where the freedom of cross-border establishment of banks and theprovision of cross-border services are guaranteed and can be effectively made use of.Here, especially the large, internationally-active banks have argued that a fragmentedsupervisory architecture is not compatible with a situation where cross-border entitiesincreasingly manage their activities centrally (e.g. cash management, development ofinternal models).

n Second, in order to safeguard financial stability in an integrated EU banking market,it is necessary to take into account the rising interdependence between financialinstitutions and the implicitly higher contagion channels and systemic risks. From thisperspective, the EU was seen as having a role with regard to macro-prudential aspects.This was also the case in light of the broad function attributed to the European CentralBank (ECB) with regard to the maintenance of financial stability,

Over time, policy makers did not attribute the same weight to these two differentperspectives for the involvement of the EU in supervisory matters. For years, the ‘internalmarket dimension’ dominated the discussions and constituted the focus of policy reformsconcerning the EU supervisory architecture. This was driven by the political goal toachieve an EU Single Market for financial services, which led for instance to increasing thepowers of the consolidating supervisor.1 This focus was to a large extent influenced bythe ambition of EU policy-markers to facilitate the creation of ‘European champions’– i.e. large cross-border financial institutions, which would be in a position to globallycompete with their international counterparts. However, both the macro-prudentialaspect of EU banking supervision and the discussions of crisis management and burdensharing were only marginally addressed by European policy-makers.

Key messages

n Any reform of the supervisory architecture should seek to build on the strengths of the current framework,especially the important role of national supervisory authorities.

n Any institutional reform has to address both micro and macro aspects of prudential supervision.n The new focus on the risks inherent to macro developments in the economy and in the financial markets is

welcome, given the role of interconnections in the build up of the crisis. Here, the main challenge will be toensure that emerging systemic risks are detected in a timely manner and that effective and efficient action is taken.

n ESBG generally supports the establishment of a European System of Financial Supervisors, which shall be adecentralized network of national supervisors with coordinating roles for the three new ‘Authorities’.

1 See Art. 129(2) of the Capital Requirements Directive (CRD) (Directive 2006/48/EC of the European Parliamentand of the Council Directive of 14 June 2006 relating to the taking up and pursuit of the business of creditinstitutions (recast), OJ L 177, 30.06.2006).

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2 Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations andadministrative provisions relating to the taking up and pursuit of the business of credit institutions andamending Directive 77/780/EEC, OJ L 386, 30.12.1989.

3 Art. 129(2) CRD (Directive 2006/48/EC of the European Parliament and of the Council Directive of 14 June2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ L 177, 30.06.2006).

4 Art. 131 CRD.5 European Parliament legislative resolution of 6 May 2009 on the proposal for a directive of the European

Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated tocentral institutions, certain own funds items, large exposures, supervisory arrangements, and crisismanagement P6_TA-PROV(2009)0367, 8.05.2009.

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The outbreak and evolution of the financial crisis led to a realignment of prioritiesregarding the EU supervisory architecture. Now, the stability of the EU financial system hasbecome the priority, while efficiency concerns – especially related to large, internationallyactive cross-border banks – are less in the spotlight.

Status quo in banking supervision

The status quo of banking supervision in the EU can be summarised as follows:The exercise of banking supervision in the EU is the responsibility of the Member States’competent authorities. However, since the Second Banking Directive2 and the applicationof the European passport to banks, the principles of home country control, mutualrecognition and consolidated supervision apply. According to these rules, the competentauthority of the Member States that authorised the establishment of a credit institution(the home country supervisor) is broadly responsible for the supervision on a consolidatedbasis of the activities of the respective institution even when performed in a differentcountry (host country) via the establishment of branches or the cross-border provision ofservices. Yet, host countries retain a series of responsibilities with regard to specificsubjects (e.g. liquidity supervision).

For banks that decide to operate in other Member States with subsidiaries, the Europeanpassport does not apply, as subsidiaries acquire a legal personality in the Member Statein which they operate; as such, subsidiaries fall primarily under the responsibility of thecompetent authority of that Member State. Nevertheless, a number of provisions havebeen adopted in recent years to facilitate the prudential oversight of cross-border bankinggroups, including foreign subsidiaries. For instance, the Capital Requirements Directive(CRD) introduced the possibility for the consolidated supervisor to validate internalmodels for risk measurement under Pillar 1 at the group level,3 as well as the possibilityfor Member States to decide on a bilateral basis on delegating the supervision ofsubsidiaries to the competent authorities responsible for the parent undertaking.4 A newstep was made with the review of the CRD in 2009, which rendered mandatory theestablishment of colleges of supervisors for all cross-border financial groups.5 The CRDalso stipulates that supervisory colleges have to strive for the adoption of joint decisionson issues of common interest (e.g. Pillar 2 supervisory review, imposition of capital add-ons).The establishment of the Committee of European Banking Supervisors (CEBS) was alsowidely regarded as an important step in the direction of a more European approachto the supervision of EU banks because of the tasks assigned to it in relation to theconvergence of supervisory practices and the creation of a common supervisory culture.

At this stage it is vital to remember that the strong national focus on supervision isintrinsically linked to the question of the fiscal responsibility in case of a bank failure.The lender of last resort, capital injections, state guarantees for ailing institutions etc.all rely on national financial resources and justify Member States’ claim in preserving theirsupervisory powers over the institutions operating in their markets.

6 de Larosière, J., L. Balcerowicz, O. Issing, R. Masera, C. Mc Carthy, L. Nyberg, J. Pérez and O. Ruding. 2009.Report by the High Level Group on Financial Supervision in the EU, 25 February 2009 [de Larosière report].

7 European Commission. 2009. Communication for the Spring European Council. Driving European recovery,COM(2009) 114 final, 4 March 2009.

8 European Commission. 2009. Communication on European Financial Supervision, COM(2009) 252 final, 27 May.9 European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. Meeting of the Council of

Economic and Financial Affairs, 9 June 2009 and Council of the European Union. 2009. Presidency Conclusionsmeeting June 18th /19th.

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The crisis and immediate policy reactions

As the financial crisis unfolded, EU policy makers were concerned that weaknesses in theEU supervisory framework were partially responsible. European Commission PresidentBarroso therefore decided in November 2008 to establish a High Level Expert Groupunder the chairmanship of Jacques de Larosière. The Group was entrusted with the taskof developing concrete proposals to strengthen European supervisory arrangementscovering all financial sectors. In February 2009, the report of the High Level Group (calledthe de Larosière Report6) was issued. The Report consists of an analysis of the crisis,proposals for regulatory reforms and policy recommendations on the structuring of the futuresupervisory architecture, separately addressing macro-prudential and micro-prudentialsupervision in the EU.

n Regarding macro-prudential supervision, the Group believes that there is urgent needto upgrade the current framework and entrust the European Central Bank/EuropeanSystem of Central Banks (ECB/ESCB) with an explicit formal mandate to assess high-level macro-financial risks to the system. The ECB/ESCB would then issue warningswhere necessary. For this purpose, the report proposes to set up a new body,the European Systemic Risk Board (ESRB) under the auspices of the ECB and replacingthe current Banking Supervision Committee (BSC).

n Regarding micro-prudential supervision, the de Larosière report recommends thegradual creation, in two stages, of a European System of Financial Supervision,that would build on the current institutional set-up. As part of this proposal, it issuggested to gradually transform the Level 3 Committees into ‘Authorities’ withkey-competences, such as legally binding mediation between national supervisors orthe adoption of binding supervisory standards.

The Commission broadly endorsed the de Larosière approach in a Communication of4 March 2009.7 Furthermore, the Commission published concrete proposals on a futureEU financial supervisory architecture on 27 May 2009 (the Commission’s MayCommunication8). In that document, the Commission generally took up the proposalsmade by the de Larosière Group on macro and micro prudential supervision.However, the Commission proposed accelerating the reform and merging the two phasessuggested in the de Larosière report in view of having the new architecture up andrunning by the end of 2010.

The general direction of the Commission’s Communication was endorsed by the ECOFINCouncil on 9 June 2009 and by the European Council on 19 June 2009.9 Concrete legislativeproposals will follow in autumn 2009.

Policy makers need to takea holistic approach beyondsupervision.

A two-tier supervisorysystem could create gravedistortions to competition.

ESBG generally supportsthe Commission’s approach.

A realistic timeframeis necessary.

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ESBG views on the EU financial supervision, in light of recent developments

General remarks

The financial crisis and its consequences put the EU supervisory architecture in thespotlight. At the same time, the reform of the EU supervisory framework should beconsidered against the background of the multiplicity of factors contributing to the crisis,most of which are unrelated to the EU supervisory structure. Therefore, a holisticapproach is needed and the focus on reforming the EU financial supervision architectureshould not divert attention from the need to address other substantial aspects throughadequate policy measures.

It is crucial that any reform to the EU supervisory framework contributes to strengtheningthe resilience of the EU financial system as a whole. It should therefore address thesupervisory concerns characterising an integrated financial market, among which interactionsand linked vulnerabilities (macro-prudential aspects), as well as the coordination of micro-prudential decision-making.

Yet, also the effect on competition arising from any such reform to the EU supervisoryframework needs to be given due consideration. Most importantly, reforms should in noway set the groundwork for a two-tier system, where systemically relevant banks aresupervised at the EU level and national or local banks remain under the control ofdomestic supervisors. Any such division would result in supervisory asymmetriesinappropriate in the EU context and would create distortions of competition in the verymarkets where credit institutions operate.

Remarks on the proposals in the Commission Communication of 27 May 2009

There is a need to repair the proven shortcomings in European supervisory arrangements.Particularly, ESBG supports the idea of bringing together macro- and micro-prudentialapproaches, as this would compel the parallel consideration of both the financial safetyof individual institutions and of the system as a whole. At the same time, the reformof the supervisory architecture should capitalise on the merits of those features ofthe current framework that worked well. Thus, the new architecture should explicitlyacknowledge the comparative advantage of national supervisors in day-to-day supervisionstemming from their proximity and their better knowledge of markets and intermediaries.

As such, whilst supporting the general principles underlying the Commission’s proposals,ESBG would like to emphasise that the concrete details relating to these principles are ofutmost importance. These details to a large extent still need to be determined and mayimpinge substantially on the concrete outcome.

The current momentum and the acute awareness of policy-makers of the risks involvedby inadequate supervisory structures should provide the impetus for changes.However, ESBG believes that it is also essential to take the time to thoroughly prepare thefuture structures and avoid rushed measures. In this sense, the ambition to have the newarchitecture in place by 2010 may be unrealistic. Rather, a more flexible time schedulewould be more promising.

Proportionality should guidethe application of

the common rulebook.

It is essential to establishclear lines of responsibility

between the various bodies.

An effectivemacro-prudential body

would be valuable.

The powers of the micro-prudential authorities need

to be cautiously devised.

10 The three Level 3 Committees in the Lamfalussy framework are: the Committee of European BankingSupervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of EuropeanInsurance and Occupational Pensions Supervisors (CEIOPS).

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Given ESBG’s consistent support for the creation of a common supervisory culture in theEU, the idea that this be underpinned by a European rulebook consisting of a harmonisedcore set of standards is in principle welcomed. However, it is important that the rulebookdoes not amount to a rigid framework or to overregulation. The rulebook should bedevised in accordance with better regulation principles and applied under the overarchingproportionality principle.

The integrated complex supervisory framework proposed by the Commission involvesa multiplicity of bodies and fora and a range of decision-making, coordination andcooperation mechanisms. These can be effective only if competences are clearlycircumscribed and if clear lines of responsibility are drawn in advance to ensure thatoverlaps or gaps in the European supervisory framework are avoided and that the bodiesinvolved are accountable for their actions.

The establishment of a body explicitly entrusted with monitoring macro-prudentialdevelopments and issuing warnings and recommendations is considered of utmostimportance. It is equally important to ensure the effective follow-up on these warningsand recommendations. Therefore the envisaged European Systemic Risk Board (ESRB) ismuch welcomed. However, the proposals of the Commission so far are only indicativeand substantial details are still pending – especially regarding the transposition of theresults of the macro analysis into concrete prudential measures.

These details should especially clarify the effects of the risk warnings and recommendationsby identifying potential addressees and the roles and responsibilities of ECOFIN and of themicro-prudential authorities. Also, in view of guaranteeing the follow-up it is crucial todetermine the precise workings of the ‘act or explain’ mechanism. Appropriate arrangementsshould warrant that the non-binding competences of the ESRB are not transformed throughfactual pressures into de facto binding powers. Furthermore, the public disclosure ofwarnings and recommendations is not necessarily the best way for increasing effectiveness.

ESBG supports in principle the creation of the European System of Financial Supervisorsas an operational network relying on the mutually reinforcing responsibilities of theupgraded Level 3 Committees10 and the competences of national supervisory authoritiesin day-to-day supervision. In principle the functions envisaged for the new Europeansupervisory authorities (ESAs) are valid, but the Commission’s Communication is stilltoo vague to allow for an accurate assessment of the underpinning mechanisms andconcrete powers.

Many details still need to be determined and several aspects should be taken into accountfor further specification. The new authorities’ competence to adopt binding standardsand the areas subject to further binding rules should be clearly circumscribed in EUsectoral legislation. Also, the mechanism for endowing technical standards with bindinglegal force should be transparent and provide sufficient guarantees to ensure accountability.Furthermore, the power to settle disagreements between national supervisors throughbinding decisions should be seen as a last-resort solution to be employed only ifmediation and conciliation have failed. Equally, ESAs’ enforcement competences andtheir powers in emergency situations should be precisely defined to avoid any abuse.

The industry shouldcontribute its viewsto the micro- and macro-prudential bodies.

Crisis management solutionsare still pending.

Costs for additionalinformation should be keptto a minimum.

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The ESAs should not be endowed with direct and binding powers against individualbanks until several preliminary issues are clearly specified. These concern especially thedetermination of the applicable law on which ESAs’ concrete decisions will be based, aswell as appropriate legal remedies and appeal procedures. Furthermore, credit institutionsshould have the possibility to be heard in cases leading to concrete decisions by the ESAswhich affect them. They should also be able to ask ESAs to mediate or settle disputesamong supervisory authorities and to request that ESAs investigate cases of manifestbreach of EU law.

The industry should have a say in the supervisory process, as it is important that expertsbring their practical insights with regard to both macro- and micro-prudentialdevelopments. ESBG suggests that the forthcoming legislation should explicitly foreseethe involvement of the industry in the new bodies. This could be realised via theparticipation of industry representatives in the advisory technical committee envisaged tosupport the work of the ESRB, while existing industry consultative panels could beintegrated and formalised inside the ESAs.

The political commitment that the powers of the new authorities do not impinge onMember States’ fiscal responsibilities is largely supported by the ESBG. This should bemore clearly articulated in the forthcoming legislative proposals. At the same time,there is an inextricable link between supervision and crisis management. Efforts to establisha coherent and workable regulatory framework for crisis management in the EU shouldbe pursued as a matter of priority.

Substantial and reliable information (and data) will be essential for the effectiveness ofthe new structures. Their main information source should be the national central banksand supervisory authorities which by now have a large database on individual institutionsand national financial systems, to which the banking industry is regularly contributing.It is crucial that banks are not submitted to double reporting and that the additional costburden for information is kept as low as possible. Therefore, the ESRC should not be able torequest information directly from market participants and the envisaged central Europeandatabase should not introduce a second set of disclosure requirements for banks.

1.2. The EU regulatory framework

Background: the Capital Requirements Directive (CRD)

The Capital Requirements Directive11 (CRD) is the framework legislative instrument in theEU setting prudential standards for credit institutions and investment firms. The CRDtransposes into EU law the Basel II Framework12 and its three pillars: capital requirements(Pillar 1), supervisory review (Pillar 2) and market discipline (Pillar 3). In the light ofprudential failures revealed by the crisis, the CRD has become a major target of regulatorsand policy makers.

A first review of the CRD took place in 2009 and inserted already in European law regulatoryresponses to perceived shortcomings. This review – referred to also as “CRD 2”13 –amended the existing rules on the large exposures regime, the definition of hybrid capitalinstruments, the prudential treatment applicable to securitisations, supervisoryarrangements and references in the CRD to liquidity risk management.

A set of further proposals for amendments to the CRD have been either issued already orare in the process of preparation. The topics addressed include: the prudential treatmentof complex financial instruments and of the trading book, liquidity risk management,procyclicality, leverage, and remuneration policies by banks.

ESBG views on the ongoing regulatory developments

General remarks

ESBG has consistently expressed support for the Basel II approach as transposed into theCRD and our current assessment remains generally positive. Specifically, the Basel IIapproach is considered to have contributed to improving risk management within ESBGMember banks and definitely constitutes a welcome step forward with respect to Basel I.Furthermore, Basel II has still large unexplored resources such as Pillar 2 which, onceconsistently applied, has the potential of preventing much of the excessive risk-takingthat contributed to the current crisis.

Key messages

n The financial crisis has exposed weaknesses in the current prudential regulatory framework. Yet, this does notcall for a complete overhaul of the rules in place. EU policy makers should correct the identified weaknessesby improving the Basel II framework.

n The current political momentum must not be lost, but the ‘Better Regulation’ approach needs to be respected.In addition, the timing for the introduction of new rules is important, as measures which would have positiveeffects in the long run could prove counterproductive if introduced in exceptional market conditions.

n ESBG supports the efforts to ensure that appropriate rules are in place to prevent excessive risk taking in thefuture. However, new rules must respond to the identified problems; they should not endanger practices thathave proven their effectiveness from a market stability or risk management perspective.

11 European Parliament and Council Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuitof the business of credit institutions (recast), OJ L 177, 30.06.2006 [Capital Requirements Directive].

12 Basel Committee on Banking Supervision, Basel II: International Convergence of Capital Measurement andCapital Standards: a Revised Framework, June 2004, revised in November 2005 [Basel II framework].

13 Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures,supervisory arrangements, and crisis management [SEC(2008) 2532] [SEC(2008) 2533]; European ParliamentResolution adopted on 6 May 2009; forthcoming publication in the OJ.

Basel II provides a valuableprudential approach.

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Amendments to Basel II/CRDshould address provenshortcomings ina systematic way.

Regulatory amendmentsshould observe the BetterRegulation principles.

Proportionality should beconfirmed as an overarchingprinciple.

Regulatory reforms needto pay due account tothe global level-playing field.

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However, in the light of the crisis some shortcomings in the Basel II framework becameapparent. ESBG fully supports efforts to address these shortcomings and stands ready tocontribute to the process of improvement of the rules in place.

Generally speaking, a more systematic and holistic approach to legislative amendmentsin the aftermath of the crisis would be welcome. All relevant aspects should be looked atand policy measures should be proposed only where pertinent. A straightforwarddistinction between short-term and long-term objectives is crucial in order to avoidregulatory mismatches. Furthermore, a clear prioritisation should be devised, taking intoaccount the substantial impact of the aggregate regulatory changes on the bankingindustry and the related high administrative burden involved.

Looking ahead, there is cause for concern regarding the acceleration of the regulatoryactivity, which implies a higher number of public consultations with ever shorterdeadlines. Although current circumstances are admittedly exceptional, such trend doesgenerally not benefit the final outcome and may ultimately undermine the BetterRegulation approach. Especially when proposals are made in areas not previously coveredby legislation, sufficient time should be granted to stakeholders in order to analyse thefull potential impact.

It is particularly important that new regulatory measures fully respect the principle ofproportionality. Regulatory measures and their application in practice should duly takeinto account the size, complexity, business strategy and riskiness of an institution – inparticular having in mind that the smaller institutions with traditional banking activitiesdid not contribute to the crisis, but rather helped to mitigate its effects.

Last but not least, the global dimension of financial markets and the imperative ofestablishing a level playing field at international level are important. All regulatory effortsshould accordingly be as much as possible coordinated at a global level. Of course,this should not prevent the EU from moving forward on its own, when reaching timelyagreement with its international counterparts does not prove possible.

Specific aspects

n Prudential treatment of complex financial instrumentsBackground: Securitisation and the emergence of innovative complex financial instruments (such asmortgage or asset backed securities, collateralised debt obligations, special purposevehicles and structured investment vehicles) have been long praised for their merits indiversifying risks and fuelling financing possibilities. Yet, the crisis revealed that therewere misunderstandings in relation to the process of securitisation and the characteristicsof such products on the part of both financial institutions and regulators.The perception of improved distribution of risks proved to be inaccurate in light ofseveral banks’ excessive use of complex instruments. Securitisation (when conductedimproperly) was among the main vehicles by which risk was actually spread.

To address the concerns related to securitisation, a new article (122a) was inserted intothe CRD at the occasion of the review finalized in April 2009. This new provision is thefirst wide-reaching response of the EU to address the shortcomings identified.

14 Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and2006/49/EC regarding capital requirements for the trading book and for re-securitisations, and the supervisoryreview of remuneration policies SEC(2009) 974 final SEC(2009) 975 final; 13.07.2009 [CRD 3].

15 In line with this new Article 122a, it appears logical that banks that are able to meet the qualitativerequirements for the review and monitoring of the securitised assets for a resecuritisation should be permittedto apply the risk weights for resecuritisations. On the contrary, banks that are not in the position to properlycarry out the required credit review and monitoring of the securitised assets for a resecuritisation should besubject to the sanctions prescribed in paragraph 5 of the new Article 122a. This would mean that they will haveto multiply the corresponding risk weighting for resecuritisations by a substantial capital requirement.

Legislative amendmentsshould focus on ascertained

inadequacies, withoutstigmatising securitisation

altogether.

New capital rules onresecuritisations should not

prevent ‘clean-up’ operations.

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On 13 July 2009, the Commission issued a new legislative proposal for amending theCRD14 (“CRD 3”), on which it held consultations in Spring 2009. The aim of theproposed changes is to ensure that minimum capital requirements better reflect therisks attached to complex securitizations and exposures to off-balance sheet vehicles,supplemented by adequate risk management and disclosure practices. The Commission’sproposals build on regulatory proposals by the Basel Committee.

ESBG views: ESBG does not dispute the well-established lesson from the crisis that the riskiness ofsecuritisation exposures was not fully understood, which was reflected in shortcomingsin their regulation. There is therefore a need for regulatory amendments that addressinadequacies under the current framework. Nevertheless any such amendmentsshould give due consideration to the fact that securitisation – when conductedproperly, with due diligence and avoiding excesses – is a valuable mechanism fordiversification and risk transfer, which has proven helpful and will remain useful in thefuture. Consequently, it is important that the envisaged new regulatory measuresfocus on addressing observed excesses without stigmatizing securitization altogether,as this could stifle securitisation activities completely.

Regarding resecuritisation, the envisaged new EU regulatory proposals should considerthat extensive qualitative requirements for the risk management of securitised assetshave already been enshrined in the new Article 122a of the CRD. Additionally, institutionshave already started to improve internal processes of risk assessment in this regard.Any suggestion to fully deduct all re-securitisations from capital would go againstArticle 122a, and would not be supported by ESBG.15 In particular, a flat deduction ofresecuritisations from own funds would not provide any incentive for appropriate duediligence and would run against the goal of ensuring proper risk management.Such a deduction requirement potentially endangers the current efforts for restoringbanks’ balance sheets. In fact, many banks are currently being encouraged by theirregulators to undertake 'clean up' transactions to deal with toxic or potentially toxicassets, where most of these transactions will count as resecuritisations. As thesestructures are currently being developed, it is impossible to determine the exact capitalimpact. However, these structures will most certainly not be developed if theassociated capital requirements make them unfeasible. Hence any such 'clean up'operation risks being undermined.

n Prudential treatment of the trading bookBackground: Banks’ investment activities are mainly registered in the trading book. In light of thecrisis, policy makers have concluded that the regulatory capital treatment applicable tothe trading book and to market risk pursuant to the CRD has been too lenient.Hence, various measures are currently contemplated by the European Commission andthe Basel Committee to strengthen capital requirements in the trading book.Following a public consultation in March 2009, amendments to the CRD in view ofreinforcing capital requirements for trading book activities were included in thelegislative proposals issued on 13 July 2009 – “CRD 3”.

16 Estimations of the industry indicate that the regulatory proposals discussed would result in a substantialincrease of capital requirements for the trading book. Such multiplication of the capital requirements stemsfrom the proposals regarding the modelling of incremental risks, as well as the introduction of portfolio-independent stressed value-at-risk (VaR). This will annul capital-based incentives for institutions to pass fromthe standardised market risk approach to a model-based approach.

17 Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial servicessector, OJ L 120, 15.5.2009.

18 CEBS, High Level Principles on Remuneration Policies, 20 April 2009.

A one-size-fits-all approachneeds to be avoided.

The use of internal modelsshould not be discouraged.

Different rules should applyto the banking book andthe trading book.

Remuneration policy hasto support the long-terminterests of the whole firm.

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ESBG views: ESBG understands the concerns motivating regulators’ proposal for increasing capitalrequirements to cover risks in the trading book. However, when devising solutionssome issues have to be looked at carefully. First, it is essential that capital requirementsare in line with the risks incurred by the individual institutions. Therefore, it isparticularly important to avoid a one-size-fits-all approach.

Second, internal models are a useful risk management tool and banks should thereforehave incentives to develop them on the basis of their internal risk managementprocesses. Rigid regulatory guidelines of a mainly conservative nature would hamperthe development of internal models. In addition, an overly drastic increase of capitalrequirements is likely to discourage a transition from a standardised market riskapproach to a model-based approach, which is known to better reflect incurredrisks.16

The Commission’s alternative proposal to treat specific risks in the trading bookexclusively according to the rules for the banking book is rejected by ESBG. Theapplication of the banking book rules to trading book assets with specific risks wouldbe a considerable step backwards on the path to a well-established risk measurementmethod for specific interest and equity risks. Such an approach is also problematic dueto the lack of risk sensitivity of the measuring procedure. This is because market riskssuch as spread movements are not adequately reflected and concentration risks arenot adequately taken into account.

n RemunerationBackground: Inappropriate remuneration and compensation policies were held responsible for theshort-termism in some banks’ business strategies and have been considered fatal forsound, long term risk management in certain cases. As a result, the Commission hasincluded incentives for appropriate remuneration structures in the proposal for “CRD3”. These proposals include the possibility for supervisors to impose measures, amongwhich additional capital requirements, on the entities whose remuneration policies areconsidered inadequate under Pillar 2. In addition to the envisaged changes to the CRD,the Commission has also issued two recommendations on remuneration – one ofwhich addresses specifically remuneration policies in the financial services sector.17 TheCEBS has also developed high-level principles on overall remuneration policies ofbanks and financial institutions.18

ESBG views: It is particularly important that compensation incentives should support long-term,firm-wide profitability. In light of the current crisis, it appears that both the level andthe structure of remuneration may be factors that could encourage short-termism andinduce high risk-taking to the disadvantage of a bank’s long-term interests and ofother stakeholders. Firms need to pay close attention to the alignment ofcompensation incentives with the long-term interests of the whole firm.

Regulation of compensationpolicies should focus on

inappropriate incentives.

Remuneration policy isinstitution-specific and

ultimate responsibility restswith banks.

Remuneration-relatedconcerns should be

addressed under Pillar 2.

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At the same time, it should be stressed that, while inappropriate compensation policieshave played a role during the current crisis, they were by far less relevant than otherfactors. Therefore, a policy response is necessary to reflect this relative importance ofreforming compensation policies in light of the broader policy and regulatory reviewcurrently underway in response to the crisis.

Furthermore, an approach focusing on an overall reform of banks’ remunerationpolicies risks diverting attention from the key issue which needs to be addressed:namely, the compensations paid to top executives and some traders. In this context,it should be acknowledged that the vast majority of bank staff is not involved in thedecisions which define a bank’s fundamental approach to risk and its risk-takingstrategies. A broad-brush approach would be unfair towards the largest part of thestaff of financial institutions. Policy and regulatory reactions targeting remunerationissues should specifically focus on the inappropriate compensation incentives thatinduced excessive risk-taking.

The responsibility for remuneration policy rests ultimately with the institutionsthemselves. In this sense, it is important to highlight the principles of contractualfreedom and of non-interference in the determination of the amount and structure ofremuneration, which must be guaranteed. The relevance and incidence of nationallabour legislation and regulations must also be acknowledged.

Given the differences within the financial sector, overall, firm remuneration policies arevery institution-specific. Consequently, a ‘one size fits all’ approach is not acceptablein this field. Public regulation of remuneration policies should be confined to high-levelprinciples. Moreover, considering the number of non-EU firms operating in the internalmarket, as well as the competition among banks for good employees, it would becrucial that such high-level principles be adopted on a global level.

Compliance with the principles on remuneration should be addressed by supervisorsexclusively under Pillar 2. Imposing capital add-ons is not the proper way to ensurecompliance with remuneration principles.

n LiquidityBackground: Liquidity risk proved to be one of the previously neglected aspects by regulators andinstitutions which ultimately contributed to the acuteness and amplification of thecrisis. Within a number of banks, the maturity transformation process in particularappeared not to have been managed sufficiently well in order to be resilient enoughonce liquidity in credit markets dried up. Regarding regulation, for the time being,the treatment of liquidity risk is not harmonised at the EU level, but CEBS and theCommission are currently working to minimally harmonise some aspects of liquidityrisk management (e.g. liquidity buffers, survival periods). This work could eventually betransformed into a legislative proposal.

Liquidity aspects should besubject to common high-levelprinciples.

Proportionality should guideliquidity risk managementand supervision.

Only undesirable procyclicaleffects should be addressed.

19 CEBS, Second part of technical advice to the European Commission on liquidity risk management,18 September 2008.

20 European Commission, Consultation regarding further possible changes to the Capital Requirements Directive[Consultation for CRD 4].

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ESBG views: ESBG supports a principles-based approach to liquidity risk management and supervision,such as the one devised by CEBS in its 2008 recommendations.19 Only by resorting tohigh-level principles – addressing the most important aspects of liquidity risk managementand supervision – can regulation possibly consider properly the multitude of businessmodels and the specificities of risk management. Furthermore, only a principles-basedapproach allows for the flexibility required by changing market conditions.

In addition, ESBG supports the explicit reference to proportionality as an overarchingprinciple, as a guideline for liquidity risk management and supervision. ESBG wouldalso encourage the explicit reference to materiality as an overarching principle.Specifically, overregulation can be avoided by making it explicit that the high-levelprinciples on liquidity are relevant in the case of material risks and material circumstances.

n ProcyclicalityBackground: Procyclicality is one of the main topics currently on the agenda of EU policy makers.Cyclicality is inherent in a framework such as Basel II, as its very objective is to rendercapital rules more risk-sensitive. However, the question remains open as to whetherBasel II induces procyclicality. At the time of writing, the Commission is investigatingthe degree of procyclicality in the CRD. A report with the Commission’s findings andeventual regulatory proposals will be published by the end of 2009.

Although procyclicality may carry different meanings depending on the contexts,in the present discussions EU policy-makers refer to it mainly as the tendency of capitalrequirements to significantly fall during economic upswings and rise with downturns.To counteract such a tendency the introduction of dynamic provisioning or counter-cyclical reserves on banks in the EU is currently being contemplated in order to buildup through-the-cycle expected loss provisions for credit risks during good times anduse these provisions during downturns to cover incurred losses. A consultationcovering these aspects was issued on 24 July 2009 (consultation for “CRD 4”).20

A legislative proposal is expected to be published by the end of 2009.

ESBG views: ESBG supports the calls to address procyclicality in the financial system, given thatundeniably some of its aspects have led to undesirable procyclical effects. Yet, it isimportant to recognize that not all aspects of the financial system which are cyclicalare necessarily procyclical, to the extent that they should be subject to new regulatorymeasures. An in-depth analysis of the building blocks of the financial system and oftheir interaction is necessary to avoid taking incorrect approaches.

A non-risk based leverageratio does not necessarily

help create a safer andsounder financial

environment.

Pillar 2 still has largelyunexplored potential that

may prove valuable.

Proportionality should guidesupervisory action under

Pillar 2.

Disclosure requirementsare important for restoring

investor confidence.

21 In December 2008 the European Banking Federation, the London Investment Banking Association, theEuropean Savings Banks Group and the European Association of Public Banks jointly presented good practiceguidelines on Capital Requirements Directive (CRD) Pillar 3 disclosures for securitisation.

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n LeverageBackground: During the build up to the crisis, financial markets were characterised by abundantliquidity and low returns, which drove market players to seek new investmentopportunities and higher yields. The innovative and complex financial instruments thatemerged were intended to offer those higher yields. This was combined with increasedleverage, which proved to be excessive. The problem is currently being addressedglobally by regulators. In the EU a new and simple metric for addressing leverage(possibly called ‘leverage ratio’) is eventually envisaged to supplement risk-basedrequirements. The European Commission is expected to present concrete proposals inautumn 2009.

ESBG views: The building-up of excessive leverage in the markets should be limited, but this needsto be done in a way which effectively contributes to the creation of a safer andsounder environment. The mere introduction of a supplementary ‘leverage ratio’,in addition to existing risk-based measures provided in the Basel II framework wouldcertainly not automatically meet this objective. The details underpinning a new andsimple metric for addressing leverage will be crucial for its effectiveness. ESBG looksforward to contributing to the forthcoming debates in order to identify the appropriateway to achieve the objective of avoiding excessive leverage in the financial system.

n ESBG views on Pillar 2 / the supervisory review processThe interplay between the three Pillars under the Basel II framework is of high value.The role and importance of Pillar 2, which obliges supervisors to review the adequacyand appropriateness of banks’ risk management processes, deserve specific attention.Pillar 2 allows – amongst other things – the individualisation of capital requirements inaccordance with the concrete risk appetite of banks and for the application of targetedsupervisory measures when specific shortcomings in banks’ risk management processare identified. Pillar 2 has so far been only put to limited use, but its potential shouldcertainly become fully exploited in the future.

Given that the core of Pillar 2 consists of a direct dialogue between supervisors andsupervised entities, it is crucial that the regulatory framework does not excessivelyconstrain its conduct. Supervisors should have sufficient discretion to adapt the intensityof controls and the substance of supervisory measures to the specificities of individualbanks, taking into account their size, complexity, business strategy and riskiness.

n Views on Pillar 3 / market disciplinePillar 3 can make a substantial contribution to the achievement of financial stability.In the context of the current crisis and in view of restoring investor confidence,ESBG fully supports the aim of improving disclosure. In this sense, ESBG points to thejoint industry initiative21 devising good practice guidelines on CRD Pillar 3 disclosuresfor securitisation. The objective of these industry guidelines is to achieve sound,consistent and appropriately detailed implementation of the Pillar 3 securitisationdisclosure requirements across the EU and, hence, to contribute to restoring investorconfidence through improved disclosures and delivery of relevant and meaningfulinformation to users.

There is also a need to provide appropriate information on the trading book, as wellas to revisit the requirements for the banking book and the qualitative disclosures.In developing those disclosures it is important to strike the right balance betweenmore transparency, the reporting burden this places on firms, and the ability of othermarket participants to assimilate and interpret the information.

Disclosure requirements should be suitable for improving the understanding of the riskprofile of an institution. However, the abundance of requirements does not necessarilyimprove disclosure and may result in an overflow of details from which it will be hardto select the really relevant aspects. Much of the information is already disclosed inaccordance with existing legislation or the recommendations of the Financial StabilityForum/Financial Stability Board, making the risk of overlap very high. Therefore, inmany cases, the additional requirements over and above the status quo should not beenshrined in EU legislation.

1.3. Deposit Guarantee Schemes

Background

Since 1994 depositors throughout Europe can rely on a scheme which guarantees, in theevent of deposits becoming unavailable, that they will recover at least EUR 20,000 of theirdeposits (and a minimum of 90% of their aggregated deposits22) within three months.23

According to the Directive 94/19/EC24 each Member State shall ensure that within itsterritory at least one Deposit Guarantee Scheme (DGS) is introduced.

In its 2006 Communication on DGS25 the Commission sets out its approach to modernisethe legislation on DGS. It concludes that the current rules are sufficient for the time being,while a number of self-regulatory measures should improve the functioning of theschemes. The European Forum of Deposit Insurers (EFDI) has been assigned to play animportant role in the preparation of these measures. It has started its works in variousareas, e.g. topping up arrangements, exchange of information between DGS, risk-basedcontributions, information to consumers and payout delay.

More disclosure does notnecessarily mean moretransparency.

22 This provision is called co-insurance; in Member States applying this option, up to 10% of the losses can beborne by the depositor.

23 From the date on which the competent authority makes the determination regarding the unavailability of thedeposits.

24 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guaranteeschemes, OJ L135, 31.05.1994.

25 European Commission. 2006. Communication from the Commission to the European Parliament and theCouncil concerning the review of Directive 94/19/EC on Deposit Guarantee Schemes.

Key messages

n The recent revision of the Deposit Guarantee Schemes Directive reflects the importance of Deposit GuaranteeSchemes for stability on financial markets and consumer confidence.

n The different national Deposit Guarantee Schemes should be maintained, as they have the importantadvantage of attributing local responsibility and social control.

n No further reduction of the payout delay which would come “on top” of the recent revision would bemanageable; the non application of such a potential provision would again be counterproductive forconsumer confidence.

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ESBG welcomes the recentrevision of the Deposit

Guarantee SchemesDirective.

ESBG is opposed tothe creation of a

Community-wide scheme.

26 Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 amending Directive94/19/EC on deposit-guarantee schemes as regards the coverage level and the payout delay, OJ L68,13.03.2009

27 European Commission. 2009. Consultation Document. Review of Directive 94/19/EC on Deposit GuaranteeSchemes.

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Triggered by the financial crisis, the decision was taken in autumn 2008 to revise the DGSDirective. After a codecision procedure the revision of the Directive was adopted inDecember 2008 by the European Parliament and in February 2009 by the Council.26

The revision mainly concerns three areas: 1) An increase in the coverage level to EUR 50,000 and, in a second step, to EUR 100,000

subject to a Commission impact assessment; 2) A reduction of the payout delay to 20 working days, with a possible additional

extension of 10 working days; 3) An end to the co-insurance option, according to which part of the loss has to be borne

by the depositor.

Possible further revision

Whereas the above mentioned revision of the DGS Directive focused on the most pressingissues, it was decided that the Commission should analyse a number of further aspects,with a view to presenting a report to be eventually accompanied by further proposals forlegislative changes by the end of 2009. The issues subject to this analysis include (amongothers) the question of the full harmonisation of the amount of coverage, the possiblecreation of a Community scheme and the possible harmonisation of risk-based contributions.In addition, the Commission has decided to look again into the issue of payout delay.27

ESBG assessment and outlook

The revised DGS Directive introduces a reduction of the payout delay to 20 working dayswith a possible extension of 10 working days, which is ambitious but realistic.Consumers received confirmation that they will be timely and fully reimbursed up to thecoverage level. In this context ESBG in particular welcomes that the scope of the Directiveremains large and has not been limited to natural persons.

Looking at the issues subject to further analysis some aspects need stressing:

n Community scheme: currently the national schemes differ considerably; this,however, does not constitute a weakness of the current state of play. What reallymatters is that each scheme is strong and safe. The national schemes are close tocustomers, which strengthens their confidence. This approach should be maintained,as it has the important attributes of local responsibility and social control. ESBG istherefore opposed to the creation of a Community-wide scheme. The division ofresponsibilities and risks would be extremely dangerous. Finally, ESBG questionswhether a Community scheme could be justified according to the principles ofsubsidiarity and proportionality.

A shortening of the payoutdelay would be unrealisticand counterproductive toconsumer confidence.

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n Payout delay: no further reduction “on top” of the recent revision would bemanageable. A whole range of steps needs to be carried out before the actual processof paying out can be tackled – in particular the closing of the bank, stoppingtransactions and calculating interest rates, identifying the customers and theirdeposits. For the action of paying out, a procedure needs to the defined, where thesafest solution seems to be that the customer (after getting a credit/debt balancesheet) goes to another bank and asks to move some or all of his/her accounts fromthe administration bank to this bank. However, this solution would take some timebecause the new bank must ask the administration bank to move the customer’saccounts. The payout from the DGS or the administration bank would also take sometime because those administering the DGS have to control the data, and the payoutmust be executed through another bank which is member of the payment system.It is also worth mentioning that the scheme needs to provide the necessary liquidity,which might be done by realizing shares or bonds, realizing other assets, or byborrowing money from the Central Bank or in the markets. Although it may take sometime it might be done parallel to the identification procedure. Finally, it is important tonote that the non-application in practice of potentially shorter payout delays would becounterproductive to consumer confidence.

n Full harmonisation of the amount of coverage: The overarching view of ESBGmembers is that minimum harmonisation, as it already exists, is useful and necessary,as it allows for a fair level of protection of depositors all over Europe. Notwithstandingthis consideration, ESBG agrees with an increase of the coverage level to EUR 100,000,which ensures a high level of coverage all over Europe. A full harmonisation would,however – in the view of the majority of ESBG members – not sufficiently take intoaccount that the economic circumstances vary form Member State to Member State.More importantly, these members consider that the existing systems should not beweakened, as this would be counterproductive to consumer confidence and couldendanger financial stability. This being said, some ESBG members express concernsregarding the competitive distortion that diverging coverage levels are provoking.Therefore they are in favor of a fixed EUR 100,000 coverage level in order to preventabnormal shifts between countries and institutions and avoid distortions to competition.In their opinion, even if most depositors are already covered by EUR 100,000, a higherlegal coverage – in particular for foreign branches – might provoke confusion andunjustified shifts between institutions.

n Risk-based contributions: Safe and sound schemes on the national level do notnecessarily require the existence of risk-based contributions. Currently, risk-basedcontributions are applied in a number of Member States, whereas the functioning ofrisk-based contributions is diverging considerably between these Member States.Harmonisation seems therefore difficult and complex. It needs to be considered thatin schemes which do not rely on risk-based contributions, the introduction of suchsystems could lead to difficulties, especially for smaller institutions, resulting inadditional administrative and financial burdens. Therefore there should be no commonEU approach in this area. It should be up to Member States to decide whether theywant to apply risk-based contributions or not.

n Funding mechanisms: More harmonization of funding mechanisms would requiresufficiently long transition periods, as in the ongoing crisis situation procyclical effectshave to be avoided. While the principal characteristics of funding mechanism might beharmonized at the EU level, some details of the layout should remain at the discretionof the Member States. Short-term financing or long-term borrowing in case of needmay be accepted to complement the funding when a critical situation arises.

Setting the scene

As noted above, in its FSAP28, the European Commission outlined a series of policyobjectives to improve the Single Market for financial services. One of them was to movetowards a single set of financial statements for listed companies. Given the need toovercome the differences between the accounting frameworks within Member States,the Commission considered that the International Accounting Standards (IAS), later calledInternational Financial reporting Standards (IFRS)29, as established by the InternationalAccounting Standard Board (IASB) were the most appropriate benchmark for framing asingle set of such requirements.

One of the main changes that IFRS brought to traditional accounting is the introductionof “fair value”. Fair value is defined by the IASB as “the amount for which an asset couldbe exchanged, or a liability settled, between knowledgeable, willing parties in an arm’slength transaction”.30 Fair value finds its main application with financial instruments.

Since the beginning of the 1980s, financial instruments underwent significantdevelopments in the banking industry. They were increasingly used by credit institutionsas a new source of business – as opposed to traditional activities – and as a consequence,needed to be reflected conveniently in bank’s balance sheets.

Key messages

n ESBG strongly supports a more flexible application of the fair value and especially concerning the measure offinancial instruments in illiquid markets.

n A practical approach and more analytical studies on the relationship between fair value accounting andprocyclicality are needed.

n ESBG advocates for coherence between disclosure requirements and a higher degree of harmonisationbetween fair value and supervisory requirements in order to diminish the reporting burden for savings banks.

n User-friendly, simple and more standardised rules of fair value accounting, disclosure and calculationrequirements are needed.

n A thorough reconsideration of the existing accounting practices is necessary in the long term.

28 European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: ActionPlan, Communication of the Commission,[COM(1999) 232], 11 May.

29 For clarification: while IAS were still at the first stage of discussion, their name changed to better reflect theimportance of transparency toward financial markets. As soon as 2001, International Accounting Standards(IAS) changed name to be called International Financial Reporting Standards (IFRS). Thus, today these standardsare technically known today as IAS/IFRS.

30 International Accounting Standards Board (IASB). 2008: 2634.

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31 International Accounting Standards Board (IASB). 2008: 1927. 32 European Commission. 2000. Communication from the Commission to the European Parliament and the

Council. EU Financial Reporting Strategy: the way forward [COM(2000) 359 final], 13 June; Regulation (EC)1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of internationalaccounting standards, OJ L 243, 11.9.2002.

33 For further information Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certaininternational accounting standards in accordance with Regulation (EC) No 1606/2002 of the EuropeanParliament and of the Council, OJ L 261, 13.10.2003 adopted 32 IAS Standards, and Commission Regulation(EC) No 707/2004 of 6 April 2004 amending Regulation (EC) No 1725/2003 adopting certain internationalaccounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of theCouncil, OJ L 111, 17/04/2004 adopted IFRS 1.

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Moreover, in a time of globalisation and increased international competition, it seemedthat disclosing financial information by using equity investor related methodologieswould make European listed companies more transparent and more competitive.

The United States was the pioneer in the application of fair value, with the appearanceof the Statements of Financial Accounting Standards 107 (SFAS 07) in 1992. With thisstandard, the Financial Accounting Standards Board (FASB) obliged institutions to publishthe fair value of all their financial instruments in notes to the financial statements. In viewof this situation, the IASB proposed in 1999 to use fair value in the case of certainfinancial instruments, particularly derivatives, as well as shares and other securities,whether held for trading purposes or for sale.31

By November 2004, in the context of the process of endorsement foreseen in the IASRegulation32, the Commission had endorsed 33 IAS standards33 and had thus alreadyaccomplished a significant unification of accounting standards within the EU. However,the standard which aimed at valuating financial instruments at their fair value, called IAS39 “Financial Instruments: Recognition and Measurement”, has been the subject toseveral revisions and ongoing discussions. The Commission, taking into account variousissues and opinions, endorsed about 95% of the text of IAS 39 but carved out certainprovisions because – in agreement with most Member States and the EuropeanParliament – further assessment was considered necessary.

Recent developments in light of the financial crisis

Against the background of the financial crisis, the IASB, the European Commission andseveral American institutions started to make efforts to curb the negative effects of a toostrict application of the fair value approach in autumn 2008. It was argued that mark-to-market accounting, which forces banks to value assets at the estimated price they wouldfetch if sold now, rather than at historic cost, could cause a cycle of falling asset pricesand forced sales that endangers financial stability.

The first move towards a more flexible application of the fair value approach was madein the United States at the end of September 2008 as part of the Paulson Plan.Specifically, the U.S. Securities and Exchange Commission (SEC) and the FASB issuedclarifications regarding the implementation of fair value accounting, allowing a moreflexible application, in particular regarding illiquid markets.

In the EU – notably at the occasion of the meeting of the Council of EU Finance Ministersin October 2008 – the Commission and the IASB were mandated to make proposals toguarantee a level playing field between the EU and the U.S. In mid-October, the IASBissued amendments to IAS 39 “Financial Instruments: Recognition and Measurement”,and IFRS 7 “Financial Instruments: Disclosures” that would permit the reclassification ofsome financial instruments. The amendments to IAS 39 introduce the possibility ofreclassifications for companies applying IFRS which were already permitted under U.S.Generally Accepted Accounting Principles (GAAP) in rare circumstances.

34 Commission Regulation (EC) No 1004/2008 of 15 October 2008 amending Regulation (EC) No 1725/2003adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 ofthe European Parliament and of the Council as regards International Accounting Standard (IAS) 39 andInternational Financial Reporting Standard (IFRS) 7; OJ L275, 16.10.2008.

35 Financial Accounting Standards Board (FASB). 2009. “Proposed FSP FAS 157-e, Determining Whether a MarketIs Not Active and a Transaction Is Not Distressed.” Board Meeting Handout. April 2. Connecticut; USA:[http://www.fasb.org/board_handouts/04-02-09.pdf]. Accessed July 2009.

36 International Accounting Standards Board (IASB). 2009. Exposure Draft ED/2009/5 Fair Value Measurement,comments to be received by 28 September 2009. London: [http://www.iasb.org/NR/rdonlyres/C4096A25-F830-401D-8E2E-9286B194798E/0/EDFairValueMeasurement_website.pdf]. Accessed July 2009.

37 International Accounting Standards Board (IASB). 2009. Basis for Conclusions on Exposure Draft, Fair ValueMeasurement, Comments to be received by 28 September 2009. London: [http://www.iasb.org/NR/rdonlyres/D55E0BA1-5420-456B-8CCC-EB488BAD5B80/0/EDFairValueMeasurementBC_website.pdf].Accessed July 2009. For specific information, see BC7 BC99 and BC 110.

38 International Accounting Standards Board (IASB). 2009. Exposure Draft Financial Instruments: Classification andMeasurement, Comments to be received by 14 September 2009. London: [http://www.iasb.org/NR/rdonlyres/D1598224-3609-4F0A-82D0-6DC598C3249B/0/EDFinancialInstrumentsClassificationandMeasurement.pdf]. Accessed July 2009. For specific information, see pages 7 and 14.

A more flexible applicationof fair value is needed.

Exceptional importancesin EU and US markets haveto be taken into account.

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Responding to the urgency of the situation and without due process, the Commissionadopted these amendments in its Regulation 1004/2008/EC34 and expressed at the sametime the need to continue monitoring all accounting issues that could impact the stabilityof financial institutions and financial markets, with a view to identifying further changes whereappropriate. As a follow-up, the Commission sent a letter to the IASB on 27 October 2008,stressing the need for further action on some issues of importance, namely: fair value,embedded derivatives, and the impairment of “available for sale” items. The Commissionstated that global solutions are preferable and that further actions should be subject toappropriate due process strictly tailored to reflect the urgency of the situation.

In April 2009, the FASB unilaterally decided to implement significant revisions especiallyregarding when to decide whether a market is not active and a transaction is notdistressed.35 In response to this development, in May 2009, the IASB issued proposalsthat would replace fair value guidance contained in individual IFRS with a single, unifieddefinition of fair value.36 The proposals also provide guidance on using fair valueapproaches in inactive markets such as those for complex financial products that canhardly be given a value as a result of frozen financial markets. This initiative forms part ofthe long-term aim to achieve convergence of IFRS with U.S. GAAP as it incorporates theFASB’s recent guidance on fair value measurement.37

Regarding the classification of financial instruments, the IASB launched its proposal onthe revision of IAS 39 in July 2009. In addition, the IASB decided to assess users’ andpreparers’ opinions concerning the inclusion of the price of the credit risk whenmeasuring liabilities and it challenged the different methods to report impairment in thevalue of financial assets. A separate IASB Exposure Draft on hedge accounting is expectedin late 2009.

The IASB aim is to replace IAS 39 completely in 2010 by issuing final guidances onimpairment, derecognition and hedge accounting. The IASB declared that it did notexpect the successor standard to IAS 39 to be mandatory before 2012.38

ESBG views

Being actively involved in the ongoing discussions on fair value, ESBG strongly supportsthe initiatives taken by all parties concerned in order to achieve a more flexible applicationof the fair value approach.

It is of high importance for the EU to adopt measures on fair value that take into accountthe exceptional circumstances in the markets and are in line with the measures taken inthe U.S.

Fair value must improveregarding financial

instruments inilliquid markets.

Reclassification should includeall financial instrumentsrecorded “at fair valuethrough profit or loss”.

A higher degreeof harmonisation between

European and American fairvalue is necessary.

EU-US convergence shouldnot be done at the expenseof quality and transparency.

39 European Commission. 2008. “IAS 39 Temporary Carve out as of January 2008.” Brussels:[http://ec.europa.eu/internal_market/accounting/docs/ias/ias_39_carve-out.pdf]. Accessed July 2009.

40 International Accounting Standards Board (IASB). 2009. Exposure Draft ED/2009/5 Fair Value Measurement,comments to be received by 28 September 2009. London: [http://www.iasb.org/NR/rdonlyres/C4096A25-F830-401D-8E2E-9286B194798E/0/EDFairValueMeasurement_website.pdf]. Accessed July 2009.

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Nevertheless, ESBG sees the need to also take into consideration other accounting topics andto address challenges posed by the financial turmoil on an ongoing basis. An improvementof IFRS rules regarding how to measure financial instruments when markets are no longeractive is necessary. This is especially true as IAS 39, which concerns the valuation offinancial instruments, had only been intended as a short term carve-out standards39 whenintroduced, and its revision should produce a lasting solution for financial instruments’accounting. ESBG therefore welcomes the IASB initiatives of May 200940 on fair valueguidance as well as the initiatives on classification and measurement of financialinstruments of July 2009.

In this respect, the issue of reclassification should not only refer to “held for trading”instruments, but should include all financial instruments recorded “at fair value throughprofit or loss”. Like financial assets held for trading, the current increase of credit spreadleads to inappropriate effects on profit and loss which does not contribute to the intendedstrengthening of confidence in the capital markets. Limiting transfers to financial assets“held for trading” would create undue competitive distortions between investmentsbanks (to which the current measure can apply) and retail banks (mostly excluded fromthis measure, having no material amounts of instruments “held for trading”).

ESBG welcomes the possibility to reclassify “available-for-sale” financial assets to the category“loans and receivables”. The current prerequisite (no active market at the date of initialrecognition) leads to the fact that new possibilities of reclassification cannot be appliedto certain financial instruments (for example debenture bonds and mortgage bonds).

In addition, ESBG welcomes the Commission’s approach aimed at finding global solutionswhenever possible. A higher degree of harmonisation between European and Americanfair value requirements is certainly needed for an easier comparison and to preventcompetition distortion. In order to achieve a level playing field, it is vital for securitizedfinancial instruments to be treated equally under both the IFRS and the U.S. GAAP.Financial reports should be a key source of comparable, reliable, and consistent datathroughout the world. The same rules should apply to every actor in the financial industry.Indeed, the goal is to create a real level playing field. Thus, having the further integrationof the different capital markets in mind, the convergence efforts made by the IASB andthe FASB are highly important.

However, this convergence should not be done at the expense of quality and transparency.More important than short-term actions which aim at mitigating the effects of the financialcrisis, a thorough reconsideration of the existing accounting practices and accountingrules is necessary. This reconsideration must also be linked with proper audit systems.

Over-reliance on marketvalue significantly increasespro-cyclicality.

Accounting standards shouldfollow a practical approach.

There is a need for simplicityand standardisation.

Disclosures needto be simplified and takethe specificities of thebanking sector.

Harmonisation betweenfair value requirements andsupervisory requirementsis expected.

An in-depth reflection onthe application of fair valueaccounting is necessary.

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Recent events have confirmed that over-reliance on market value not only significantlyincreases pro-cyclicality, but in fact also results in providing an inaccurate image of acompany’s situation. In times of stress, the volatility in financial statements can increasedramatically, as shown by the current crisis. This also reflects possible “marketoverreactions” notwithstanding the potential procyclical effects of capital requirementsunder Basel II and/or risk management policies such as sale triggers and margining.Possible remedies to these pro-cyclical effects of fair value measurement includereclassifications, buffers or dynamic provisioning. All these solutions entail costs in termsof transparency of information. In any case the quality of information needs to bepreserved. Overall, there is a need for more analytical studies on the relationship betweenaccounting and procyclicality. It is important to note that these analytical studies areespecially needed if financial markets happen to have imperfections. Indeed, in such acase accounting rules are not necessarily a neutral measurement system and can lead to(upward or downward) biased profit estimates.

ESBG agrees with the Commission that further actions should follow due process and bestrictly tailored to each specific situation. Accounting standards should not be designedin an abstract way which insulates valuation from underlying conditions and companies’business practices and environment.

There is a need for simplicity and standardisation concerning IFRS rules on fair valuedisclosure and calculation requirements. In this respect, technical weaknesses regardingIAS 39 rules on de-recognition and reclassification still have to be solved.

Additionally, disclosures also need to be simplified and take the specificities of the bankingsector into account, as, for instance, sometimes information asked for is unavailable.Moreover, the focus should be on the balance between the important workload thatfinancial reports constitute for banks and the necessity to disclose the best information interms of quality rather than in terms of quantity. It is important to avoid informationoverload of account users and to assure that the information provided fully reflects theeconomic reality.

ESBG advocates for more coherence in the proposed IFRS defining fair value. It expectsa higher degree of harmonisation between fair value requirements and supervisoryrequirements in order to diminish the reporting burden for banks. IFRS requirements forfair value can still appear too complex for preparers of financial reports as well as forusers. Users might have difficulty choosing between the IFRS figures from financialreports and those disclosed for national supervisory guidances.

However, despite the strong signals from politicians and policy-makers on the pressingneed for changes since the start of the turbulence in the financial markets, the necessaryreforms in this field will be difficult to carry out. Looking ahead, an in-depth andunprejudiced reflection on the application of fair value accounting is necessary whichpays particular attention to the pro-cyclical effects of excessive reliance on market prices.

Setting the scene

In May 1999, the European Commission launched the “Financial Services Action Plan”(FSAP) to improve the Single Market for financial services.41 Amongst the objectives ofthe FSAP was the urgent need to move towards a single set of financial statements forpublicly traded companies. The Commission considered that the International FinancialReporting Standards (IFRS) – at the time called international accounting standards (IAS)as established by the International Accounting Standard Board (IASB) – were the mostappropriate benchmark for framing a single set of accounting standards.

Although the IFRS were initially developed for publicly traded companies, the IASB starteda project called “IFRS and Small and Medium-sized Enterprises” (IFRS for SMEs) in 200342

which has been finalized with a stand-alone standard in July 2009. The IASB expressedthe need to achieve the same transparency for SMEs as for public entities – namely toenhance the comparability between European SMEs and SMEs in other countries as wellas to avoid distortions in the Single Market due to different standards.43 More precisely,the IASB’s twin goals were to meet users’ needs by providing them with comparableinformation and limiting administrative burden for the preparers. The IASB’s proposalwas, as a consequence, based on full IFRS with modifications and simplifications.

In a first step, the IASB defined SMEs, in contrast to public companies, as entities that donot have public accountability and do not publish financial statements for external users.From 2004 to 2007, various discussion papers and questionnaires were issued androundtables organised. In February 2007, the Exposure Draft (ED) “IFRS for SMEs” witha synthesis of the findings was published.44

Key messages

n ESBG supports a practical, cash-flow and solvency oriented approach regarding International FinancialReporting Standards and SMEs.

n Banks which are not capital-market oriented should be allowed to use IFRS for SMEs.

41 European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: ActionPlan, Communication of the Commission [COM(1999) 232], 11 May.

42 International Accounting Standards Board (IASB). 2009. “IFRS for SMEs”. London: [http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm].Accessed July 2009.

43 International Accounting Standards Board (IASB). 2009. IASB publishes IFRS for SMEs Press release. London[http://www.iasb.org/NR/rdonlyres/F4FFF721-62A4-4E02-BCB7-A0BD7A6D4FF8/0/PRIFRSforSMEs.pdf] July 2009.

44 International Accounting Standards Board (IASB). 2007. Exposure Draft International Financial ReportingStandard for Small and Medium-sized Entities, Comments to be received by 1 October 2007. London:[http://www.iasb.org/NR/rdonlyres/DFF3CB5E-7C89-4D0B-AB85-BC099E84470F/0/SMEProposed26095.pdf]. Accessed July 2009.

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45 International Accounting Standards Board (IASB) . 2007. “IASB launches field tests of SME exposure draft”.Press Release June 18. London: [http://www.iasb.org/NR/rdonlyres/B60A8709-0388-4B3A-8865-6A8081481D87/0/PRonSMEfieldtests.pdf ]. Accessed July 2009.

46 European Financial reporting Advisory Group (EFRAG). 2008. “Re: ED of a Proposed IFRS for Small and Medium-sized Entities”. Letter February 7. Brussels: [http://www.efrag.org/files/EFRAG%20public%20letters/IFRS%20for%20SMEs/EFRAG%20Output/EFRAG%20CL%20on%20ED%20IFRS%20for%20SMEs%20(07.02.2008).pdf] Accessed July 2009.

47 International Accounting Standards Board (IASB). 2009. “IFRS for SMEs”. London: [http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm]. AccessedJuly 2009.

48 International Accounting Standards Board (IASB). 2007. “IASB published draft IFRS for SMEs”. Press ReleaseFebruary 15. London: [http://www.iasb.org/NR/rdonlyres/CFC99B13-BF3C-4B71-AEF8-5B2960C16C2C/0/PRonSMEsED15Feb07.pdf]. Accessed July 2009.

49 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on annual accountsof certain types of companies, OJ L222, 14.8.1978; and Seventh Council Directive 83/349/EEC of 13 June 1983based on Article 54(3)(g) of the Treaty on consolidated accounts, OJ L193, 18.07.1983.

50 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on theapplication of international accounting standards, OJ L243, 11.09.2002.

51 Commission Recommendation 2003/361/EC of 16 May 2003 concerning the definition of micro, small andmedium enterprises, OJ L124, 20.05.2003.

52 European Commission. 2007. Communication from the Commission to the Council, the European parliament,the Economic and Social Committee and Committee of the Regions Action Programme for ReducingAdministrative Burdens in the EU[COM(2007) 23 final], January 24.

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In parellel, the IASB started a “field testing” of 116 SMEs in 20 countries in June 2007.45

The aim of the field testing was to evaluate the impact of IFRS for SMEs in reality and toreport any problems encountered. In February 2008, the European Financial ReportingAdvisory Group (EFRAG) issued a Final Comment letter on the IASB ED.46 EFRAG appearedin general supportive of the development of a simplified set of standards. However, EFRAGstated that the proposed standards could have been further improved and a number ofcritical remarks were made, especially concerning administrative burden and cost ofimplementing some proposed IFRS accounting disclosures.

On 9 July 2009, the IASB issued its Final Standard on IFRS for SMEs47 taking into accountsome of the criticism concerning its project. The new standard is a complete stand-alonedocument and contains five types of simplification from full IFRS48 especially concerningrecognition and measurement principles, such as a reduction of the number of requireddisclosures. The necessary revisions are proposed to be limited to once every three yearsand not once a year as for listed companies.

As opposed to accounting for listed companies, IFRS for SMEs are not compulsory forSMEs. These standards have been developed outside the legal basis of SME accounting.Listed companies have been relieved from most of the requirements in the 4th and 7thCompany Law Directives49 since 2002 when the Regulation 1606/2002/EC on theapplication of international accounting standards (IAS Regulation)50 was adopted andobliged publicly traded companies to present IFRS accounts by 2005. On the contrary,these accounting directives still form the basis for SME accounting in the EU. Thus, thelegal basis for SME accounting is still the 4th and 7th Directives and as a consequenceIFRS for SMEs have to comply with the Directives to be enforceable.

In parallel to the IASB initiative, the European Commission started to amend theDirectives and focused on diminishing the administrative burden for SMEs. Therefore, theCommission started a review process with the aim to simplify the accounting directivesfor SMEs. In 2003, the Commission reiterated in its Recommendation “Concerning thedefinition of micro, small and medium-sized enterprises”51, that easing the administrativeburden for SMEs was an important objective. Four years later, the Commission launchedan “Action programme on reducing administrative burden in the European Union”52

– again stressing the need to diminish accounting reporting requirements for SMEs.

53 European Commission. 2007. Communication from the Commission on a simplified business environment forthe companies in the areas of company law, accounting and auditing [COM( 2007) 394], 10 July.

54 European Commission. 2006. Communication from the Commission to the Council, the European Parliament,the Economic and Social Committee and Committee of the Regions A strategic review of Better Regulation inthe European Union [COM (2006) 689 final], 14 November.

55 European Commission. 2008. Proposal for a Directive of the European Parliament and the Council amendingCouncil Directives 78/660/EEC and 83/349/EEC as regards certain disclosures requirements for medium-sizedcompanies and obligations to draw up consolidated accounts [COM(2008) 195 final, 2008/0084(COD)], 17 April.

56 European Commission. 2009. “Review of the Accounting Directives” Brussels: [http://ec.europa.eu/internal_market/accounting/sme_accounting/review_directives_en.htm]. Accessed July 2009.

57 European Commission. 2009. “Results of the Consultation on the Review of the Accounting Directives”.PowerPoint presentation. June. Brussels: [http://ec.europa.eu/internal_market/accounting/docs/2009-results-consultation-review_en.pdf]. Accessed July 2009.

58 European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council amendingDirective 78/660/EEC on the annual accounts of certain types of companies as regards micro entities[COM(2009) 83 2009/0035(COD)], 26 February.

59 European Council. 2007. “2813th Meeting Economic and Financial Affairs”. Press Release, 11464/07 (Presse 160),July 10. Brussels: [http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/95233.pdf].Accessed June 2009.

60 European Parliament. 2007. Draft Report on International Financial reporting Standards (IFRS) and theGovernance of the IASB (2006/2248(INI)). Committee on Economic and Monetary Affairs of 24 September2007. Rapporteur: Alexander Radwan.

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As part of this programme, in July 2007 the Commission published a Communication“On a simplified business environment for companies in the areas of company law,accounting and auditing”.53 In this Communication, the Commission made a strongstatement regarding the IASB’s Exposure Draft proposals and indicated that they were notconvinced that the current IASB work on SME accounting would provide sufficientelements to simplify the day-to-day work of European SMEs. Instead, the Commissionidentified a number of other measures that could lead to tangible simplification for SMEswhich all aimed at diminishing the administrative and accounting burden for SMEs.These proposals covered various subjects, such as to exempt “micro entities” fromthe application of the accounting directives which are typically mandatory for SMEs andto include exemptions for SMEs from the requirement to publish their accounts.

In 2008, the Commission announced major initiatives on the same policy for smallbusinesses, based on its 2006 ambitious strategy for reducing administrative burdens forSME’s by 25% by 2012.54 In April 2008, the Commission issued a proposal amending the4th and 7th Directives regarding certain disclosure requirements for small and medium-sized enterprises.55

The action programme on reducing administrative burden in the EU continued in 2009.In February, the European Commission launched a Consultation on the “Review of theFourth and Seventh Company Law Directives”56 which again aimed to raise issuesrelating to the modernisation and simplification of the Accounting Directives. The resultsof the Commission Consultation were published in April 200957 and concluded that thereis a need to reduce the number of categories, to standardize key indicators and to abolishadditional requirements which mainly consist of quantitative information. In parallel, theCommission published a Proposal to amend the 4th Company Law Directive regardingmicro-entities.58

Taking note of the evolution of the IASB’s work, the Commission’s initiatives and adecision of the EU Finance Ministers Council meeting of July 200759, the EuropeanParliament drafted an own-initiative Report on “International Financial ReportingStandards and Governance of the International Accounting Standards Board” inSeptember 2007.60 The draft report, prepared by MEP Radwan of the Economic andMonetary Affairs Committee (ECON), analysed among other subjects IFRS for SMEs.

61 European Parliament. 2008. Report on International Financial reporting Standards (IFRS) and the Governanceof the IASB (2006/2248(INI)). Committee on Economic and Monetary Affairs of 5 February 2008. Rapporteur:Alexander Radwan.

62 European Parliament. 2008. Resolution of 24 April 2008 on International Financial Reporting Standards (IFRS)and the Governance of the International Accounting Standards Board (IASB) (2006/2248(INI)).

IFRS for SMEs should notresult in the creation of

additional administrativeburden.

IFRS for SMEs should bean option.

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During the discussions in the ECON Committee it was stated that the standards proposedby the IASB Exposure Draft are far too complicated for SMEs and refer in many places tothe full IFRS. Therefore, the need to have simplified IFRS for SMEs was emphasized.Moreover, it was indicated that the EU should carefully assess the respective benefits ofcommitting to an IFRS standard for SMEs or developing its own independent andcomprehensive solution for SMEs. In addition, the MEPs took the view that any such EUsolution should fit into the IFRS conceptual framework without obliging SMEs to use thefull IFRS. A final remark was that no political mandate has been conferred on the IASBto draft IFRS for SMEs. The Plenary adopted the report of the ECON Committee on5 February 200861. In its Resolution of 24 April 200862 the Plenary added andemphasized that the Community endorsement procedure may not be used for therecognition of the IFRS for SMEs.

With the publication of the Final Standard from the IASB on IFRS for SMEs in July 2009,stakeholders found numerous changes which aimed to take into account their previousremarks. The Commission is currently assessing the implications of the IASB’s finalposition paper and the potential use of IFRS for SMEs. While the Commission had shownscepticism concerning the compatibility between the ED and SMEs’ needs, its viewcurrently appears less negative as the complexity of the final standard has been reduced.Interviews with stakeholders, mainly SMEs from various Member States, made it clearthat enterprises seem to have some degree of appetite regarding the final IASB proposal.Looking ahead, the Commission will decide on its next steps after a thorough legalanalysis, especially regarding potential conflicts with the 4th and 7th Directives.

ESBG views

Being actively involved in the ongoing discussions, ESBG in general supports the IASB’sand European Commission’s initiative to promote intelligibility in SMEs accountingstandards. Savings banks are by tradition the natural business partners of SMEs, and thusESBG’s major interest is to ensure that SMEs benefit from the best possible accountingstandards both in terms of simplicity and comprehensibility. However, Europe’s retail andsavings banks do not have any strong preference regarding the accounting standards thattheir SME clients apply. More specifically, the members of ESBG can adapt to theaccounting standard used by SMEs for the purpose of conducting a credit assessment– be it on a national General Accepted Accounting Principle or on an internationalaccounting standard specifically designed for SMEs. Thus, ESBG’s main concern is thatany new standards should benefit SMEs and not result in the creation of additionaladministrative burden.

Against this background, the following points are important:

IFRS for SMEs should be an option. It would not be appropriate to make it mandatory forall the SMEs active in the EU. If some might benefit from such a standard – especially thoseactive in several countries – others might find it excessively burdensome and might preferto continue applying their national standard. Therefore, for the moment, each SME shouldbe given the option whether to use any forthcoming IFRS for SMEs standard or not.

Tax reporting has to be analternative to IFRS reporting.

IFRS for SMES should beuser-friendly andstandardised.

More reduction ofdisclosure requirementswould be welcomed.

The time frame formodifications of thestandards should beextended.

IFRS for SMEs should focusmore on treasury issues ratherthan on investment value.

Full IFRS should be appliedby banks only if they arecapital-market oriented.

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Tax reporting has to be an alternative to IFRS reporting. The effects of having differentsets of standards must be assessed before any measures are taken towards imposing thenew standards on SMEs. SMEs are generally under a legal obligation to report to theirnational tax authorities according to national accounting standards. Thus, most smallcompanies already have in place information tools that would allow them to comply withpublication requirements without many additional cost efforts. Unless national taxauthorities accept reporting according to IFRS for SMEs, an obligation to use tax reportingwould lead to double reporting.

ESBG welcomes the improvement found in the IASB Final Standard. It agrees with theIASB’s decision to simplify IFRS for SMEs and to contain them in a stand-alone document.However, it is very important to make these standards even more user-friendly andstandardised. Users of SME financial statements usually have limited resources to devoteto an in-depth analysis of financial statements, and often value standardisation in thepreparation and presentation of financial statements more.

More reduction of disclosure requirements would be welcomed. In line with EFRAG’sview, ESBG appreciates that in the IASB’s Final proposal the disclosure requirements havebeen reduced compared to the full IFRS. However, further reductions in disclosuresrequirements could be achieved but should not go beyond the requirements set bynational accounting regulations.

With regard to the IASB proposal to revise the standards every three years, the time framefor modifications and further developments of the standards should be extended astimeframes which are too short may create unnecessary instability and additionaladministrative burden for SMEs.

IFRS for SMEs should focus more on short term and treasury issues rather than oninvestment value. Users’ needs differ widely when comparing SMEs’ economic issues tothose of larger corporations. Users of SMEs’ financial statements tend to be less interestedin value and, especially when speaking of banks, appear to be more interested in howthe entity will be able to meet its obligations towards its creditor on time. This is generallya question of long-term versus short-term investment, where shareholders of largecorporations look for the fair value of their investment at any given moment while thestakeholders of SMEs are typically interested in another kind of information. The focusamongst users of SMEs’ financial statements is on the entity’s ability to generate positivecash-flows in the normal course of business. In order to assess the risk of their creditportfolio, banks feed their risk calculation models with information provided by thefinancial statements of their clients. The publication of financial statements contributes toa positive discrimination of small companies that have good economic results, allowingthem to have easier access to credit, not only from banks but also from private investors.ESBG is concerned that these views, though they have been shared by the IASB, have notbeen sufficiently taken into account when creating the standards.

Finally, the scope of entities obliged to report in accordance with full IFRS should not beexpanded to include banks and insurance companies as being publicly accountableentities unless they are capital-market oriented.

Background

Wholesale payments are payments instructed and received by credit institutions, financialinstitutions (and, in the future, payment institutions), National Central Banks (NCBs),and/or other authorized institutions or entities. Such payments are either payments madebetween institutions for their own account, represent the bilateral settlement of retail andcommercial payments, are payments made by ancillary systems such as payment andsecurities clearing systems, or are transactions made by NCBs in relation to monetary policy.

With the introduction of the euro, integration has progressed as regards wholesalepayments.

On one side this is due to the fact that the infrastructure for clearing and settlingwholesale payments (also often referred to as “high value payments” or “urgentpayments”) has changed.

The introduction of the euro saw the activation of the TARGET63 system – first as a bridgebetween national Real Time Gross Settlement (RTGS) systems, and now as an integratedsystem – although the national dimension has not completely disappeared (notably withthe capability for NCBs to manage bank accounts locally, and a certain number of otherfunctions of the system).

In addition, the advent of the TARGET system has meant that traditional correspondentbanking has been redefined in a number of instances – although it has far from disappearedaltogether from the eurozone, as some pundits were only too keen to expect and promote.

Key messages

n Savings banks certainly support the continued development of central bank infrastructure that effectivelyenables finality and certainty.

n However, it must be stressed that sight cannot be lost of the public-good dimension of these initiatives – in starkcontrast to commercial settlement platform initiatives.

n Particular care should be paid to ensuring that the level playing field is not inadvertently jeopardized – forexample by constraints that make direct access to payment and settlement systems unattractive, and/or pricingschemes that unduly – in a public-good context – reward larger transaction volumes.

63 Trans-European Automated Real-time Gross settlement Express Transfer, introduced in 1999.

A fully integrated Real TimeGross Settlement system willbe complemented by centralmanagement of collateraland a real time deliveryversus payment structurefor securities.

4. WHOLESALE PAYMENTS ANDSETTLEMENTS INFRASTRUCTURE

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64 European Council Framework Decision (2002/475/JHA) of 13 June 2002 on combating terrorism, OJ L164,22.06.2002.

65 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention ofthe use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309,25.11.2005.

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Certainly the TARGET (and related systems) infrastructure has successfully passed the testof the recent financial crisis. Indeed, in the face of the level of shocks experienced by highvalue payments and securities systems in the last months of 2008, and the dramaticallyincreased volume of activity, one may only draw the conclusion that the infrastructurefunctioned as it was built and expected to (i.e. well). Indeed, no significant increase inaverage settlement time has been noted throughout the financial shock period (even atthe time of the default of Lehmann Brothers).

At the same time, experience in the midst of the financial shock has served to highlightthe critical role played by central counterparties. This is an area where certainlyintegration is all but complete. This would tend to prove that deeper integrationcontinues to be a valid objective for wholesale payments, yet alone it is not the responseto all the challenges these systems can be confronted with.

ESBG preliminary assessment

Both at the European and international level the payments landscape is characterized by:

n Continued regulatory and supervisory demands for certainty and finality of payments,transparency of conditions, and use of payment systems for policing purposes (e.g.FATF – Fight against Terrorist Financing64 and AML – Anti-Money Laundering65).

n The demand for payment schemes to separate notably processing activities from therulemaking and scheme management functions.

n A demand for the participation of other stakeholders in society to the definition andmanagement of payment services.

n A growing place for international standards (mostly ISO) as opposed to nationalstandards.

These developments meet the requirements of policy makers and regulators for continuouslyincreasing confidence in payment systems and removing barriers to competition in orderto decrease costs. But the direct consequences of these developments are also that:

n Regulatory demands need to be met by continued investment in technology andseeking economies of scale. This prompts many banks to become indirect rather thandirect participants in payment infrastructures.

n Detaching scheme management and payment processing activities on one siderequires establishing new governance structures (in which a place may be reserved forother stakeholders). On the other side this separation drives the emergence of potentpayment processors who will weight on standards and product evolution.

n The influence of individual players on the definition and decision making in standardsis waning.

66 European Code of Conduct for Clearing and Settlement by the Federation of European Securities Exchanges,the European Association of Central Counterparty Clearing Houses and the European Central SecuritiesDepositories Association, 7 November 2006.

Central SecuritiesDepositories to outsourcesettlement services tothe Eurosystem inthe T2S project.

T2S is pro-competition.

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These developments provide some market participants with the opportunity to leveragetheir market positions further and create new barriers to entry and/or to a level playingfield. Barriers to competition could be raised in the following situations:

n For indirect participants in payment systems, the cost of executing payments increasescompared to the direct participants with whom they compete in the retail market.This is as true for RTGS systems as for automated clearing houses e.g. STEP2.In addition indirect participants will be at a disadvantage when the D+1 executiontime mandated by the Payment Services Directive (PSD) comes into force.

n In addition, larger participants in payment systems tend to request steeply decreasingpricing scales for volumes submitted – which include those of indirect participants.Certainly for RTGS systems such diversion of public good should not be supported.

n Attempts to levy royalties when co-operatively developed rules are to be re-utilisedhave been noted.

n With most standards now being developed within ISO, the influence on decision makingrests with those banks who can dedicate staff to be appointed national representatives.They have a greater say on the scope of changes, and thus on costs adjustments.

All of these represent threats to the level playing field and to the bottom line of retailbanks in particular.

Coming developments

In 2007 the Eurosystem launched the study of the TARGET2 Securities (T2S) project.The concept is to create a real time settlement system in central bank money for securitiestransactions throughout the eurozone – and possibly open the platform to non-eurocurrencies as well. In effect, this would lead Central Securities Depositories (CSDs) tooutsource to the Eurosystem the settlement service they have provided up to now.Following a feasibility study, the Governing Council decided in July 2008 to go ahead withthe project. A 2013 launch date has been set. T2S will be operated by the Eurosystem ona cost recovery, not-for profit basis.

This Eurosystem initiative is viewed as the opportunity to foster harmonisation for securitiesprocessing and provide in the near future a settlement system for all euro-denominatedsecurities (equities, fixed income, funds and Eurobonds). T2S is pro-competition and willallow full transparency on prices and cost recovery. It will increase competition betweencustodians by extending the market size and providing options for direct CSD access.With fair and equal access, the project will provide asset services with the opportunity tocompete on a fair basis. The T2S initiative should also generate savings both at the backoffices level and in terms of collateral requirements. T2S will further enable CSDs tocomply with the Clearing & Settlement Code of Conduct66 for infrastructures:transparency and fair access requirements should be met.

Savings banks welcome“Collateral Central Bank

Management”.

67 Next generation of the TARGET system, introduced in 2007.

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This project is supported by the savings banks community who throughout theconsultation highlighted several principles with which the initiative should comply:

n In line with ECB standards, full transparency on tariffs related to T2S services (the CSDsbeing the actual customers of the Eurosystem in this instance) is expected;

n T2S should not lead to an increase in costs for settlement at domestic level. n Pricing should not discourage direct connection.n The economic business case for T2S should be convincing enough (also from a

methodology and validation perspective) to trigger rapid acceptance by key participants.n A cross-subsidisation between T267 and T2S should be excluded. n Should discounts be granted to larger users, the discount scheme should acknowledge

the public-good dimension of the initiative and be in line with the overall objectives togenerate efficiencies and foster innovation in the Clearing and Settlement industry ona pan-European scale.

The savings banks community also welcomes the “Collateral Central Bank Management”(CCBM2) project, a further initiative of the Eurosystem to facilitate the mobilisation andtransfer of collateral throughout the EU. CCBM2 will be foremost a Eurosystem internalsystem, yet it can provide significant opportunities for users in Europe, provided severalpre-conditions are met:

n Participation of Eurosystem NCBs would be on a “voluntary basis”. It has beensuggested that on the contrary the development of CCBM2 would be the signal of aclear commitment of all Eurosystem NCBs to use it.

n Participation of all Eurosystem NCBs is also desirable when it comes to cost recovery.Although again this will be foremost a Eurosystem internal system, ultimately endusers will support its cost. It is therefore important to aim at the widest possibleacceptance and usage basis.

n Whilst the benefits expected from the CCBM2 project will be greatly enhanced byTARGET2 Securities, the timeline of the two projects should not be tied. On thecontrary, CCBM2 should be deployed in the market as soon as possible provided thereis no regression in terms of service or in terms of costs.

n CCBM2 should be able to accept collateral denominated in currencies other thanthe euro. In particular government bonds in non-euro currencies should be eligibleand supported.

n Users will be able to perform in genuine real time – also with intraday effect – allactions which allow them to amend their collateral position. Of course, consultationof positions must be accessible in real time as well.

n External collateral management systems (such as tri-party collateral managementservices) as well as 2-tier collateral management organisations (e.g. correspondentbank arrangements put in place by decentralised banks) should be easily integratedinto and make use of the CCBM2 architecture and service.

n CCBM2 (as well as TARGET2 Securities) will deliver their desired benefits not onlythrough the deployment of well designed technical capabilities. Further harmonisationin legal aspects as well as market, Central Bank and CSD practices are required forthese projects to bring effective advances.

Savings banks support thedevelopment of a Europeancentral counterparty forcredit default swaps.

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The savings banks also follow and support work leading to the development of a (ormore) European central counterparty (CCP) for credit default swaps (CDS). Both the ECBand the European Commission share the view that there should be at least one CCP inthe euro area. Savings banks support the principle that the location of a core marketinfrastructure should correspond to the location of the market, which brings benefits toall stakeholders. Whilst the supervisors’ and regulators’ objective of a safe CCP is certainlyshared, the following consideration should be taken on board when establishing it:access criteria are very important and should be risk-based – there is a need for direct andindirect membership to guarantee the safety of the CCP. Both the buy side and the sellside of CDS markets must be taken into consideration. CCP membership should bemostly the banking community; with buy-side access through an intermediary unless astrong capital base can be evidenced. A framework to protect and safeguard thecollateral of the buy side (with segregation of collateral) should be developed.

Setting the scene

The Financial Services Action Plan68, a set of measures adopted in the EU during1999-2004, put a strong focus on wholesale financial services with the aim to create areal internal market in this area by 2004. This has led to a highly regulated environmentfor securities and investment funds, while a few players (such as Credit Rating Agenciesand hedge funds) stayed outside the scope of direct regulation.

This wave of regulation also had a huge impact on retail and savings banks which serveas intermediaries for investment services for their retail clients, and which (to a smaller orlarger extent) also issue financial instruments themselves. Simultaneously capital marketshave become more and more accessible to retail clients, and retail labelled/ orientedproducts have been extended.

The Financial Services Policy between 2005 and 201069 followed the guideline of a‘dynamic consolidation’ of progress already achieved. Simultaneously a number ofmeasures aimed at removing the remaining economically significant barriers. Finally, thefinancial crisis has led to action in areas, which formerly had not been subject to directregulation (e.g. hedge funds) and to an acceleration of the Commission’s work in otherareas (e.g. retail investment products).

This section will provide a tentative assessment of the legislative instruments of main relevanceto ESBG members in the area of capital markets and will outline possible ways forward.

5.1. Markets in Financial Instruments Directive (MiFID)

68 European Commission. 1999. Commission Communication on Implementing the Framework for FinancialMarkets: Action Plan. [COM(1999) 232 final], 11 May.

69 European Commission. 2005. White Paper on Financial Services Policy 2005-2010 [COM(2005) 629 final]. 1. December.

Key messages

n MiFID has introduced significant changes and was accompanied by a heavy burden for credit institutions(in terms of administration, costs and human resources).

n During the first year of practise of MiFID ESBG members mainly focused on compliance with the rulesestablished. A period of continuity is of utmost importance to enable all players to exploit the possiblebusiness opportunities offered by MiFID.

n It is still early to make a final judgement on whether MiFID was successful in achieving its stated objectives ornot. However, ESBG’s preliminary assessment indicates that MiFID has not fully reached its envisaged aims.

n The revision of MiFID should not only focus on identifying weaknesses and administrative burden. It shouldalso be taken as an opportunity to assess whether introducing such radical changes benefits equally andadequately all market participants and fully respects the principles of subsidiarity and proportionality.

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70 Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, OJ L 141, 11.06.1993. 71 European Commission. 2000. Communication to the European Parliament and the Council Upgrading the

Investment Services Directive (93/22/EEC) [COM(2000)729 final], 15 November.72 The ISD enables Member States to opt for the application of the concentration rule, i.e. orders given by

investors within their national territory must by law be carried out on official markets.73 Directive 2004/39/EC of the European Parliament and Council of 21 April 2004 on markets in financial

instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the EuropeanParliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145, 30.04.2004.

74 Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the EuropeanParliament and of the Council as regards organisational requirements and operating conditions for investmentfirms and defined terms for the purposes of that Directive, OJ L 241, 02.09.2006 and Commission Regulation(EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and ofthe Council as regards recordkeeping obligations for investment firms, transaction reporting, markettransparency, admission of financial instruments to trading, and defined terms for the purposes of thatDirective, OJ L 241, 02.09.2006.

MiFID has had a significantimpact; a period of continuity

is now needed.

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Background

The 1993 Investment Services Directive (ISD)70 constituted the first attempt to create anEU framework for the provision of investment services. While recognizing that theintroduction of the ISD had had a number of positive consequences for Europe’s marketsin financial services, the Commission referred in its analysis of the ISD to a number ofimportant weaknesses, which from its point of view had to be corrected.71 In particular,the following points were raised by the Commission:

n The Commission highlighted that the ISD left markets fragmented along national linesdue to the option of imposing a concentration rule.72

n In addition, the Commission determined weaknesses in the mutual recognitionconcept for investment firm licences due to insufficient harmonisation.

n Furthermore the Commission criticised that the ISD failed to cover the full range ofinvestor-oriented services as well as the full range of financial dealing.

n Finally the Commission stressed that cooperation between supervisors wasunderdeveloped and did not address newly arisen regulatory and competitive issues.

The MiFID Directive 2004/39/EC73 (adopted in 2004) and its implementing rules74

(adopted in 2006) replaced the ISD and aimed to address the weaknesses describedabove. MiFID introduced stricter and more equal rules for all financial instruments and alltrading venues with the aim to create a true single market, increase competition in theprovision of services and marketplace functions, and to promote an integrated financialtrading infrastructure. Furthermore the MiFID influences the conduct of business forinvestment service providers and aims to strengthen investor protection.

ESBG preliminary assessment and outlook

MiFID has been in effect since November 2007. It constitutes the continuation of the ISD,but to some extent can be described as a ‘revolution’ due to the significant impact it hashad on the organisation of the financial markets and its players. ESBG members had toundertake huge efforts to be MiFID-compliant from November 2007 onwards, not leastbecause the transposition was delayed in a number of EU Member States, whichshortened the preparatory phase for industry. For these reasons, ESBG members have notyet been able to make the best of all possible potential business opportunities offered byMiFID to date. In this context, it is important to ensure that a period of continuity berespected, enabling all players to fully adapt to this new environment and exploit newbusiness opportunities.

75 For further details please see below.76 See in particular Art. 19 (2)- (3) of the Level 1 Directive and Art. 27 and 29-35 of the Level 2 Directive.77 See in particular Art. 4 (10)- (12), Art. 24, Annex II of the Level 1 Directive and Art. 28 of the Level 2 Directive.78 See in particular in Art. 19 (4)- (7) of the Level l Directive.

MiFID has changed firms’internal organisation.

MiFID affects firms’relationships with clients.

MiFID has led to considerablechanges in the area of advice.

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After a year and a half year of experience with MiFID it is still too early to make a finaljudgement on whether it was successful in achieving its stated objectives or not. For thetime being, only preliminary responses can be given as to whether MiFID has beenbeneficial for investors in financial services, investment firms and generally the EU singlemarket in financial services. Similarly, only tentative conclusions can be drawn regardingthe opportunity for the EU to venture into similar initiatives in the future.

Despite the duty to be cautious in any assessment due to the limited experience withMiFID, it is worth highlighting two areas of vital importance, in which ESBG membershave experienced the most important changes (in their daily business practice): the conductof business rules and the organisation of market places.

Assessment of the impact of MiFID in the area of ‘conduct of business’

An important aspect of MiFID is that it contains many provisions which have had and stillhave a strong impact on the way Europe’s investment firms have to conduct theirbusiness. This concerns in particular the information and the advice to be given toclients.75 In this context, it can be said that the impact of MiFID on the relationship toclients has generally been strong.

It should be highlighted here that ESBG members have traditionally put particular focuson the relationship with their clients (“relationship banking”). Thus, it is not the level ofpriority of the issue that has changed with the introduction of MiFID, but rather thepractical arrangements in place. In particular, MiFID has led to important changesespecially in the following areas:

n MiFID has changed firms’ internal organisation. From a very practical andorganizational point of view, MiFID has had a considerable influence on severaldepartments in banks, which are not directly related to the relationship with investors,such as the marketing-, the compliance- and the IT/data processing departments. In allthese departments banks have had to carry out important investments as a result ofthe introduction of MiFID.

n Information to customers: with MiFID, banks’ clients, as potential investors, receivemore written information about the financial products.76 ESBG considers that MiFIDhas generally led to an overload of written information. This concern is confirmed byfeedback ESBG member banks receive from their clients, who feel overwhelmed by theinformation they now receive from their provider of financial services.

n MiFID affects firms’ relationships with clients. The relationship between banks andtheir customers: MiFID has also influenced the direct relationship between the bankadvisor and his client: - Changes in this area mainly stem from the concept of ‘client categorisation’, which

introduces a distinction between “retail client”, “professional client” and “eligiblecounterparty”.77

- MiFID has led to considerable changes in the area of advice. MiFID has also led toconsiderable changes in the area of advice. It formalises78 the concept that the bankneeds to obtain the necessary information regarding the (potential) client'sknowledge and experience in the investment field relevant to the specific type ofproduct or service, his financial situation and his investment objectives. Against thisbackground a piece of advice which is suitable and appropriate for the (potential)client should be given.

79 See in particular Art. 4, 22, 27, 28, 29, 30, 44, 45 of the Level 1 Directive.80 See in particular Art. 19 (1) and 21 of the Level 1 Diretive.81 See in particular 19 (1) and 22(1) of the Level 1 Directive.82 For the definitions see Art. 4 (7), (14) and (15) of the Level 1 Directive.

MiFID, has changed theEU financial markets,notably through theappearance of MTFs.

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ESBG would like to highlight that ESBG member banks have always put a strongfocus on this aspect. Regrettably, they are now confronted with the dissatisfactionof some of their clients who judge as a useless burden/ paternalism the numerousquestions asked by their banking advisor in order to be in a position to classify theclient and to give him/her appropriate advice. This concern in particular applies toclients, who have already been active in the financial markets in the past. It istherefore true that the relation to their clients has become generally more formaland bureaucratic. Simultaneously ESBG considers that the formal focus on customerprotection has been strengthened. In this context several ESBG members regard thesuccess of MiFID as questionable.

Assessment of the impact of MiFID regarding the organisation of financial markets

While the impact of MiFID on the relationship to clients can be described as ratherimmediate, the assessment of MiFID’s impact on market structures and market accessopportunities is less straightforward and thus indeed, even more difficult.

To start, the main objective of MiFID in this area should be recalled: creating a single EUmarket for the trading of financial instruments, which would result in good prices for allmarket participants based on a high degree of competition between the differentexecution venues. With the elimination of the concentration rule, widely regarded asincompatible with the EU single market and by some as old-fashioned, a series ofprovisions have been introduced in MiFID to guarantee market integrity and a gooddegree of interconnection between competing execution venues. These include:

n Rules on pre- and post-trade transparency79; n An obligation of best execution80; and n Rules on the handling of orders.81

Also, it should be recalled that according to MiFID three categories of market participantscan execute orders: regulated markets, Multilateral Trading Facilities (MTFs) and firms(especially when they act as systematic internalisers, i.e. when systematically dealing onown account by executing clients’ orders outside regulated markets and MTFs).82

The idea is therefore to organize competition and level the playing field between differentcategories of venues.

Whether the provisions contained in MiFID fully achieved their aim of more competitive,liquid, integrated and efficient financial markets cannot be conclusively answered at thispoint in time, as experience with MiFID is still limited. Undoubtedly, important changeshave already been observed in a number of Member States, which are a direct consequenceof MiFID. They mainly relate to the appearance of number of MTFs, such as Chi-X andTurquoise. As a reaction, in some Member States the more traditional players (regulatedmarkets) decreased their prices or diversified their offer in terms of services. As aconsequence, some ESBG members can now operate with decreased trading costs for thebenefit of their customers, which was one of the main priorities of MiFID.

83 Fidessa fragmentation index, report for week ending 14 August, http://fragmentation.fidessa.com/stats/.84 European Commission. 2008. MiFID Transposition Quality Check Results of call for evidence from market

participants.85 CESR/ 09-295.

Differences betweenMember States exist.

Rules regarding SystematicInternalisers are toobureaucratic.

MiFID’s revision needs to beprepared carefully.

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However, considerable differences between the different Member States exist.The comparison of two former markets applying the concentration rule, notably Franceand Spain, confirms these divergences; in France about 65% of the CAC trades arehandled on the traditional markets, whereas in Spain still 99,8% of the IBEX 35 arehandled on the Madrid stock exchange, which is due to the late entry of MTFs in thismarket.83 More developments can be expected in this area.

In ESBG’s view the creation of MTFs can be described as a success, at least in certainmarkets, since it resulted in enhanced competition, which can be beneficial for theinvestor. On the other hand, the provisions regarding Systematic Internalisers (SIs) seemless successful, as these rules are too bureaucratic.

An assessment about the implications of MiFID on the functioning of the market can onlybe preliminary at the current stage and needs to be continued.

Outlook

Looking ahead, the Commission envisages a review of MiFID in 2010. On the basis of the2008 results of the transposition check conducted by the Commission84, such a reviewcould focus on the following issues: transaction reporting, access to central counterpartyand clearing and settlement facilities. In addition, the Commission concludes that(further) Level 3 guidance could be useful, in particular regarding the definition ofinvestment advice and the cooperation between home and host competent authorities.

ESBG fully supports the Commission’s conclusions regarding Level 3 guidance, suggestingthat additional Level 3 guidance could be given regarding the “suitability test”,“execution only” services and “best execution”; in this context ESBG welcomes the factthat the Committee of European Securities Regulators (CESR) is currently consulting on arelated issue: the treatment of complex and non-complex products for the purposes ofthe appropriateness requirements.85 ESBG would also welcome future work on the issueof access to central counterparty, clearing and settlement facilities and transactionreporting. Regarding this last issue, CESR could establish a list of all EU investment firmssubject to transaction reporting.

The revision of MiFID should also be taken as an opportunity to assess whetherintroducing such radical changes benefit all market participants in the same manner, infull respect of the principles of subsidiarity and proportionality. Finally, all possible measuresshould be evaluated against the background of avoiding new administrative burdens.

5.2. Prospectus Directive

Background

Measures concerning the conditions for admission of securities to official stock-exchangelisting and the financial information that listed companies must make available toinvestors have been subject to EU rules since the end of the 1970s (Directive 1979/27986,1982/12187, 1988/62788). Within the Financial Services Action Plan (FSAP) a consolidationprocess of these diverse measures was initiated: Directive 2001/34/EC89 consolidates theabove mentioned Directives into a single Directive without adding substantive changes.Subsequently the rules were updated, notably by the Prospectus Directive and theTransparency Directive.

The Prospectus Directive (2003/71/EC ) harmonises requirements for the drawing up,approval and distribution of a prospectus to be published when securities are offered tothe public or admitted to trading on a regulated market situated or operating within aMember State and thus creates a single passport for issuers. The Directive also reinforcesinvestor protection as all prospectuses issued in the EU must provide clear andcomprehensible key financial and non-financial information that enables the investor tomake informed investment decisions.

ESBG views

General assessment

Overall, ESBG members consider the practical application of the Prospectus Directivefunctional, although it involved a high administrative and financial burden.

Investors now receive more complete and clear information. However, positive feedbackfrom clients regarding the changes introduced by the Prospectus Directive remains limited.

86 Council Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities toofficial stock exchange listing, OJ L 066, 16.03.1979.

87 Council Directive 82/121/EEC of 15 February 1982 on information to be published on a regular basis bycompanies the shares of which have been admitted to official stock-exchange listing, OJ L 48, 20.02.1982.

88 Council Directive 88/627/EEC of 12 December 1988 on the information to be published when a major holdingin a listed company is acquired or disposed of, OJ L 348, 17.12.1988.

89 Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission ofsecurities to official stock exchange listing and on information to be published on those securities, OJ L 184,06.07.2001.

Key messages

n Overall, ESBG members have found functional the practical application of the Prospectus Directive.n However, there has been considerable administrative and financial burden caused by the implementation of

the Prospectus Directive.n The foreseen revision of the Prospectus Directive is a good opportunity to cut the burden it imposes and ESBG

in principle welcomes the Commission’s related reflections. n The review of the Prospectus Directive has to address additional issues. In particular the exemption from the

obligation to issue a prospectus for credit institutions where the total consideration is less than 50 millioneuro, should be extended.

114

90 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectusto be published when securities are offered to the public or admitted to trading and amending Directive2001/34/EC, OJ L 345, 31.12.2003.

91 European Commission. 2009. Consultation on a draft proposal for a Directive of the European Parliament andof the Council amending Directives 2003/71/EC on the prospectus to be published when securities are offeredto the public or admitted to trading and 2004/109/EC on the harmonisation of transparency requirements inrelation to information about issuers whose securities are admitted to trading on a regulated market.

92 Art. 2 (1) (e).93 See in particular Art. 10.94 Art. 16 (2).95 Art. 2 (1) (m).96 Art. 1 (2) (j).97 Art. 1 (2) (h).98 Art. 12 (1)-(2).

The focus on reducingthe administrative burdenis welcome.

Additional issues should betackled as part of the reviewprocess.

115

From an issuer’s point of view, ESBG members have not encountered significant problemsrelated to the passport. In this context, ESBG would like to point out CESR’s valuable“Questions and Answers” tool, which delivers practical guidance on the application ofthe provisions included in the Prospectus Directive.

Specific comments regarding the current review process

Regarding the current review process of the Directive91, the Commission is putting thisexercise in the context of a broader exercise regarding the reduction of administrativeburden. ESBG welcomes the approach chosen.

ESBG also supports many of the concrete proposals for changes included in the January2009 consultation paper. In particular, it would be useful to adapt the definition ofqualified investors to the provisions included in the MiFID Directive92 and to deleteinformation requirements which duplicate those contained in the Transparency Directive.93

ESBG welcomes the Commission’s intention to harmonise the timeframe for the withdrawalof an order.94 More reflection is necessary regarding related technical issues, such as theimpossibility of handling the withdrawal if the settlement has already taken place.

The Commission also tackles the issue of certain thresholds of the Directive. The limitationon the free determination of the home Member State for issues of non-equity securitieswith a denomination below EUR 1,000 is rightly seen as a burdensome restriction,which does not allow all issuers to select the most appropriate competent authority.95

ESBG agrees with this judgment, but in addition considers it necessary to revise anotherthreshold included in the Directive – the exemption from the obligation to issue a prospectusfor credit institutions where the total consideration is less than EUR 50 million.96

Practise has shown that not all small banks are able to benefit from this possibility and,as a consequence often abstain from issuing securities which in return limits the offer onthe market. ESBG therefore proposes to raise the threshold of the total consideration ofthe offer to EUR 500 million. Investor protection would not be affected by this measure,as the exemption only applies to plain, non-derivative products. Corresponding deliberationspertain to the threshold relating to disclosure requirements for small quoted companies.97

The present figure of EUR 2.5 million is unduly burdensome and accordingly the thresholdshould be increased.

Furthermore it should be possible to update the registration document which forms apart of a prospectus consisting of separate documents.98 This would enable the issuer toprovide all investors with a uniform, updated registration document.

In addition it is necessary to make some clarifications in the Directive, for instanceregarding (a) the exact timing when the requirement to supplement a prospectus ends,99

(b) the use of the prospectus on subsequent distribution stages (retail cascade)100 and (c)the exact timing when the issuer should be allowed to issue the security in the hostMember State.101

Finally, ESBG would welcome guidance by CESR in several areas, for instance regardingwhich information may form part of the final terms and which information must be madein the prospectus itself.102

5.3. Market Abuse Directive

Background

The Market Abuse Directive (2003/6/EC103) covers both insider dealing and marketmanipulation. It reinforces market integrity in the securities field and establishes a strongcommitment to proper market transparency and equal treatment of market participants.Transparency is seen as a prerequisite for trading for all economic actors in integratedfinancial markets. The Market Abuse Directive applies to any financial instrumentadmitted to trading on a regulated market in the EU, including primary markets.

ESBG views

ESBG members assess that the application of the Market Abuse Directive is functioningwell. In addition, they appreciate the valuable work by CESR, giving guidance on practicaldetails and thereby improving the convergent application of the Directive within the EU.CESR issued in May 2009 its third set of guidance104, covering the areas of insider lists,suspicious transaction reporting, stabilisation and buy-back programmes, rumours andinside information.

99 Art. 16 (1)100 Art. 3 (2)101 Art. 18102 Art. 5 (4)103 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing

and market manipulation (market abuse), OJ L 96, 12.04.2003.104 Committee of European Securities Regulators. 2009. Guidelines on Market Abuse Directive Level 3 – Third

set of CESR guidance and information on the common operation of the Directive to the market, CESR/09-219,15 May.

Key messages

n ESBG members assess that the application of the Market Abuse Directive is functioning well.n With a view towards the upcoming review, ESBG supports in particular the Commission’s preliminary views

regarding possible exemptions for disclosing inside information in the context of emergency measures andregarding the reassessment of the rules on insider lists. Furthermore ESBG believes that the issue of reportingof suspicious transactions needs to be analysed closely and might require revision.

116

With a view towards the upcoming review of the Market Abuse Directive, ESBG welcomesthe general orientation of the Commission’s call for evidence105, focusing on a simplificationof the Directive and on reducing its administrative burden. ESBG in particular agrees thatthe issuer may be exempted from disclosing inside information in the context ofemergency measures, while stressing that the situations in which the issuer’s financialstability is endangered need to be clarified. On another note ESBG highlights that itsupports a reassessment of the rules on insider lists with a view towards introducingmodifications to the duty to draw up and maintain insider lists; in this context, anychange which would lead to less administrative burden for the issuer, a strongeralignment of national implementations and enhanced legal clarity would be welcomed.

Furthermore, ESBG asks for an analysis regarding the reporting of suspicious transactions.ESBG refers to low figures of suspicious transactions reporting (according to ourcalculations in 2007 less than 0.13 reports have been delivered per entity), while the costsassumed by the entities are very high. Another argument for the revision of the provisionson suspicious transaction is that there are significant interpretation problems with theobligation. This is the case regarding both the meaning of “transaction” and “reasonablesuspects”. Uncertainties in these respects may easily entail that the obliged firms mayreport more transactions than intended, thus creating excessive administrative burden.

5.4. Transparency Directive

Background

The Transparency Directive (2004/109/EC106) amends the Directive 2001/34/EC on theharmonisation of transparency requirements in relation to information about issuerswhose securities are admitted to trading on a regulated market. It upgrades thetransparency requirements in relation to the content and dissemination of periodic andongoing information for securities issuers and investors acquiring or disposing of majorholdings in issuers whose shares are admitted to trading on a regulated market in the EU.This includes in particular information on a company’s performance and financial positionas well as changes in major shareholdings.

105 European Commission. 2009. Call for evidence. Review of Directive 2003/6/EC on insider dealing and marketmanipulation.

106 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on theharmonisation of transparency requirements in relation to information about issuers whose securities areadmitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004.

Key messages

n ESBG members assess that the application of the Transparency Directive is functioning relatively well.n With a view towards the revision of the Transparency Directive, there is scope for certain improvements,

which would lower the unnecessary burden, in particular for smaller banks.

ESBG would welcomeless administrative burden,stronger alignment ofnational implementationsand enhanced legal clarity.

117

ESBG recommendsa revision of the provisions

on publication of majorholdings and theaggregation rule.

118

ESBG views

Based on the experience gained by ESBG members concerning the practical applicationof the Directive, it can be concluded that it is functioning relatively well. This being said,it would be worth revising some aspects of the Directive. We would mention especiallythe following issues:

n The rules on publication of major holdings are too formal. n The aggregation rule in Article 10 causes a high administrative and financial burden,

in particular for small banks. In many cases a subsidiary’s holdings and holding strategyare wholly independent from the parent company’s holding; against this backgroundthe aggregation rule should be more clearly specified so that aggregation is onlyobligatory when it is relevant in practise.

More generally, ESBG members would welcome a similar approach to the one chosen forthe revision of the Prospectus Directive, thus also putting the revision of the TransparencyDirective in the context of the exercise of reduction of administrative burden.

6.1. UCITS

Background

UCITS (Undertakings for Collective Investment in Transferable Securities) are speciallyconstituted collective investment portfolios exclusively dedicated to investing fundsbrought by investors. The importance of UCITS is demonstrated by the volume of thesales; in 2007 the value of all UCITS was EUR 6,160 billion in total net assets – a growthby almost 75% since 2000.107 In addition ‘UCITS’ has been recognized as a global brand.

UCITS were first created with the 1985 UCITS I Directive108, which established the firstEuropean retail financial product. UCITS I sets common rules for the authorization,supervision, structure and activities of collective investment undertakings situated in theMember States and the information they must publish. UCITS I was limited to open-ended funds investing in transferable securities, complying with the principle of riskspreading. The scope of UCITS funds has since then been extended several times,whereas the guiding principle has always remained a high level of investor protection.

The Directive was amended by two Directives in 2001 (UCITS III109), notably concerningthe areas of eligible assets, management companies and simplified prospectuses.However, the Commission stated in its 2005 Green Paper that the initial aim of an internalmarket had not yet been fully reached, with a relative low number of cross-border UCITSand sub-optimal fund sizes. In addition, the introduced changes did not work in anoptimal manner. In particular UCITS III introduced the concept of the managementcompany passport which did not materialize in practice.

107 Efama. 2008. Efama Fact Book. Trend in European Investment Funds 6th edition 108 Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and

administrative provisions relating to undertakings for collective investment in transferable securities (UCITS),OJ L 375, 31.12.1985.

109 Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 amending CouncilDirective 85/611/EEC on the coordination of laws, regulations and administrative provisions relating toundertakings for collective investment in transferable securities (UCITS), with regard to investments of UCITS,OJ L 41, 13.02.2002 and Directive 2001/107/EC of the European Parliament and of the Council of 21 January2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrativeprovisions relating to undertakings for collective investment in transferable securities (UCITS), with a view toregulating management companies and simplified prospectuses, OJ L 41, 13.02.2002.

Key messages

n ESBG welcomes the changes introduced by UCITS IV, in particular the introduction of the managementcompany passport.

n With view to future modifications regarding the definition of eligible assets, ESBG stresses the need topreserve the spirit of UCITS as safe products for retail investors.

n The responsibilities of the depositaries are an issue which requires further attention.

6. CAPITAL MARKETS II –ASSET MANAGEMENTAND INVESTMENT FUNDS

119

110 Directive 2009/…/EC of the European Parliament and of the Council of on the coordination of laws,regulations and administrative provisions relating to undertakings for collective investment in transferablesecurities (UCITS), (recast), 2008/0153 (COD), 19.06.2009, awaiting publication in the Official Journal.

111 Art. 91-96112 Introduction of the principal in Art. 5(3), further provisions in particular in Art. 13-23113 Directive 2001/107/EC, in particular Art. 5 (1)114 Art. 78-82115 Mergers Art. 37-48, master-feeder Art. 58-65116 Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the

coordination of laws, regulations and administrative provisions relating to undertakings for collective investmentin transferable securities (UCITS) as regards the clarification of certain definitions, OJ L 79, 20.03.2007.

UCITS IV is expected to bringconsiderable improvements.

Looking ahead, the questionof which assets are eligible

as UCITS will be crucial.

120

In June 2009 the ‘UCITS IV’ Directive110 was adopted. UCITS IV contains provisionsregarding the product passport, which basically permits the distribution of a productwhich has been registered in one of the EU Member States. Once the registration is valid,the other supervisory authorities just need to be notified, whereas in the past often are-authorisation procedure had to be undertaken.111 UCITS IV also makes themanagement company passport work. The management company passport allowsmanagement companies to provide their services all over Europe.112 While the relevant2001 Directive had introduced the principle but failed to put the concept into practise,this passport has now become a reality.113 Furthermore UCITS IV replaces the simplifiedprospectus with a new concept, called Key Investor Information, the content of which isharmonised, short and simple.114 CESR is currently preparing its advice regarding theimplementing details for Key Investor Information, as well as the other areas covered bythe revision of the Directive, which it will publish in October 2009. Finally, UCITS IV allowsfund mergers both on a domestic and on a cross-border basis. It also allows funds to berelated via a master-feeder structure (i.e. a feeder UCITS has to invest at least 85% ofits assets in one single master UCITS).115 Both measures will result in economies of scaleand lower costs.

ESBG views

With UCITS IV a solid basis for the internal market for UCITS has finally been created.The concepts of product passport and management company passport have been givena clear legal basis. Former weak points regarding the notification procedure for theproducts have now been eliminated. In particular this procedure will now be carried outin considerably less time. ESBG also considers it of high importance that UCITS IV makesthe management company passport work while simultaneously maintaining highstandards of investor protection and of supervision. In addition the relationship betweenthe management company and the depositary has been clarified. In light of the changesintroduced by UCITS IV in relation to fund mergers, it needs to be guaranteed that anaccompanying framework concerning tax neutrality is created soon. ESBG fully supportsthe European Parliament’s request for a Directive by the end of 2010.

Looking ahead, the question of which assets can be eligible as UCITS will be of crucialimportance. No changes in this field have been introduced with UCITS IV, as the newprovisions were adopted in 2007 (i.e. in Directive 2007/16/EC116, which adapted theeligible assets to market developments). Changes to this Directive will become necessaryagain in the future; the speed of the legislative process for the adoption of the Directivementioned above can serve as a good example. All future revisions should preserve thespirit of UCITS, being known as a safe product for retail investors.

Looking further ahead, discussions will also continue regarding the question of whethera depositary passport should be introduced. Such a passport would enable depositariesto provide their services all over Europe. However, the possible introduction of adepositary passport would certainly raise supervisory concerns. As such, a detailedassessment would need to be conducted; CESR could play an important role in thisprocess. Furthermore, and even prior to such an assessment, the tasks and responsibilitiesof depositaries would have to be aligned. The Madoff collapse has brought a new spotlighton the question of tasks, responsibilities and liability of depositaries, and confirmed theexistence of divergences in this area. The Commission envisages a clarification of theseaspects117, which would constitute a useful step toward enhanced harmonization andinvestor protection in this area.

6.2. Alternative Investment Fund Managers

Background

Until autumn 2008 the Commission considered that hedge funds did not pose anyspecific risk to Europe’s financial stability and that therefore no particular regulatoryaction on the EU level was necessary. However, later the Commission expressed the viewthat the recent market convulsions had revealed that hedge funds may play a pro-cyclicalrole that might indeed create risks to the stability of the financial system and thereforewarrant closer prudential oversight.

On 30 April 2009 the Commission issued its proposal for a Directive on AlternativeInvestment Fund (AIF) Managers118 – capturing all non-UCITS funds. The Commissionproposes that, above a certain threshold119, all managers of non-UCITS funds shall besubject to an authorisation procedure and shall have to fulfill further requirements(e.g. capital requirements, organizational requirements, transparency requirements).On this basis, the manager will be entitled to market AIFs to professional investors all overEurope. Furthermore, the proposal foresees that managers will have to fulfill additionalrequirements when they employ certain techniques or strategies, notably management ofleveraged AIFs or management of AIFs which acquire controlling influence in companies(excluding SMEs).

117 European Commission. 2009. Working Document of the Commission Services (DG Markt). Consultation Paperon the UCITS Depositary Function.

118 European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council onAlternative Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC [COM(2009)207 final], SEC(2009)576 SEC(2009)577, 30 April.

119 The Directive will not apply to AIFM managing portfolios of AIF with less than 100m EUR of assets or of lessthan 500m EUR, in case of AIFM managing only AIF which are not leveraged and which do not grantinvestors redemption rights during a period of five years following the date of constitution of each AIF.

Tasks and responsibilitiesof depositaries should befurther aligned.

Key messages

n ESBG welcomes the discussion on the topic of alternative investment funds, in particular hedge funds.n After a preliminary assessment of the Commission proposal, ESBG is concerned about a number of vague

elements, in particular regarding the scope of “non-UCITS”.n Furthermore ESBG is concerned about the heavy burden put on the depositary banks.

121

ESBG views

From the beginning of the discussions ESBG welcomed the Commission’s decision totackle the issue of hedge funds. ESBG recommended coordination at an internationallevel (through the International Organisation of Securities Commissions / IOSCO) whilerecognizing the necessity for a leading role of the EU.

With regard to the Commission proposal for a Directive, ESBG notes that the focus hasbeen expanded to cover all non-UCITS funds. At the same time, the Commission ismoving away from the traditional products approach and puts the focus on the fundmanagers. ESBG regrets this policy change, since the product approach has provedsuccessful in many cases.

ESBG is currently analyzing the impact of the proposal to significantly broaden scope bycovering all “non-UCITS”. Also to be looked at are the responsibilities and liabilities of thedepositary; in this regard clarification and reconsideration might be necessary.Finally, ESBG reflects upon the implications for managers selling products to retail andprofessional clients, such as a double or triple authorization and compliance under UCITS,AIFM and eventually national rules.

Referring to the discussions held in the past on open-ended real estate funds (OEREFs)120,ESBG notes that the proposal for a Directive on AIFM includes such products, whilelimiting their cross-border sale to professional investors. This approach conflicts to someextent with the Expert Group recommendation to create an EU framework for OEREFsand to facilitate their cross-border distribution to retail investors. ESBG is of the opinionthat it would be worth giving renewed consideration to this recommendation at a laterpoint in time.

6.3. Packaged retail investment products

Background

Since 2007 the European Commission has been analysing the impact of the fragmentedregulatory landscape for retail investment products on the protection of retail investorsand on the level-playing field at the EU level between the different product categories.

120 From June 2007 to March 2008 an expert group set up by the Commission assessed the opportunity of aEuropean approach for OEREF. The expert group recommended the creation of an EU regime for OEREF inorder to facilitate their cross-border offer to retail consumers. Looking at the possible ways to achieve such an EUregime, the expert group recommended to either modify the UCITS Directive or to create a standalone Directive.

A number of issues stillneed to be discussed

and reconsidered.

Key messages

n ESBG is open for discussions on how a framework for all packaged retail investment products could workin practice.

n The discussions need in particular to focus on the questions of scope (i.e. which products shall be captured)and degree of flexibility (i.e. how rules can be sufficiently flexible to be suitable to the different products).

122

121 European Commission. 2009. Communication from the Commission to the European Parliament andthe Council. Packaged Retail Investment Products [COM(2009) 204 final], SEC(2009) 556 SEC(2009) 557,30 April.

Legal clarity needs to beprovided.

123

In April 2009 the Commission released its Communication on this issue121, opting for ahorizontal approach to both mandatory disclosures and selling practices for all packagedretail investment products. Based on the Commission’s Communication ‘packaged retailinvestment products’ include (for example) investment or mutual funds, unit-linked lifeinsurance policies, retail structured securities and structured term deposits (the list ofexamples is neither static nor exhaustive). The Commission’s plan is to use UCITS KeyInvestor Disclosure and MiFID as benchmarks for the areas of disclosure and sellingpractises respectively.

ESBG views

During the discussions taking course in 2007 ESBG stressed that its member banks couldnot identify any sign of market failure and that the substitutability among certainproducts effectively depends on the clients’ needs and objectives. Since then discussionshave progressed, with the focus shifting from substitutability to a more generalizedapproach on retail investment products.

Given that the Commission is expected to present detailed orientations on the form andcontent of future legislative measures by end of 2009, ESBG’s comments are at this pointonly preliminary. ESBG is open for a dialogue on how to improve selling and disclosurepractices for all packaged retail investment products. In this context, it is crucial that theterm “packaged retail investment product” be clearly defined. Only on that basis will itbe possible to find a framework which can capture all these products. In any case,the rules need to be sufficiently flexible to be suitable to all concerned products, withoutharming functioning business activities. A good implementation of a future frameworkcould provide legal certainty, clear selling and distribution practices and promotion of ahigh level of investor protection.

122 European Commission. 2007. Green Paper on Retail Financial Services [COM(2007) 226 final, 30 April,p. 6; European Commission.2008. Special Eurobarometer 298. Consumer Protection in the Internal Market,Fieldwork February – March 2008. Publication October 2008, p. 120.

123 European Commission.2008. Special Eurobarometer 298. Consumer Protection in the Internal Market,Fieldwork February – March 2008. Publication October 2008, p.125-126.

7. CONSUMER POLICY IN THE AREAOF RETAIL FINANCIAL SERVICES

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Setting the scene: the European approach to consumer protection

In recent years, European policy makers have shown a distinct desire to put the consumerat the centre of designated policy initiatives. Consumer protection has become acornerstone of European retail financial services policy. The initiatives and proposals bythe European Commission in this area are focused on assisting consumers in makinggood financial decisions, giving them the freedom to select the products that best suittheir needs, and ensuring that they are offered a high level of protection.

In addition, the Commission believes that although advances in technology make it mucheasier to buy financial services across borders, consumers are still reluctant to purchasefinancial products from countries other than their own.122 Recent studies 123 have shownthat this reluctance is mainly due to language and cultural barriers, and to a lack ofconfidence in foreign financial regimes. In this respect, the Commission’s initiatives seekto raise consumer confidence through information and education and to increasecompetition in the Internal Market.

As described in Part 2 of this report, despite the new opportunities for businesses andconsumers through the technological advances like the Internet, most people still preferface-to-face communication when it comes to financial service providers. Retail bankingservices are in principal locally orientated. Moreover, as decentralised financial institutionswith local and regional ties and a wide-stretching network of branches, savings bankshave kept a focus on proximity banking and thus often hold a long-standing relationshipwith their clients.

Hence, the European consumer policy in retail financial services should focus on financialeducation and efficient information to foster consumer confidence in the short term andon the convergence in consumer protection at the EU level in the long term.

Consumer confidence

Consumer confidence and the consumers’ ability to decide upon comprehensive informationare key for any commercial transaction. These issues are paramount when it comes tofinancial services. Nowadays, European consumers are living a moment of weakconfidence due to turbulence in the global financial markets. Moreover, in times ofglobalization new opportunities in terms of new financial products, new instruments andnew technologies became available posing new challenges for the consumers such asunderstanding the risks associated with complex products. This is the main lesson learntas the current crisis in the banking sector has led people to question the stability andreliability of the banking sector.

120 From June 2007 to March 2008 an expert group set up by the Commission assessed the opportunity of aEuropean approach for OEREF. The expert group recommended the creation of an EU regime for OEREF inorder to facilitate their cross-border offer to retail consumers. Looking at the possible ways to achieve such an EUregime, the expert group recommended to either modify the UCITS Directive or to create a standalone Directive.

Advice can not bestandardised and always

needs to be determined ona case-by-case basis.

126

Beyond that, consumers’ lack of confidence in financial services is often caused bydetrimental personal, family and friends’ experiences as well as negative media releases.This explains why financial firms need to be aware that dissatisfaction with one part ofthe industry can taint consumers’ views of the industry as a whole, whether or not it isjustified.

A permanent dialogue between the credit industry and consumer organisations isnecessary in order to resolve consumer complaints, address consumer demand forinformation and advice in a satisfactory way and regain consumer confidence. Savingsbanks serve this demand as they are institutions which are close to consumers and havea solid and long-term business philosophy.

Information and advice

Information and advice are two of the most important topics in the relationship betweenconsumers and banks. The financial markets depend on the ability of consumers to play theirrole by making customised choices between different products which are based on theinformation acquired beforehand. Thus, it is important for the banking industry that consumersare conscious of their own financial needs and abilities and decide based upon this.

Regarding information, in retail financial services the distinction between pre-contractualand contractual information – depending on the phase of the financial transaction – hasto be made. The quality and quantity of the types of information provided to consumersraise additional questions. The information which financial institutions are required toprovide to consumers should be strictly limited to that which the consumer actually readsand needs in order to understand the product. So far, this limitation of informationrequirements to the real needs of consumers has not been achieved, and a rigorousassessment is therefore necessary. Thus, ESBG members strongly encourage focusing onincreasing the quality of information rather than the quantity. To avoid informationoverload or possible information gaps, the approach towards consumer information must becoherent in all EU legislation and the political objectives have to be coordinated at all times.

Advice is another important factor in the relationship between consumers and banks buthas to be clearly distinguished from information. While financial institutions should fullyand appropriately inform consumers, the final decision to opt for a specific financialproduct should be made by that consumer, based on his or her own needs andcircumstances. Providing professional advice is a separate service and should remain atthe disposal of the consumer. Moreover, advice cannot be standardised and always needsto be determined on a case-by-case basis. The introduction of an obligation to advisewould be detrimental for those consumers who would have to pay for a service whichthey do not need and/or did not request. Furthermore, the advice given must be objectiveand based on the consumer's profile considering the complexity of the offered productsand the risks associated with them.

7.1. Consumer credit

Background

After more than six years of negotiations, the Council approved the changes made by theEuropean Parliament and enabled the final adoption of the Consumer Credit Directive(CCD)124 in April 2008. An impact assessment on the CDD was not conducted by theCommission. Although at a later stage an impact assessment was carried out uponrequest of the European Parliament, this was not taken into account in the discussions atthe Council level.

The previous Directive (87/102/EC)125 in this area was based on minimum harmonisation.Most Member States have gone beyond the requirements and created a patchwork ofdifferent rules across the 27 EU Member States. The new Directive (2008/48/EC) onConsumer Credit,126 with the objective of full harmonisation, aims to grant consumersan appropriate degree of protection when taking out consumer credit. The regulationwas designed to ensure this objective by providing consumers with standard andcomparable information on advertising, adequate pre-contractual information,information on an annual percentage rate of charge (APRC) and generally high qualitycontractual information.

The Directive also introduced two fundamental rights for consumers. First, the right ofwithdrawal allows consumers to withdraw within a period of 14 calendar days from thecredit without giving any reason and without any charge.127 Second, the CCD confirmsthe right to repay early at any time.128 Standards are set on the compensation creditorsare entitled to claim in case of an early repayment129 in order to make it easier for consumersto refinance their loan. This also lowers market entry barriers for lending institutions.

124 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,OJ L133, 23.04.2008.

125 Council Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions ofthe Member States concerning consumer credit, OJ 042 , 12.02.1987, see p. 48 – 53.

126 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,OJ L133, 23.04.2008. See for specific details Recital 9, cf. insofar as it contains harmonised provisions.

127 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,OJ L133, 23.04.2008. See for specific details Article 14.

128 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,OJ L133, 23.04.2008. See for specific details Article 16.

129 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers, OJ L133, 23.04.2008. See for specific details Article 16(2).

Key messages

n Various concerns of the financial industry regarding the provisions for over-drafting, pre-contractualinformation, the definition of the annual percentage rate of charge, early repayment and the right ofwithdrawal have not been addressed in the Consumer Credit Directive.

n The current regime of the Consumer Credit Directive prolongs the handling of consumer credit, imposesadditional administrative burdens on financial institutions, increases their costs and as a result causes a delayin the implementation at the Member State level.

127

Consumer Credit Directivestill needs clarifications.

National transposition hasto account for the specific

needs of financialinstitutions.

Information requirementsin the Consumer Credit

Directive are by fartoo extensive.

New bureaucratic burdenis created for credit

institutions and consumers.

130 The European Commission DG SANCO launched a study on the establishment of a benchmark on theeconomic impact of the CCD on the functioning of the internal market in the consumer credit sector and onthe level of consumer protection. The final report is expected by the end of 2009.

131 A final report can be expected in the course of 2009.132 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers,

OJ L133, 23.04.2008. See for specific details Article 5(6).

128

During the implementation and transposition process of the CCD in the Member States,the banking industry raised general concerns on the implementation of the CCD (e.g.adequate time for lenders to implement technical provisions, etc.) and specific concernsrelated to the interpretation of a selection of provisions of the Directive (e.g. definition ofnon-discriminatory access to credit databases, clarifications on advertising provisions, etc.).

In this regard, the European Commission Directorate General Health and Consumers(DG SANCO) commissioned several studies.130 In particular, the study on the calculationof APRC launched in April 2009 should be highlighted as giving concrete examples anda calculation formula for a harmonised APRC.131

ESBG views

During the discussions held in past years, ESBG presented proposals to address theproblems identified in the revised Consumer Credit Directive, such as the provisionsrelating to overdrafts, pre-contractual information, the definition of APRC, early repaymentand the right of withdrawal. Another controversial issue was the lack of an impactassessment, for which ESBG has continuously advocated.

While recognising the progress made with the revised CCD proposal compared to theoriginal proposal tabled by the Commission in 2002, ESBG believes that the implementationof the Directive will be expensive and enormously slow down the handling of these typesof credits. Moreover, delays of implementation are expected, as certain areas still awaitclarification including APRC, the notion of ‘adequate explanation’ in Article 5 (6)132 andthe definition of creditworthiness/ability to pay.

In addition, some provisions leave flexibility to Member States. This means that theindustry will have had to commit to information technology changes without regulatorycertainty. Therefore, it is of paramount importance that the national authorities take thespecific needs of the financial institutions into account when transposing the Directiveinto national law.

In more concrete terms, the treatment of pre-contractual information in Article 5 of theCCD will certainly be a major issue. Banks will have to extensively redraft informationsheets and brochures in order to adapt the existing credit forms to the new legalrequirements. The implementation of the Directive confirms the concerns expressedrepeatedly during the adoption process that the information requirements are by far tooextensive and therefore not suitable to help consumers to understand the credit offer orcompare different offers.

The new CCD provisions create an enormous bureaucratic burden for both creditinstitutions and consumers. Thus ESBG remains concerned about the ability of theDirective to fulfil its objectives, namely to increase consumer confidence and consumercredit activities in the EU.

7.2. Mortgage credit

Background

In recent years, discussions have been ongoing to address some aspects of mortgagecredit at the European level. In March 2003, the European Commission set up a ForumGroup on Mortgage Credit with a mandate to identify the barriers to the functioning ofthe Internal Market for mortgage credit.133 In parallel, the Commission launched aresearch project on the costs and benefits of further integration of the EU mortgagecredit market.

In early 2005, the Commission established the Government Expert Group on MortgageCredit to provide advice on its mortgage credit policy. In the same year, the Commissionpublished its Green Paper on Mortgage Credit134 launching a consultation process.After the Green Paper consultation, in 2006 the Commission decided to create two newad-hoc working groups. One of these working groups focused on funding – theMortgage Funding Expert Group (MFEG)135 – and the other focused on consumer issues– the Mortgage Industry and Consumer Expert Group (MICEG).136 Consumers andindustry representatives alike considered the dialogue a constructive and positive debate.

133 For more information see European Commission. 2004. The Integration of EU Mortgage Credit Markets.Report by the Forum Group on Mortgage Credit. [http://ec.europa.eu/internal_market/finservices-retail/docs/home-loans/2004-report-integration_en.pdf ]. Accessed June 2009.

134 European Commission. 2005. Green Paper on Mortgage Credit in the EU [COM (2005) 327 final], 19.7.2005.135 For more information see European Commission. 2006. Terms of References. Mortgage Funding Expert Group.

[http://ec.europa.eu/internal_market/finservices-retail/docs/home-loans/mfeg/tor-en.pdf]. Accessed June 2009.136 For more information see European Commission. 2006. Terms of References. Mortgage Industry and Consumer

Expert Group. [http://ec.europa.eu/internal_market/finservices-retail/docs/home-loans/miceg/tor-en.pdf].Accessed June 2009.

Key messages

n The initiatives of the Commission to assess possible future developments in the area of mortgage credit arewelcome steps forward.

n ESBG appreciates the current well-functioning self-binding European Standardised Information Sheet (ESIS)and welcomes a revised version aligned with consumers’ needs.

n In future regulatory developments a narrow method of calculating the APRC specific to mortgage creditshould be favored.

n Early repayments should be a contractual option in all Member States.n There is a need to adapt the recommendation on property valuation and use of valuation methodologies to

national market specificities.n A legal obligation to consult credit registers will raise key issues, such as liability for wrong information,

sufficiency and appropriateness of contents of credit registers, and different negative or positive criteria ofcredit registers.

n Responsible lending and borrowing should achieve a fair spread of responsibilities between consumers andlending institutions.

129

137 European Commission. 2007. White paper on the integration of EU mortgage credit markets [COM(2007)807 final], SEC(2007) 1683 SEC(2007) 1684, 18 December.

138 Commission Recommendation 2001/193/EC of 1 March 2001 on pre-contractual information to be given toconsumers by lenders offering home loans, C(2001) 477), OJ L 069, 10.03.2001.

139 For more information see European Commission. 2009. Mortgage Credit. Studies. Brussels[http://ec.europa.eu/internal_market/finservices-retail/credit/mortgage_en.htm#studies]. Accessed June 2009.

140 For more information see European Commission. 2009. DG Internal Market and Services Study on CreditIntermediaries in the Internal Market. Final Report by Europe Economics. [http://ec.europa.eu/internal_market/finservices-retail/docs/credit/credit_intermediaries_report_en.pdf]. Accessed June 2009.

130

Both reports of the Expert Groups were published at the beginning of 2007 andconsidered by the European Commission when drafting its White Paper on MortgageCredit137 launched in December 2007. The White Paper did not propose any concretelegislative measure but defined four objectives in the area of mortgage credit:

1) Obstacles to cross-border provision of both funding and supply of mortgage credithave to be reduced.

2) Product diversity has to increase, in part also based on greater cross-border supply.3) Consumer confidence should be improved. 4) Consumer mobility needs to be promoted in order to facilitate the switching of

mortgage lenders and encourage customers to actively search for the best offersoutside local markets.

In order to achieve those objectives, the Commission announced several initiatives and in2008 launched studies in the following areas (i) the revision of the current EuropeanStandardised Information Sheet (ESIS), (ii) a study on the costs and benefits of thedifferent policy options for mortgage, (iii) credit credit intermediaries, (iv) landregistration, property valuation and foreclosure procedures, (v) non-credit institutions and(vi) equity release schemes. All the studies mentioned are being carried out by externalconsultancies and the results are due to be published in 2009.

For the revision of the ESIS, the Commission is carrying out a consumer testing of thecurrent ESIS in order to check the effectiveness of different options in conveying theintended message to consumers when providing pre-contractual information. This formatprovides pre-contractual information to consumers as established by the Code ofConduct on home loans agreed by the industry in 2001.138 The Commission believes thatthere are some inefficiencies in the current application of the ESIS. Against thisbackground, the Commission mentioned its considerations to keep either the currentnon-binding form of the ESIS, via the Code of Conduct on home loans, or to convert itinto binding legislation.

Certain policy areas of the study on a revised ESIS have been supplementary addressed inthe Commission study on costs and benefits of different policy options for mortgagecredit. The latter study analyses the current legal and regulatory requirements in fourpolicy areas, such as pre-contractual information, APRC, responsible lending andearly repayment.139

Through the study on credit intermediaries, the Commission is gathering informationon whether the current legislative framework is sufficient and if consumers face anyparticular problems in dealing with credit intermediaries, especially on a cross-border basis.The final report of the contractor, released in May 2009, stated that credit intermediariesare beneficial to consumers and lenders. Following the report, the regulatory frameworkfor credit intermediaries varies significantly by Member State and credit product.However, the report has given credit intermediaries only a limited role to overcomepotential barriers in cross-border trade of retail financial services.140

141 European Commission. 2007. White paper on the integration of EU mortgage credit markets [COM(2007)807 final], SEC(2007) 1683 SEC(2007) 1684, 18 December, p. 8.

142 For more information see European Commission. 2009. Mortgage Credit. Archives. Brussels [http://ec.europa.eu/internal_market/finservices-retail/credit/mortgage_en.htm#archives]. Accessed June 2009.

143 For more information see European Commission. 2009. Study on Equity Release Schemes in the EU. Part 1:General Report. By Institut für Finanazdienstleistungen e.V. [http://ec.europa.eu/internal_market/finservices-retail/docs/credit/equity_release_part1_en.pdf]. Accessed June 2009.

144 Commission Decision 2008/542/EC of 13 June 2008 setting up an Expert Group on Credit Histories, OJ L 173,3.7.2008, p. 22–24.

145 European Commission. 2009. Communication for the Spring European Council. Driving European recovery.Volume 1 [COM (2009) 114 final], 4.3.2009; European Commission. 2009. Communication for the SpringEuropean Council. Driving European recovery. Volume 2: Annexes [COM (2009) 114 final], 4.3.2009.

131

With regards to the study on land registration, property valuation and foreclosureprocedures, in 2008 the Commission issued a Draft Recommendation in order to reducetime for foreclosure and registration procedures, to facilitate the use of foreign valuationreports, and to promote the development and use of reliable valuation standards.141

Aiming to review the role and regulation of non-credit institutions in the Europeanmortgage markets, the respective study assesses whether appropriate action at theCommunity level is needed.142

The study on equity release schemes provides an overview of different equity releaseschemes currently available across the Member States. However, it does not reach anypolicy conclusions in its final report.143

Another Commission intention in the area of mortgage credit was to identify any obstaclesto the access to and exchange of credit data for the development of cross-bordermortgage credits. The Commission was seeking advice on how to address these whilstensuring a high level of consumer protection. Therefore, it established an Expert Groupon Credit Histories in 2008.144 The Expert Group’s final report was published in June 2009and the Commission is consulting the financial industry before drawing any conclusions.

At the beginning of March 2009, the Commission published its Communication on“Driving European Recovery”145 announcing the release of a package on responsiblelending and borrowing in autumn 2009. This initiative has a broad approach andtherefore, all studies conducted so far will most likely feed into the package onresponsible lending and borrowing in autumn 2009. On 15 June 2009, the Commissionallowed a first look at the potential content through its consultation on “Responsiblelending and borrowing in the EU”. Building on previous consultations, studies and policydevelopments especially in the area of mortgage credit, the aim of the consultation is togather information on outstanding issues and to deepen the Commission services’understanding. The Commission is seeking information on business practices prior to andin the context of lending transactions, on responsible borrowing, and on creditintermediaries. In more detail, the consultation addresses issues of advertising andmarketing requirements, pre-contractual information, risk guidance, product suitability,creditworthiness checks, advice standards and credit intermediaries.

ESBG views

The approach taken by the Commission to assess open questions and possible futuredevelopments via impact assessments and consultation is a clear commitment to theBetter Regulation principle. Another achievement is the dialogue through the establishedworking groups like the Mortgage Industry and Consumer Expert Group (MICEG) andMortgage Funding Expert Group (MFEG), which could serve as a precedent to organisemore direct open dialogues between consumers and industry representatives.

The Code of Conduct shouldmaintain its voluntary natureas a self-regulatory measure.

ESBG favours a narrowdefinition of the APRC

specific tomortgage credit.

Early repayment should bea contractual option.

Requirements for creditintermediaries should be in

line with those for creditproviders.

A single EU standard forvaluation methodologies

neglects national, regional &local market specificities.

146 For more information see European Commission. 2009. Code of Conduct. Brussels [http://ec.europa.eu/internal_market/finservices-retail/home-loans/code_en.htm]. Accessed June 2009.

147 The Code of Conduct on home loans was not signed by Spain.

132

Furthermore, any action at the European level in the area of mortgages has to demonstratethe potential benefits for both consumers and the industry alike, – in particular in light ofthe current crisis.

At present, one of ESBG’s major concerns is the revision of the European StandardisedInformation Sheet (ESIS). The financial industry fears that with the revision of the ESIS, theCommission has in mind to introduce mandatory rules such as regulation in the form ofa Directive following the model of the CCD (Consumer Credit Directive – see Part 3,Section 2.1). To emphasise the well-functioning of current self-regulatory regime,the financial industry already provided the Commission with a 3rd Progress report146 onthe implementation of the Code of Conduct. In particular, the situation in the UK andSpain147 has to be highlighted where pre-contractual information is also provided – thoughnot using the ESIS format. The industry is also in favour of revising and updating the Codeof Conduct. However, it should maintain its voluntary nature as a self-regulatory measure.

In addition to the issue of pre-contractual information, ESBG members are also concernedabout the method of calculating the Annual Percentage Rate of Charge (APRC). ESBGfavours a narrow definition specific to mortgage credit. A common Annual PercentageRate of Charge with the Consumer Credit Directive could have been envisaged, but noton the basis of the broad APRC definition recently adopted in the Consumer CreditDirective, because this would not deliver comparability for mortgage products.

Early repayment should be a contractual option legally in force in all Member States. Ifconsumers do not exercise this option, they should not be obliged to pay for the costsinvolved in an anticipatory manner.

With regard to the study on credit intermediaries, EU Member States do not have thesame rules and standards regarding the regulatory regime applicable to these entities.If the Commission concludes from the final report of the study that there are insufficientcontrols in place for credit intermediation across the EU, ESBG members support theintroduction of EU regulation in this field in order to bring the requirements for creditintermediaries in line with those for credit providers.

Regarding property valuation, the industry welcomes the focus of the CommissionRecommendation on facilitating the use of foreign valuation reports and promoting thedevelopment and use of reliable valuation standards. In this context, valuationmethodologies should always reflect national, regional and even local market specificities.As such one single EU standard for valuation methodologies would be inappropriate.The Commission Recommendation is an appreciated non-binding, flexible tool which isthe best-suited instrument to drive further convergence in the areas in focus.

On access to credit registers, a legal obligation to consult credit registers is notacceptable. They often do not deliver the necessary information and questions on liabilityfor wrong information remain unresolved. Also, harmonisation of negative and/orpositive criteria is neither desirable nor feasible at this stage. Compulsory consultation ofcredit registers would not improve the correct assessment of the consumers’creditworthiness. At the same time, there should be no mandatory obligation to informthe consumer about the outcome of the register consultation in the context of mortgagecredit, as this could result in abuse. The consumer should, however, be provided with theinformation upon request.

In principle, it is promising that the Commission is approaching lenders and borrowers atthe same time as in its consultation “Responsible lending and borrowing in the EU”.Moreover, the Commission’s view that credit products should be appropriate toconsumers’ needs and tailored to their ability to repay makes sense and representsalready good banking practice in Europe. Regarding the concept of “responsible lending”the principle of assessing creditworthiness is already an obligation with which lenderscomply under supervision rules, namely the Capital Requirements Directive (CRD).148

Mixing supervision obligations with contract law and civil liability would constitute asystemic break. On top of existing CRD obligations, a legal obligation to assesscreditworthiness would not remedy legal uncertainty and would exponentially increaselitigation. Reference to good banking practice would enhance certainty.

The Commission’s perception on responsible borrowing is highly appreciated – recognizingthat consumers have a responsibility to inform themselves about offered products,provide relevant, complete and accurate information on their financial situation to lendersand take their personal as well as financial circumstances into account when makingtheir decision.

In general, responsible lending and borrowing should achieve a fair spread ofresponsibilities between consumers and lending institutions.

7.3. Distance marketing of consumer financial services

A legal obligationto consult credit registersis not acceptable.

The Commisision’s definitionof responsible lendingrepresents already goodbanking practice in Europe.

Responsible borrowing byconsumers is vital.

148 Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers, OJL133, 23.04.2008. See for specific details p.1.

Key messages

n The consumers’ preference of “face-to-face contact” offered by local providers is essential for the purchase offinancial products.

n The Directive 2002/65/EC for Distance Marketing of Consumer Financial Services contains unclear definitionsfailing to match with current banking practices.

n The extensive nature of the information requirements in Article 3 represents a bureaucratic burden.n The delay of the period for withdrawal, if information obligations have not been fulfilled, and the possibility

of a timely unlimited right of withdrawal in Article 6 could result in legal uncertainty, unnecessary costs andadditional burdens on consumers and banks.

n The Directive is not effective at encouraging consumers to buy financial services cross-border.

133

Consumers prefer“face-to-face contact”

offered by local providersover distance marketing.

Some definitionsremain unclear and fail totake into account current

banking practices.

149 Directive 2002/65/EC of the European Parliament and the Council of 23 September 2002 concerning thedistance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives97/7/EC and 98/27/EC, OJ 271, 9.10.2002. See for specific details p.16.

150 Directive 2002/65/EC is complementary to the former Directive 1997/7/EC, which did not cover financialservices. For more information see Directive 1997/7/EC of the European Parliament and the Council of20 May 1997 on the protection of consumers in respect of distance contracts, OJ L 144, 4.6.1997. See forspecific details p. 19.

151 European Commission. 2006. Communication from the Commission. Review of Directive 2002/65 of theEuropean Parliament and the Council of 23 September 2002 on the distance marketing of consumer financialservices [COM (2006) 161 final], 6.4.2006.

134

Background

In order to encourage consumers to purchase financial services via new technologies,such as internet or phone, the Commission issued regulation for these distance marketingtechniques. Aiming to enhance internet transactions of financial services across borders,the Directive 2002/65/EC for Distance Marketing of Consumer Financial Services,149 inforce since 9 October 2002, is covering contracts for retail financial services which arenegotiated at a distance.150 The Directive had to be transposed by 9 October 2004 at thelatest and provides consumer protection provisions for financial services such as (i) rightof reflection, (ii) right of withdrawal and reimbursement, and (iii) the requirement toprovide contractual terms in writing beforehand.

On 6 April 2006, the Commission launched a Communication151 informing the EuropeanParliament and the Council that the implementation of the Directive had been delayed inmany Member States. As a result, a review of the application and operation of thetransposed provisions in the Member States, as foreseen by Art. 20 of the Directive, couldnot be carried out. In March 2007, DG SANCO disclosed its intention to start the revisionof the Directive through the organisation of workshops and studies on its positive and/ornegative impacts. Given the delay and difficulties of the Directive’s transposition,the Commission launched two studies on the functioning of the Directive, addressing thelegal as well as the economic impact. Both studies will be used to produce a comprehensiveCommission review of the implementation of the Directive over the course of 2009.

ESBG views

ESBG generally supports the efforts to enhance the functioning of the internal market forconsumer activities. Nevertheless, for an enhanced purchase of financial productsvia distance communication tools the consumers’ preference of “face-to-face contact”offered by local providers is a key issue.

In addition, ESBG has identified some priorities with regards to the implementation of theDistance Marketing of Financial Services Directive. Some definitions remain unclear andfail to take into account current banking practices. Moreover, inconsistencies arisebetween Directive 2002/65/EC on Distance Marketing of Consumer Financial Services andDirective 1997/7/EC on Distance Selling (e.g. as concerns the right of withdrawal and theprovision of information). Another issue is the extensive nature of the informationrequirements in Art. 3 of the Directive. In Art. 6 of the Directive, the delay of the periodfor withdrawal asserts that if the information obligations of the financial service providerhave not been duly fulfilled or in due time the consumer’s right of withdrawal changesto be unlimited in time. This rule could result in legal uncertainty, unnecessary costs andadditional burdens on consumers and banks.

Finally, the anti-money laundering legislation constitutes a barrier to all forms of distancemarketing since it is very difficult to comply with the legislation without some face-to-faceinteraction with the customer – especially when conducting distance marketing cross-border.

Overall, the very formal and overall burdensome provisions for distance marketing do notencourage consumers to buy financial services via distance communication tools.

7.4. Consumer redress

Background

In mid-2007, the European Commission announced its intention to evaluate the systemsof redress mechanisms in Europe and the ways in which they could be improved. It wasstressed that before taking any measure, the Commission aimed to gather moreinformation and feedback from the Member States, the European Parliament andstakeholders. This opened the door to an increasing interest in discussions on consumerredress mechanisms. The Commission decided to include this issue as a priority in theagenda with different Directorates General working in parallel on the matter.

White Paper on Damages Action for breach of antitrust rules

In April 2008, DG COMP published a White Paper on Damages Actions for breach ofthe EC antitrust rules.152 The White Paper presented a set of recommendations to ensurethat victims of competition law infringements have access to effective mechanisms forclaiming full compensation for the harm they have suffered. These recommendations aimto offer a solution to the current compensation systems in place. The White Paper’s keyrecommendations cover collective redress, disclosure of evidence and the effect of finaldecisions of competition authorities in subsequent damages actions.

In September 2008, the European Parliament (EP) began discussing the White Paper andadopted it in March 2009. The most debated issues had been the question of a sufficientlegal basis, the primacy of public antitrust enforcement, and the possibility of a horizontalmeasure for collective redress instead of a sector-specific solution. In the following, a firstdraft legislative proposal for a Directive arose from DG COMP at the end of March 2009.It differed from the EP’s views by leaning towards U.S.-style class actions and therefore,another legislative proposal of the Commission is now expected in the course of 2009.

152 European Commission. 2008. White Paper on Damages action for breach of the EC antitrust rules [COM(2008) 165 final] SEC(2008) 404 SEC(2008) 405 SEC(2008) 406, 2 April.

Key messages

n ESBG supports the Commission’s initiative to reinforce the provisions of effective and efficient disputeresolution and redress mechanisms for consumers.

n There is a need for the further assessment of existing redress and alternative dispute resolution systems atMember State level.

n There is a lack of a legal basis and a need to comply with the subsidiarity principle for further actions in this field.n In case of EU action, the correct balance needs to be struck between consumer rights and avoiding a US-style

litigation culture.n With regard to the experience in practice of its members, ESBG strongly favours out-of-court settlement

procedures.

135

Existing redress & disputeresolution schemes at

national level needfurther assessment.

Future measures should notcreate an imbalance between

consumers’ rights andbanks’ business.

153 European Commission. 2008. Green Paper On Consumer Collective Redress [COM (2008) 794 final] 27 November.154 In addition, DG SANCO has also launched a comprehensive study on Alternative Dispute Resolution in

March 2009.

136

Green Paper on Consumer Collective Redress

In November 2008, DG SANCO published a Green Paper on Consumer CollectiveRedress153 which seeks to facilitate redress in situations where large numbers ofconsumers have been harmed by a single trader’s practice by breaching consumerprotection legislation. The Green Paper contains an evaluation of the existing consumerredress mechanisms. It concludes that the current redress situation in the EU isunsatisfactory and presents several problems. To close the identified gaps, DG SANCOpresented several options varying from cooperation between Member States to judicialcollective redress procedures in all Member States. Due to the feedback fromstakeholders, DG SANCO changed the policy options and conducted a furtherconsultation of market participants starting in May 2009. In this follow-up consultationDG SANCO leaned towards an EU-wide judicial collective redress mechanism includingcollective Alternative Dispute Resolution mechanisms.

Consultation on Alternative Dispute Resolution in the area of financial services

To further improve alternative redress mechanisms, DG MARKT launched a publicconsultation on Alternative Dispute Resolution (ADR)154 in the area of financialservices in December 2008. The Commission expressed that currently consumers andfinancial services providers will not always have the option of resolving their domestic orcross-border disputes through an ADR scheme. The objective of the consultation was toseek views on how ADR schemes in the area of financial services could be improved inthe internal market.

ESBG views

Existing redress & dispute resolution schemes at national level need further assessment.ESBG supports the Commission’s initiatives in this area in order to provide consumers witheffective and efficient redress and dispute resolutions mechanisms. However, furtherassessment is necessary of the existing redress and dispute resolution schemes at thenational level before introducing any EU legislation in the field.

ESBG has expressed its concerns about some of the Commission’s actions in this field, ascare should be taken to ensure that the future European measures do not create adisproportionate imbalance between consumers’ rights to effective redress mechanismsand the ability of businesses to function without fear of unmeritorious claims beingbrought against them. In this regard, ESBG stated the need to learn from the Americanlitigation experience and make sure that procedural reforms do not open the door tolitigation abuse in Europe. During discussions in the process, the Commission’s explicitrecognition that the aim is not to develop a lawsuit culture based on the American modelwas therefore very welcome. Against this background, a first Commission draft proposalof spring 2009 raised concerns by indicating a contrary approach. At the same time,ESBG acknowledged the increasing awareness of private enforcement in competitionmatters. ESBG believes, however, that the application of the “subsidiarity principle”should be taken into account before proposing any harmonisation of important aspectsof Member States’ procedural and tort law. Furthermore, it is a matter for national lawto provide the procedural safeguards for the exercise of consumers’ rights, in particularfor the exercise of collective actions.

Regarding ESBG views on ADR in financial services, ensuring mechanisms for effectiveconsumer dispute resolution and redress is a key issue for the savings and retail bankswhich have a long-standing tradition of providing consumers with “in-house“ complaintsdepartments. Internal complaints handling provides consumers with the opportunity toresolve their complaints directly without imposing a fee or charge for accessing or usingthese processes.

ESBG members’ experience is that consumers and businesses should first attempt toresolve their disputes directly before seeking recourse through third-party mechanisms.Having said that, ESBG welcomes the Commission initiative examining the problems thatconsumers face in obtaining effective redress. ESBG is strongly in favour of out-of-courtsettlements. In this context, it is worthy to mention the existence of FIN-NET155,a network of national out-of-court complaint schemes dealing exclusively withconsumer’s disputes in the area of cross-border financial services. Most of ESBG membersparticipate in the FIN-NET network through their respective national contact points.Therefore, in this area the work should be focused on promoting existing out-of-courtsettlements rather than establishing new ones.

7.5. European contract law

Background

In its Action Plan on European contract law of 2003156, the European Commissionannounced that it would examine whether problems in the European contract law areamay require non sector- specific solutions such as an optional instrument.

The Commission established a long-term project, the Common Frame of Reference (CFR),which aims to provide the European Legislators (Commission, Council and EuropeanParliament) with a "toolbox" or a handbook to be used for the revision of existing andthe preparation of new legislation in the area of contract law. This toolbox could containfundamental principles of contract law, definitions of key concepts and model provisions.

155 For more information see European Commission. 2009. FIN-NET. Financial Dispute Resolution Network.[http://ec.europa.eu/internal_market/fin-net/docs_en.htm]. Accessed in June 2009.

156 European Commission. 2003. Communication to the European Parliament and the Council. A more CoherentEuropean Contract Law. An Action Plan [COM (2003) 68 final], 12 February.

Key messages

n ESBG in principle supports the initiative of a handbook to achieve a coherent and consistent Europeanlegislative framework.

n The Draft Common Frame of Reference is not practicable because of the lack of consideration of the input ofstakeholders provided by the CFR-Net.

n ESBG calls for an open exchange of views and an appropriate impact assessment.n ESBG is concerned about the legal basis for the Common Frame of Reference and indicates that it shall be

limited to subjects relevant to the Single Market.

Alternative DisputeResolution has a long-standing traditionin financial services.

Existing out-of-courtsettlements should bepromoted rather thanestablishing new ones.

137

It is important to achievea coherent and consistent

European legislativeframework.

The legal basis orits creation for such

an optional instrumenthas to be questioned.

The final outcome of thisinitiative is not reflecting the

practitioner’s point of view.

157 Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group). 2009.Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference(DCFR). Outline Edition, Munich [http://webh01.ua.ac.be/storme/2009_02_DCFR_OutlineEdition.pdf].Accessed June 2009.

138

After several years of work, in April 2008 the Study Group on a European Civil Code andthe European Research Group on Existing EC Private Law officially launched the Draft ofa Common Frame of Reference (DCFR).157 The Draft contains “Principles, Definitions andModel Rules of European Private Law” in an interim outline edition. One purpose of thetext is to serve as a model for drawing up a ‘political’ Common Frame of Reference (CFR).Nevertheless, the Commission has stated several times that if a CFR emerges, it wouldnot necessarily have the same coverage and content as the DCFR.

The Commission has informed about its intentions regarding the DCFR stating that it willmake a selection from the work of the two groups. Such a selection process should takeplace during summer 2009. All the interested parties – the EP working group,the Council, the researchers and the CFR-Net experts – would be consulted on the resultof this process. The consultative document is scheduled to be released in the summer of2009. However, the Commission did not explain how such a selection would preserve theconsistency of the final result and has been criticised throughout the discussions by themembers of the two groups. They feared that a “cherry-picking” by just taking overcertain parts and rules from the DCFR would undermine the logic and structure of thewhole work done so far.

The legal basis and the content had been discussed under the Czech presidency and willbe continued under the Swedish presidency of the EU in the second half of 2009.

ESBG views

As member of the CFR-Net, ESBG actively follows the debate on European Contract Lawand generally supports this initiative. However, it is important to achieve a coherent andconsistent European legislative framework and there are some concerns regarding thefollowing issues:

ESBG would like to draw attention to the question regarding the creation of a legal basisfor such an optional instrument. The EC Treaty neither provides a specific competence tocreate private law instruments, nor does it provide any general competence to harmonizeprivate law. Any future optional instrument will have to be limited to rules on the subjectsthat are particularly relevant to the Internal Market.

The overall draft structure of the CFR based on the Principles of European Contract Lawis not appropriate, as these principles are far too detailed, too academic and, all in all,too adverse to taking account of the views of stakeholders, i.e. consumers’ and industry’spositions.

ESBG regrets that the members of the two groups did not consider input and commentsprovided by the CFR-Net and hence did not modify their drafts where appropriate, so thatthe final outcome of this initiative is not reflecting the practitioner’s point of view.ESBG therefore calls for a truly open exchange of views by way of transparentconsultations which take proper account of all stakeholder groups and carrying outappropriate impact assessment, in line with the EC’s “better regulation” policy.

7.6. Consumer rights

Background

On 8 October 2008, the European Commission adopted the proposal for a Directive onConsumer Rights.158 The proposal is a result of the review of the Consumer Acquis159

which covers a number of Directives on consumer protection. The Review of theConsumer Acquis was launched in 2004 with the objective to simplify and complete theexisting regulatory framework. The overarching aim of the review was to achieve a realbusiness-to-consumer internal market. This means striking the right balance between ahigh level of consumer protection and the competitiveness of enterprises, while ensuringrespect of the principle of subsidiarity.

The Directives under review contain minimum harmonisation clauses meaning thatMember States may maintain or adopt stricter consumer protection rules. Member Stateshave made extensive use of this possibility. The outcome is a fragmented regulatoryframework across the Community which causes significant compliance costs forbusinesses wishing to trade cross-border. The new proposal on Consumer Rights refers topre-contractual information, rules on delivery and passing of risk to the consumer, coolingoff periods, repairs, replacement, guarantees and unfair contractual terms.

The Consumer Rights Directive had been discussed at the European Parliament and theCouncil but further assessments have to be undertaken by the Parliament and theCommission in the course of 2009.

ESBG views

In its response to the consultation launched by the Commission in May 2007, ESBGwelcomed the Green Paper on the Review of the Consumer Acquis. It is an expression ofthe Commission’s commitment to its Better Regulation principles and the objectives ofthe Lisbon Agenda. At the same time, ESBG supported the Commission in its efforts torevise the proposed directives in order to simplify and improve the consistency of thecurrent European consumer legislation framework, to the benefit of the Single Market.Furthermore, in the response to the consultation, ESBG also pointed out that achievingthe right balance between consumer protection and industry competitiveness is ofparamount importance.

158 European Commission. 2008. Proposal for a Directive of the European Parliament and of the Council onconsumer rights [COM (2008) 614/3 final] SEC(2008) 2544 SEC(2008) 2545 SEC(2008) 2547, 8 October.

159 European Commission. 2007. Green Paper on the Review of the Consumer [COM (2006) 744 final],8 February.

Key messages

n ESBG supports the initiatives of the Commission to simplify and to make European consumer protectionlegislation consistent.

n ESBG believes that there is a need to strike the right balance between consumer protection and the industries’competitiveness.

n ESBG stresses that it is important that the Commission works towards the establishment of a coherent andconsistent regulatory framework in the areas of contract law, consumer protection and financial services inorder to provide legal certainty to both consumers and industry alike.

Achieving the right balancebetween consumerprotection and industrycompetitiveness is vital.

139

The EU should targeta coherent framework

for contract law,consumer protection &

financial services.

140

With regards to the current proposal for a Directive on Consumer Rights, althoughfinancial services are in principle outside the scope of the current proposal, some of theprovisions might be applicable in the area of financial services. ESBG is thereforeconcerned about the interaction of the proposed Directive with other legislation onconsumer protection issues which is currently under the Commission’s review – such asthe revision of the Directive on Distance Marketing of Financial Services. Other EUinitiatives will also be affected, such as the Common Frame of Reference for contract law.The Commission should work towards the establishment of a coherent and consistentregulatory framework in the areas of contract law, consumer protection and financialservices in order to provide legal certainty to both consumers and industry alike. In thisrespect, there is a need to clarify to what extent the proposal will be applicable in the areaof financial services.

Background

Retail payments are payments instructed and received by end-customers for the purchaseof goods and services, including social services and tax. End-customers can be consumers,SMEs and corporates, or public administrations and other government related entities.Such payments are either one-off or repeat instructions given to a bank by a payer toexecute to the benefit of a payee, or initiated by a payee on the basis of a mandate givenby the payer, directly or through the banking/payment institution channel. In the future– after the transposition of the Payment Services Directive161 which should theoretically takeplace by 1 November 2009 – a payment service provider could include a payment institution).

In 2009 – almost 8 years after the introduction of the physical euro, the promulgation ofRegulation 2560/2001162 on cross border payments in euro, and over a year after thelaunch of the SEPA (Single Euro Payments Area) Credit Transfer Scheme163 and the SEPACards Framework164 – the overwhelming majority of retail and commercial paymentscontinue to be payments made and received within the borders of an EU Member State.

160 Single Euro Payments Area – a project to eliminate any differentiation between national and cross borderpayments within the euro area.

161 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on paymentservices in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC andrepealing Directive 97/5/EC Text with EEA relevance, OJ L 319, 05.12.2007.

162 Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December2001on cross-border payments in euro, OJ L 344, 28.12.2001

163 European Payments Council. 2008. SEPA Credit Transfer Scheme Rulebook (EPC125-05 version 3.2),approved by the EPC Plenary on 24 June 2008, effective on 2 February 2009.

164 European Payments Council. 2006. SEPA Cards Framework Version 2 (Cards-027/05 version 2.0), approvedby the EPC Plenary on 8 March 2006.

Key messages

n The future European retail and commercial payments landscape is first and foremost shaped by political visionand legislation – rather than widely expressed customer requirements.

n The concept of regulating a function performed by market players (payment account, payment services)rather than market players on the basis of their institutional status is a major legislative innovation. Only timewill tell whether the benefits for society outweigh the risks for customer confidence and payment system stability.

n Adoption of SEPA160 payment instruments by government authorities and related entities (accounting forabout 30% of European payment transaction volume) will be an essential driver of massification, and thelogical consequence of the heavy public policy dimension of the SEPA project.

n Savings banks have since the beginning supported the SEPA project yet have constantly warned that theinterests of retail customers must be preserved both in the design of payment instruments, and in their markettransposition.

Regulators’ theory thatpricing had been the biggestobstacle to integration hasbeen defeated.

8. RETAIL PAYMENTS

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165 Produced by the ECB and provides a comprehensive description of the main payment and securitiessettlement systems in EU Member States.

166 See Statistical Annex, Part 2.167 European Payments Council. 2009. SEPA Core Direct Debit Scheme (EPC016-06 version 3.3) approved by the

EPC Plenary on 31 March 2009

The notion of “europayment” will first appear

in “border corridors.”

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Indeed most authoritative market analysts estimate that at a maximum 2% (or about1.7 billion, according to the latest ECB Blue Book165) of all retail and commercial paymenttransactions in the EU are cross-border transactions. This would be in spite of the fact thatwell-oiled channels for cross border credit transfers and payments with cards have existedfor decades, and in spite of the fact that as a consequence of Regulation 2560/2001,since mid-2003 the cost for making cross border credit transfers has been equal to thecost for making a national credit transfer – in most instances reducing that cost to zero.The regulators’ theory that pricing had been the biggest obstacle to integration has thusbeen defeated. Indeed, with a zero cost, the number of credit transfers should havebecome infinite – which it did not, by a wide margin.

This represents substantial evidence towards the reality that retail and commercialpayments remain payments made and received locally – in essence within 30 kilometresof where the payer and the payee live and/or are established. Incidentally, this is thecurrent situation in the U.S., a market which definitely has enjoyed a single currency forover two centuries, and a fair extent of harmonization as far as retail payment legislationis concerned. Indeed the vast majority of non-cash payments are payments driven by theprovision of work (i.e. salaries and wages) and work-related services (pensions, etc.), aswell as social security and similar transfers. Equally, utility payments (electricity, gas, etc.)represent a large volume of recurrent, usually non-cash payments. One should not loosetrack either of the fact that in Europe today, there are still over 300 billion cash transactionsevery year. It should be noted, however, that within the EU there are 2 “border corridors”where 150 million people live within 50 kilometres of another country’s border. It is verylikely that the notion of “euro payment” will really appear first within these corridors,where citizens will be enticed by the option of working and sourcing goods and servicesacross the nearest border, whilst maintaining their account where they reside, or shiftingit to where they work.

In addition there still are today (in mid-2009) vastly different patterns in the usage of boththe volume and the types of non-cash payment instruments across the EU MemberStates. According to the figures of the European Central Bank (ECB) Blue Book there is a20 to 1 difference between the number of per capita non-cash payment transactionsbetween the EU country using them most (Finland), and the country using them least(Romania). There are significant differences also between “large” and “small” countries– with an almost 1 to 200 gap between the smallest and the largest. Furthermore thereare completely different patterns of usage of types of non-cash instruments, with broadgroupings between countries still favouring cheques, countries favouring credit transfers,and countries favouring direct debits. Finally, the usage of cards also differs greatly,between countries where cards are used effectively for point-of-sale payments,and countries where cards are used mostly for cash withdrawals at ATMs (AutomatedTeller Machines).166

ESBG preliminary assessment

Will this situation be radically and dramatically changed with further harmonization at thelegal level (in essence, the mandatory transposition by 1 November 2009 of the PaymentsServices Directive (PSD) into national legislation) and the further deployment of the SEPAproject (in essence, the launch of the SEPA Direct Debit Schemes167)?

168 Treaty on European Union, OJ C 191, 29.07.1992. Applicable national legislation.169 European Commission. 2009. Consultation of the European Commission Internal Market and Services DG on

Possible End-Date(s) for SEPA Migration, MARKT/H3/VM D(2009), 8 June.

The Payment Services Directiveattempts to harmonizeconsumer protection andoffers 23 provisional waiversto Member States.

DG Competition will onlytake responsibility for thecross border space, makingthe effective amount ofintegration limited.

Public administrationsmust adopt SEPA to createa massification effect.

The policy maker-drivennature of SEPA is emergingever more clearly.

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This is unlikely for 2 reasons:

Firstly, the PSD is an attempt to harmonize consumer protection in the field of paymentservices, and to introduce greater competition in the provision of these services byallowing a new category of players – payment institutions – to compete with creditinstitutions. Very wisely, the PSD acknowledges the local dimension of payment services,and allows Member States to waive for no less than 23 of the provisions of the Europeantext in favour of choices made at national level. This is an endorsement by the Europeanlegislators of the continuing, predominant local dimension. Local customers will – to avery large extent – continue to enjoy the protection and convenience provided by locallegislators and providers. Of course customers either dissatisfied with, for example, thechoice available at the national level, and/or in utter need of a provider outside their placeof residence, will be able to have access to services under better known andunderstandable conditions – which is significant progress. During the elaboration of theDirective, significant concern was expressed that the intended harmonization targetwould be missed due to translation, transposition, and conflict of law issues.

Secondly, the SEPA Schemes (Credit Transfer and Direct Debit) mostly introduce bank-to-bank (or, more exactly: payment service provider to payment service provider)standardization as regards the structure and the content of the instruction and reportingmessages to be exchanged. Regarding end customer impact, all will be dictated on oneside by the PSD and its transposition, and on the other side by applicable competitionlegislation.168 As a consequence, the SEPA Schemes by themselves will have a rathermarginal impact on integration. It is interesting to note in this respect that after years ofclaiming the contrary, DG Competition recently admitted to the banking industry that itonly holds responsibility for the cross border space. Responsibility at the Member State levelcontinues to be held by national competition authorities. As a consequence, the effectiveamount of integration – beyond standardization – will be limited. Again, however, there is noindication that this would conflict with actual customer expectations and/or requirements.

The lack of massification from the biggest stakeholders, i.e. reluctant public administrationsand corporates makes investing a challenge. The lack of migration to the new schemesforces the maintenance of parallel legacy systems – a costly exercise. The large differencesin infrastructure and implementation between larger and smaller countries should not beoverlooked either as these will continue to be the cause of tension during migration– larger countries invested heavily in costly-to-implement infrastructure that give a lowper-transaction cost, whilst smaller countries need substantially less infrastructureinvestment to obtain a low per-transaction cost. Yet the value-added products that couldbe developed on top of SEPA as a means to recuperate costs could be far more limited insmaller countries than in larger ones.

These legislative and regulatory signals are compounded by the debate instigated byEuropean policy makers about the necessity for a mandatory end date for SEPAmigration169 and by the ever more open admission that SEPA is public-policy driven.At the same time these same policy makers are promoting the concept of e-SEPA– implying that any effort towards SEPA can only bear fruit if the former is achieved –thus installing a prospect of never-ending transformation of the payment landscape,with a corollary of continued European legislative and regulatory intervention.

170 European Payments Council. 2005. Crowne Plaza declaration. Brussels, 17 March 2005.171 Capgemini Consulting. 2008. SEPA: Potential Benefits at Stake - Researching the impact of SEPA on the

payments market and its stakeholders.

Is a legislativelymandated end date for SEPA

migrations avoidable?

The European Commissionsees up to EUR 123 billion inpotential benefits in a swift

migration to SEPA.

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Market participants are longing for a stable legal and regulatory environment.Only absolutely necessary legislative or regulatory initiatives should be undertaken on thebasis of wide, open, and transparent market consultations and impact assessments.

While SEPA was originally portrayed as a self-regulated project, the reality that it is apolitical and policy-maker driven initiative is increasingly becoming apparent today.Regulators’ insistence that an end date should be implemented confirms SEPA’stransformation from a market driven assumption to a regulatory driven initiative.Indeed this regulatory insistence stands in sharp contrast to EPC’s 2005 Crowne PlazaDeclaration170 which agreed that the adoption of SEPA products would be market driven.

The continued intervention of policy makers and regulators in SEPA developments, andthe significant legislative and regulatory content which is being transposed, have anchoredthe perception in the general public that SEPA is a policy maker/regulatory driveninitiative. In such a context it becomes increasingly difficult to sway customers to migrateon the basis of value propositions. Thus the setting of a mandated end date couldbecome unavoidable.

At any rate, applicable competition legislation would not allow for an end date to be setby self-regulation. Yet for regulators to set and enforce a legally sanctioned end datewould not only compel change but also cause a wide reaching ripple effect. Indeed, itcannot be ignored that an end date would change the nature of the market for paymentservices by mandating supply and enshrining commoditization, polarising attention onthe migration process and on the deadline (away from possible enhancements andinnovation), and creating additional costs (which because of legal/regulatory/ marketconstraints cannot be recouped) at the level of individual market participants byinterrupting depreciation and investment planning.

Pre-conditions for such a setting of an end date should include publicly announcingthe end date at least five years prior to taking effect in order to allow all stakeholdersconcerned to depreciate existing applications where relevant, making the end datecontingent on public administrations and related entities complying with a specific enddate which should be set mid-course in order to ensure a massification effect, and ensuringthat at national level all payment originators and collectors have become familiar with– and are using – the IBAN and BIC standards.

SEPA migration should be as short as possible to fully reap the potential benefits of theSEPA project. The study171 undertaken on behalf of the Commission published last yearestimates potential benefits for SEPA of up to EUR 123 billion over a six year period(2007–2012). On the other hand, if migration is slow, losses could amount to EUR 43billion. The effects on stakeholders are also expected to vary sharply depending on thesuccess of the uptake of SEPA. For consumers, benefits may vary from EUR 12 to EUR 129per person over the course of six years. The other stakeholders may incur benefits if SEPAis implemented quickly and comprehensively, but may loose money if this is not the case.A swift migration to the basic SEPA instruments is also essential for a successful massadoption of innovative services (i.e. e-payments, m-payments and e-invoicing), which arebased on these basic SEPA instruments.

172 European Commission and European Central Bank. 2009. Joint statement by the European Commission andthe European Central Bank clarifying certain principles underlying a future SEPA direct debit (SDD) businessmodel .SEC(2009)397, 24 March 2009.

The economic crisis hascreated a nationalisticpreference for countryaccounts and credit as well ascast more doubt over theSEPA microbusiness case.

The question of whoultimately pays for SEPAhas not been answered.

While banks see interchangeas the most efficient way torecoup cost, competitionauthorities do not, and willban it after 2011.

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In line with this rationale and assuming that a binding end date can be publicly announcedin 2010, the deadline could be set no earlier than 2015. Because of the changes requiredfor corporate accounting and processing parameters, it must be acknowledged that aSEPA migration is infinitely more complex than the migration to the euro.

An additional variable is injected by the current economic crisis. Many market players andobservers have noted that the crisis spells a return to the notion of “national” at theexpense of other objectives. For example corporates who could have been convinced bythe SEPA logic to consolidate country accounts into European ones are now keen toretain them – as well as the credit lines attached to them. Furthermore the crisis hasobviously brought business case considerations to the fore. Many have long held thatwhilst SEPA (i.e. the creation of an EU domestic payment system) is a public good initiative,the business case at micro-economic level proves far more elusive. The economic crisis willdo little to help with the micro-economic business case.

The stances of European institutions need be reconciled as a matter of urgency. The pro-integration stance of DG Markt and the ECB at times conflicts with the positions takenby DG Competition. In particular as regards payments, the question of who actually willpay for SEPA has never been answered by policy makers. The “no customer charging”approach of DG Market and ECB rests ill with the “no interbank charging” stance of DGCompetition. This and the very long response times from authorities (over 3 years in someinstances) directly affect banks’ bottom lines and capabilities.

What does this bode for the medium term?

After transposition of the PSD, a harmonised legal framework will be in place that establishesa “commodity payment account”, mandates transparency of terms and conditions atpre-contracting levels, eases the termination of contracts, and invites broader competitionby creating payment institutions. Although some may perceive them as burdensome,the consumer safeguards provided for in the PSD are justified (it should be noted that,for the purpose of this discussion, “consumer” is used interchangeably for “end user”).

Regulators should acknowledge that SEPA-related policies are redistributive betweenthose consumers who have neither the need nor intent to make or receive “cross-border”payments and the minority of European citizens who do or are interested in doing so.The recently announced MBP/interchange policy172 only compounds this distortion byforcing cross-subsidisation.

With customer protection in place, it comes as somewhat of a surprise that regulatorsnow drastically challenge the business models for the provision of payment services – atleast in the field of direct debits and payments with cards. Two and a half years afterinforming the European competition authority of its plans for the SEPA Direct DebitScheme the banking payment industry was informed that the intended defaultinterchange mechanism would not be acceptable beyond 2011 – although no significanttransaction volume is expected to be registered any earlier. Although many banks seeinterchange as the most efficient way to recoup costs, competition authorities view themas stymieing what should be a constant search for actively lowering their cost basis.

173 SEPA Direct Debit presentation by Jean-Michel Godeffroy at COGEPS, Frankfurt 16 March 2009.174 Speech by Jörgen Holmquist at Friends of Europe Roundtable on Electronic Payments and Competition in

Europe, Brussels 17 March 2009175 European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. 2922nd Meeting of the

Council of Economic and Financial Affairs, 10 February 2009. 6069/09 (Presse 32).176 ECB, SEPA High-Level Meeting Issues Note, 8 May 2009.

Regulators feel that selfregulation has not succeeded

so direct debits riskbecoming a commodity.

The banking industry hasbeen left to explain to

debtors why they will nowbe charged for direct debits.

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It strikes the casual observer that in both instances justifications provided by thecompetition authority are rooted in lessons drawn from the past, or from currentsituations in a limited number of countries, and/or for a limited number of paymentinstruments. Admittedly, there is no economic theory available that would model thetransformation over a number of years of multiple payment landscapes (each with theirdiffering sets of habits, practices and laws) into an “internal market for payments”. In theabsence of such model, to rein in (or outlaw) interchange on top of customer protectionprovided by other legislation could be read as good policy.

Regulators’ preference for direct pricing models (i.e. models where end-customers aredirectly charged for the services they buy or use) is a long term goal (not limited to directdebits, or payments) which will be difficult to reverse. Whilst direct pricing has merits, itsimplementation at the time of a major market transformation (i.e. the PSD, pan-Europeanscheme) is questionable. Authorities have not prepared public opinions for such a radicalchange, and regulators have condoned cross-subsidization for decades (e.g. for cash).Although some national competition authorities have recently inquired aboutinterchange for legacy direct debits, the ECB’s and DG Competition’s emphasis that anyposition is their’s only leads to question the breadth of support for their policy. This wouldconfirm SEPA as a top-down vision, in effect limited to cross-border. A presentation173 bythe ECB Director General for Payment Systems and Market Infrastructures on 16 Marchand a speech174 on 17 March by the Director General of DG Markt, indicate thatregulators perceive self-regulation as having failed (certainly the fact that there is a newRegulation 2560 fortifies this view). This means that direct debits will be viewed as aregulator mandated product – in effect a commodity.

A banning of interchange for direct debits (and in effect a banning of returnarrangements when the debtor is directly accountable, e.g. lack of funds – or 80% of thecases) affects up to 88% of direct debits paid in euros. In many countries it will beimpossible to charge the debtor for legal or practical reasons. In the absence ofinterchange, debtor banks will cross-subsidize the SEPA Direct Debit – to the benefit ofcreditors and creditor banks. The 10 February ECOFIN meeting175, whilst confirmingFinance Ministers’ support to the SEPA project, also re-confirmed the principle of“non-degradation” of services. This means that SEPA products may not be moreexpensive, yet not less performing, than existing national payment products – thuscreating a “perfect squeeze” for debtor banks. In addition, the ECB Issues Note176 of8 May seems to suggest that it will up to the banking industry to explain to debtors why– breaking with decade-long practice – they will be charged for paying by direct debit.This is unlikely to spur acceptance.

The above decision only provides certainty for the cross border space – i.e. 1% of thetransaction volume. In addition, the baseline (types and number of payment instrumentsused) differs vastly across Member States. All of this compounds a distortion of the levelplaying field – rather than enhancing competition.

177 See i.a. Rochet, J.-C. and J. Wright. 2009. “Credit Card Interchange Fees” (23 January 2009), as presentedat the joint ECB/ De Nederlandsche Bank Conference Retail payments: integration and innovation on25 May 2009.

178 European Commission. 2009. White Paper final by the European Commission on Professional Cross-BorderTransportation of Euro Cash by Road between Member States in the Euro Area, COM(2009) 214, 18 May 2009.

Unlike card payments thecost of cash is often ignoredor misused.

Legislation to harmonizeprofessional cross bordercash transport is necessary toreap the benefits of a trueinternal market.

147

The conditions for payment service providers to determine the nature and level ofremuneration they seek from end-customers and/or intermediaries (including each other)should be assessed by competition authorities against the new background of a large,harmonised payment area, with significant consumer protection dispositions – unlike anyother existing at the national level for the time being.

On one side the cross-subsidisation that will be induced by the competition authorities’current approach to interchange actually defeats the objectives pursued with the PSD.On the other side, whenever it would not be possible to cross-subsidise (e.g. because oflegal constraints), then the competition authorities’ current approach equates to levyinga tax on the banking sector – as SEPA is not so much a choice as a political obligation.

Whilst the cost of notably card payments is discussed openly, the cost of cash is pushedaside, or misleadingly used by competition authorities for tactics such as the “touristtest”177 that justify disputable decisions on interchange fees. Policy makers tend to ignorethat cash costs are infrastructure costs (with a significant fixed basis), which often cannotbe externalised to customers. However little progress has been made regarding therepositioning of cash in society. Whilst acknowledging that the “war on cash” campaignpromoted by some does little towards creating the necessary conditions for a usefuldialogue about repositioning, policy makers and regulators should also soon accept thatthere is more to the cash equation than operational aspects only. This must lead toacceptance that cost perceptions and the anonymity feature of cash – for both customersaccepting and disbursing cash – play a determinant role, which have to be changed forEurope to move decisively towards a digital economy.

However without convenient alternatives and cost transparency in particular for face-to-face transactions, cash in circulation still expands sharply – averaging 7% of GDP inthe EU 27 compared to 5% in the U.S., and yet little has been done to harmonize the27 national processes and conditions for distributing and recycling euro cash. Almost 8 yearsafter the introduction of the physical euro, it is still in most instances impossible forprofessional cash transports to cross a border even between 2 eurozone Member States,resulting in more risks and costs and less competition.

The renewed initiative178 from the European Commission to try and redress this situationthrough legislation which would create the conditions for cross border cash transport byprofessionals is welcomed. What the legislator should pursue is the creation of a trueinternal market for professional cash transport. Any lesser objective would lead toquestioning the policymaker’s stance on the need for SEPA and an internal market forpayments. It is suggested that to introduce greater coherence in the path towards SEPA,professional cash transportation should be included in the overall SEPA plan.Accordingly ESBG would request that in a 1st Phase, cross border cash transportation isformally allowed – as soon as possible – within “cross border corridors” spanning up to100 kms on each side of a border. In a 2nd Phase, at the latest by the end date that theEuropean Commission is currently contemplating setting for the migration of legacypayment instruments to the SEPA Credit Transfer and Direct Debit Schemes, any limitationto cross border cash transport should be lifted and a genuine internal market shouldbecome possible.

179 See i.a. Amundsen, E. and D. Kalsone. 2009. “E-Payment products and value-added services – moving towardsan innovative European internal market,” (25 March 2009), Danmarks Nationalbank Working Paper.

180 European Commission. 2009. Commission Communication to the European Parliament, the Council,the European Social and Economic Committee and the Committee of the Regions on Europe’sDigital Competitiveness Report – Main achievements of the i2010 strategy 2005-2009, COM(2009) 390,4 August 2009.

181 European Payments Council. 2009. Consultation: Draft SEPA e-Payment Framework Service Descriptionissued 4 June (EPC283-08 Version 1.0 draft 0.14). European Payments Council. 2009. Consultation: DraftSEPA e-Payments Framework e-Operating Model - High Level Definition issued 30 April 2009 (EPC084-09Version 1.0 draft 1.5).

The topics of e-SEPAare too broad to be handledunder the sole responsibility

of the banking industry.

Attributes like convenience,user friendliness and

perceived low costs havelead to a penetration rate

of 119% for mobile phonesin the EU.

148

The concept of “e-SEPA179”, as promoted by European authorities, is as yet ill-definedand ill-understood. It seems to cover domains such as e-invoicing in which banks can playa very limited role, and where there still are considerable legal hurdles to be removed forany progress to be seen. It is unwise for the banking industry to be seen as co-responsiblefor what will be – even more than SEPA – a very long and uncertain process. As to otherdimensions of “e-SEPA”, we are in effect talking about either using existing schemes overdifferent access channels, or enhancing end-to-end convenience, again for existingschemes/payment instruments, such as e-payments (online payments) and m-channel(mobile channel).

A clear distinction needs to be made between mobile and online payments on one side,which in many instances are only extensions and/or alternative channels to initiate and/orreceive classic payment instructions such as credit transfers and direct debits, ande-invoicing on the other, which represents a completely different value chain in whichbanks play a very limited role. It must furthermore be highlighted that for the foreseeableshort term future there will be limited deployment of actual m-payment solutions inEurope – simply because the massive enabling Near Field Communication (NFC)deployment – essential as in Europe m-payments will mostly be a niche application forsubstituting very, very low value cash transactions is still at least 2 years away.

There can be no dispute that the mobile phone is developing into the key interactionmedium for citizens. Any residual doubt should be dispelled by the EuropeanCommission’s Digital Competitiveness Report180 that finds the mobile penetration rate tohave reached 119% in the EU in 2008. The stellar growth in mobile phone deploymentleads mobile phones to be increasingly used either for receipt of bank statement ortransaction information, or for payment initiation, or payment execution. From the onsetthe possibilities created by mobile phones for payments and banking have been muchpromoted – as not unusual the speed of market acceptance is slower than mostpredictions. Such rapid adoption of new technology and related services certainlydemonstrates that customers have been swayed by key product attributes such as greatconvenience, user friendliness and perceived low costs.

As far as developed countries are concerned, there is consensus amongst market expertsthat the target for mobile payments will be the displacement of cash for very low valuetransactions (e.g. transactions under EUR 20). Business cases are heavily savings andtransaction price-dependent. Furthermore massive NFC deployment – expected to be akey enabler – is still two years away.

The EPC decided in December 2007 to develop an “E-Payments Framework”181, a pieceof work which is currently the subject of a consultation with all national communities.It should be confirmed that the E-Payments Framework approach is coherent withthe principles of building on international standards and defining conditions forinteroperability between existing market solutions, thus giving market participantsoptions for participation (either interlinking or migrating) which are pro-competition.

182 ICT Policy Initiatives of the European Commission presentation by Costas Andropoulos, Brussels 9 March 2009.183 Capgemini Consulting. 2008. SEPA: Potential Benefits at Stake - Researching the impact of SEPA on the

payments market and its stakeholders.184 ICT Policy Initiatives of the European Commission presentation by Costas Andropoulos, Brussels 9 March 2009.185 The EACT (European Associations of Corporate Treasurers) project CAST (Corporate Action on Standards).186 Under development by the European Commission’s Expert Group of E-Invoicing.187 Under development by the European Commission’s Expert Group of E-Invoicing.

The Commission hasacknowledged thate-invoices must be treatedon a par with paper invoices.

149

Indeed the interoperability and possibly convergence that will be triggered by theE-Payments Framework will open the market for competition between payment serviceproviders in their efforts to recruit both merchants and buyers, both choosing between arange of solutions on the basis of their features and pricing. This healthy competitionshould provide a continued incentive for further innovation – far more than a sole,co-operative or rather commodity-like approach.

As with the e-channel, the challenge is not to create a new payment instrument (e.g. aset of technical standards complemented by a rulebook), but a framework organising thelogical layers that will support the provision of mobile payment services by participants inthe payment industry, and formulating the core requirements that will ensure there isinteroperability between the multiple solutions that will develop in a competitive market.

The business case for switching from paper to e-invoicing is supported through multiplestudy results: France Case Study182 – B2B savings of EUR 40 billion (2001), CapgeminiStudy183 – EUR 238 billion over 6 years, Danish Government184 – G2B savings EUR 100-134 million/year, EACT-CAST Project185 – 80% cost saving. The Expert Group convenedin February 2008 by the European Commission is to deliver by the end of 2009 a“European Electronic Invoice Framework (EEI)186, and foster open and interoperablee-invoice services”. Work structured in three streams namely business requirements,the legal and regulatory framework, and network and standards solutions, is wellunderway. The extremely low overall penetration rate of e-invoicing in the EU is notablydue to uncertainty regarding the treatment of invoices with respect to VAT and differentperceptions as to how to guarantee authenticity and integrity of data.

In order to overcome these hurdles, the Expert Group proposed, and the Commissionacknowledged, the principle that e-invoices must be treated on a par with paper invoices.Obstacles created by diverging legal and tax practices must be overcome, and solutionsmust remain technology neutral. Furthermore the Expert Group believes that the overallprocess control framework within and between trading entities is the crucial element inorder to ensure the secure transmission and storage of e-invoices. The constantapplication of such business controls should represent the most important reassurance totax authorities that VAT processes are correct. The Expert Group also formulated an EEIModel Agreement187 which would help create a binding framework for sellers and buyersto use and accept electronic invoices (whether they deal directly with each other orthrough a service provider).

188 Financial Action Task Force (FATF-GAFI). 2009. “FATF Home”. Paris [http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html]. Accessed June 2009.

189 CouncilDirective 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for thepurpose of money laundering, OJ L 166, 28.6.1991.

9. ANTI-MONEY LAUNDERING,COUNTER TERRORIST FINANCINGAND FINANCIAL INSTITUTIONS

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Setting the scene

In order to protect the global financial system from illicit financial activities and toenhance the integrity of financial markets, the prevention of money laundering and offinancing terrorism has become a major priority in the international arena in recent years.Money laundering is not a new phenomenon. However, the new threats of the 21stcentury by terrorist attacks raise international awareness towards the problems of moneylaundering and terrorist financing. While the nature of money laundering and terroristfinancing is different, both issues are intimately linked.

Money laundering is an extremely complex process involving ever-changing financialset-ups which imitate legitimate commercial operations as closely as possible. In brief,money laundering operations include three stages:

n First, the pre-laundering or placement, where the criminal seeks to conceal anyconnections between the money and its criminal origin.

n The laundering or layering in the second stage consists of multiplying the number oftransactions in order to dilute the funds through different channels.

n In a third step, recycling or integration makes the funds available again.

Nowadays, money laundering takes place via international circuits through the use ofnew technologies and disparities between national laws.

To address these developments, already in 1989 the G-7 established an inter-governmentalbody on international level. The Financial Action Task Force (FATF) – bringing together33 states – developed and promoted policies both at national and international levels tocombat money laundering and terrorist financing.188

In Europe, the creation of the Single Market provides advantages for businesses andconsumers but also increases opportunities for money laundering and financial criminalactivities. The EU – being aware of these associated risks – has therefore adoptedlegislation to protect the financial system and prevent money laundering and thefinancing of terrorism. The first Anti-Money Laundering Directive on the prevention of theuse of the financial system for the purpose of money laundering adopted in 1991189

concentrated on drug trafficking. It obliged credit and financial institutions to identifycustomers and transactions exceeding EUR15,000, to examine any suspicious transactionpossibly related to money laundering, and to inform the authorities of any fact whichmight be an indication of money laundering. Such reporting in good faith shall notconstitute a violation of banking secrecy and must be made to specialized bodies knownas Financial Intelligence Units (FIUs).

These central national agencies are charged with analysing the information collectedfrom credit and financial institutions and, in case of serious evidence of moneylaundering, forwarding the case to prosecuting authorities.

In 2001, Directive 2001/97/EC extended the scope to a series of non-financial activities andprofessions which are vulnerable to misuse by money launderers.190 Just a few years later,the European Union adopted Directive 2005/60/EC191 on the prevention of the use of thefinancial system for the purpose of money laundering and included terrorist financing.

Moreover, in 2006 the European Commission launched an informal dialogue with thefinancial industry to exchange views on the issues in practice regarding Anti-MoneyLaundering and counter terrorist financing.

As one of the keys to prevent money laundering transactions and to reveal suspicioustransactions, knowing the person behind the relevant transaction seems to be essential.This approach is represented in the legislative measures of the Commission, which is toidentify the parties behind the transaction. In particular, non-face-to-face activitieschallenge the capacity of the existing measures to ensure appropriate identification of thecustomer, thus bearing a risk of anonymity or false identity. Especially in retail bankingwith its focus on providing locally financial services to its customers, savings bankspractice in their daily work a face-to-face relationship with their customers and maintainthis approach through a wide-spread regional network of representations. Therefore, ESBGstresses the importance of a sound and stable business-consumer relationship to counterthe risk of money laundering and terrorist financing.

ESBG welcomes all the Commissions initiatives and is actively involved. However, in orderto provide realistic expectations as to what financial institutions are able to achieve inpractice, ESBG emphasises the importance of consulting and considering financialindustries’ experiences for more effective regulatory initiatives in future.

9.1. The Third Anti-Money Laundering Directive

190 Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending CouncilDirective 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering,OJ L 344, 28.12.2001.

191 Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention ofthe use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005.

Key messages

n ESBG highlights the risk of human error when revealing the transmission if a data subject pursues his/her rightto access his/her personal data.

n Practical problems with the rule on “no tipping-off” occur, particularly when it comes to opening a basic bank account. n The provision for feedback from national Financial Intelligence Units after filing a suspicious transaction

report requires improvement.n ESBG is concerned about the obligation to identify and verify the identity of beneficial owners because of the

lack of access to sufficient and reliable information for carrying out such identification.n The Commission should develop clearer guidelines regarding the extent of measures which a bank needs to

take in order to be considered compliant with the rules on beneficial ownership.n ESBG is concerned that there is no coherent application of the treatment of Politically Exposed Persons

throughout the EU.n ESBG calls for an official EU Politically Exposed Persons list since the definition of a Politically Exposed Person

is very broad.

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194 Financial Action Task Force (FATF-GAFI). 2003. “40 Recommendations”. Paris [www.fatf-gafi.org/document/28/0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html]. Accessed June 2009.

193 Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive2005/60/EC regarding the definition of ‘politically exposed person’ and the technical criteria for simplifiedcustomer due diligence procedures and for exemption on grounds of a financial activity conducted on anoccasional or very limited basis, OJ L 214, 4.8.2006.

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Background

The Third AML Directive 2005/60/EC came into force on 15 December 2007 and aims toinclude the funding of terrorism in the definition of money laundering. It extends theapplication of the system to trusts and insurance intermediaries and introduces asimplified due diligence system as well as banning anonymous accounts. Moreover, itincorporates the 40 Recommendations of the FATF192 on anti-money laundering andcounter terrorist financing.

The Third AML Directive introduces a risk-based approach which means that banks areobliged to implement customer due diligence requirements proportionally to the concreterisks in each particular case depending on the type of customer, country,and transaction at hand. Enhanced due diligence should be carried out when there is anincreased risk. As consequence, supplementary measures have to be taken in order toverify the identification documents and to assess third-party institution's anti-moneylaundering and anti-terrorist financing controls.

Moreover, the Third AML Directive introduces more specific and detailed provisions forthe identification and verification of the customer and of the “beneficial owner”.A beneficial owner is defined as the natural person who, directly or indirectly, owns orcontrols 25% or more of the shares or of the voting rights of a legal person.The definition in the Directive covers multiple constellations even if the account holder isa legal entity.

In addition, the Third AML Directive imposes requirements, such as the applicable level ofthe due diligence, concerning the risks associated with customers who, by virtue of theirposition in public life, are vulnerable to corruption, and sets out ways for firms to dealwith such Politically Exposed Persons (PEPs). The Directive defines PEPs as “natural personswho are or have been entrusted with prominent public functions and immediate familymembers or persons known to be close associates of such persons”. Examinations of PEPswere already considered best practice but through the Third Directive this procedure hasbecome law. National PEPs are excluded from the banks’ obligations to apply enhanceddue diligence.

Moreover, any disclosure to the customers that information related to their transactionshas been transmitted to the authorities is prohibited through the Directive, the so-called“no tipping-off” rule.

In order to enhance the efficiency of AML, the Commission adopted level 2 implementingmeasures193 to the Third Directive, such as a definition of what should be understood bythe term PEP, technical criteria allowing simplified due diligence, and technical criteria toexclude persons or entities with limited activities from the scope of the Directive.

194 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection ofindividuals with regard to processing of personal data and on the free movement of such data, OJ L 281,23.11.119.

The “no tipping-off” rulecreates practical problems.

Feedback from national FIUsshould be improved.

How far do banks need to goin investigating the identity

of the beneficial owner?

The treatment ofPolitically Exposed Persons in

the EU seems incoherent.

There is a need forclarification on how far

investigations have to beundertaken.

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ESBG views

ESBG welcomes the risk-based approach, as it allows targeting efforts where they areneeded most. Regarding ESBG members’ experiences in relation to the rule on “notipping-off”, members generally seem not to experience any problems. Nevertheless,some find that safeguarding the non-disclosure of the transmission to the FinancialIntelligence Unit (FIU) requires special attention and special procedures to be taken intoaccount by staff members manually. This carries the risk of human error which wouldreveal the transmission if a data subject utilises his/her right to access his personal dataon the basis of the Privacy Directive 95/46/EC.194 Furthermore, practical problems withthe rule on “no tipping-off” do occur – particularly when it comes to opening a basicbank account.

Furthermore, as relates to the provision of feedback from their national FIUs after filing asuspicious transaction report, ESBG members as well as the industry see substantial roomfor improvement. It seems that understaffing is a problem for some FIUs and in generalit appears that there is substantial lack of feedback to the reporting bank. Moreover, thestructure and designated powers of the FIUs vary widely in the 27 Member States.

Regarding beneficial owners, ESBG is concerned about the obligation to identify andverify their identity. Identifying a beneficial owner is not always easy, in particular in caseswhere the account holder is a legal entity. In this regard, the key issue for financialinstitutions in terms of risk assessment is to understand the ownership and controlstructure of the customer. Many times, due to the lack of an official register or when thecompany is very small, financial institutions do not have access to sufficient and reliableinformation for carrying out such identification. Considering the complicated ownershipstructures of companies nowadays, the financial industry is concerned that theimplementation of the directive at the national level does not sufficiently stipulate howfar a bank must go in taking measures to decide on the beneficial owner.

ESBG doubts that there is a coherent application of the treatment of PEPs throughout theEU, as there is no official PEPs list and the definition of PEPs is very broad. In the currentsituation, the European Commission should release an official “EU PEPs list” to facilitatea coherent application of the rules. Prior to the Third AML Directive, financial institutionschecked on a voluntary basis existing commercial lists to identify “Publicly ExposedPersons”. Now, on a daily basis ESBG members encounter the problem that, because ofthe broad definition of a PEP in the Third AML Directive, the financial institution’s staffneeds to make the distinction between “Politically Exposed Persons” and “PubliclyExposed Persons”. The latter is based on a commercial list, which leads to interpretationproblems. Commercial lists therefore, can only be provided per Member State and cannot be harmonised with an EU PEPs list.

As a more general comment, the Commission should develop clearer guidelinesregarding the extent of measures which a bank needs to take in order to be consideredcompliant with the rules on beneficial ownership. It should be clarified how farinvestigations have to be undertaken, also depending on the size of the client and thelevel of risk considered to be involved in the type of business the client carries out.

9.2. Compliance at Group Level

Background

The so-called “compliance at group level” is currently being intensively discussed at theEuropean level – dealing with AML requirements for groups active in different countries.In order to identify difficulties for compliance by financial institutions with the Third AMLDirective at group level in an EU cross-border context, the Commission is thereforecarrying out a survey among banks.

One of the assumptions of the survey is that financial institutions tend to have a globalrisk management policy. The difficulties that may arise can be the result of more stringentor additional AML requirements in national legislation (gold-plating), but also as a resultof of bank secrecy rules, data protection rules or different national supervisory practices.The Commission considers that discrepancies or inconsistencies between national AMLregimes could give rise to legal uncertainty, operational problems (or operationaladvantages), and/or increased costs for financial institutions.

The Commission survey is related to data protection rules and their relation with thetransfer of customer data across borders. This is especially complicated when the groupinvolves banks outside of Europe. The final Commission report issued in July 2009concludes that, despite the minimum harmonisation nature of the AML Directive, thedegree of convergence across Member States’ AML rules applicable to banks is relativelyhigh. However, national regulatory differences remain in certain areas – in particularregarding the interaction of AML rules with national data protection rules and with banksecrecy rules and their impact on banks’ AML policies at group level (especially regardingthe information flows within the group). Based on these findings, the Commission willprepare its report on the application of the AML Directive due on 15 December 2009.

ESBG views

ESBG members are very active and contributed to the Commission’s study at the end of2008. Although ESBG members are currently focusing on the recently implementednational legislation following the Third AML Directive, some Member States have nottransposed the Directive into national law yet. For that reason, it is not certain that allproblems regarding compliance at group level have been defined. There are, however,legal issues that have an impact on how a banking group can operate within the EU.

Key messages

n Banks have an interest in having good knowledge about operations and transactions of customers throughoutthe group.

n Not all problems regarding compliance at group level have been defined due to the lack of transposition ofthe Third AML Directive in all Member States.

n There is great value in establishing harmonised Data Protection rules for the handling of cross groupinformation in order to know what is acceptable when processing personal data for AML purposes.

n Bank secrecy laws should not hinder transmission of information within a banking group about a customerwhen it is needed for “Know Your Customer” or when it comes to suspicion of Money Laundering.

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Given the legal responsibilities to handle issues at group level, and given the reputationrisk involved, it is in a bank’s own interest to have good knowledge about what ishappening throughout the group. This is especially valid as some customers mightconduct business in another part of the group as well.

On the division of the sanctions list, a large amount of information in the official list leadsto complications for financial institutions when screening for sanctions. Whenever theCommission wishes to offer “additional information”, it should be very clear that all theadditional information on goods or personal data is only for reference and not forblocking transactions.

In order to handle this cross group information, it would be of great value to have DataProtection rules harmonised in order to know what is acceptable when processingpersonal data for AML purposes. It should be clear that it is allowed to share data aboutcustomers for consolidated “Know Your Customer” (KYC) and suspicious MoneyLaundering activities (ML) and probably also allowed to share data for a group-commonMoney Laundering-register. The question of which personal data is allowed to be used incustomer approval processes, cross-border payments and checks against customerdatabases should be answered in a consistent manner across the EU.

Furthermore, bank secrecy laws should not hinder transmission of information within abanking group about a customer when it is needed for KYC or when it comes tosuspicion of ML.

9.3. Financial Action Task Force – FATF

Background

The Financial Action Task Force on Money Laundering (FATF) – also known by its Frenchname ”Le Groupe d'action financière sur le blanchiment de capitaux (GAFI)” – is an inter-governmental body founded in 1989 by the G-7. Its scope of action has widened frombeing related to the fight against money laundering to also include terrorist financing.Recently a “third leg” has been added to its remit: the fight against the financing ofproliferation of weapons of mass destruction (so-called Proliferation Financing).

Excessive informationin the official sanction list

leads to complications.

Great value to have DataProtection rules harmonised.

Key messages

n There are mutual benefits for policymakers and the industry from further exchanging views and theConsultative Forum is a successful and workable format.

n There is a need for adequately timed consultation periods which allows the financial industry to providereasonable and substantive responses.

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195 Financial Action Task Force (FATF-GAFI). 2003. Financial Action Task Force on Money Laundering.The Forthy Recommendations. Paris [www.fatf-gafi.org/dataoecd/7/40/34849567.PDF]. Accessed June 2009.

196 Financial Action Task Force (FATF-GAFI). 2004. Financial Action Task Force on Money Laundering. Paris[www.fatf-gafi.org/dataoecd/8/17/34849466.pdf]. Accessed June 2009.

197 For more information see Financial Action Task Force (FATF-GAFI). 2002. “Terrorist Financing. FATF Action Planagainst Terrorist Financing”. Paris[ www.fatf-gafi.org/pages/0,3417,en_32250379_32236947_1_1_1_1_1,00.html#actionplan]. Accessed June 2009.

198 For More information see Egmont Group. 2009. “The Egmont Group”.www.egmontgroup.org]. AccessedJune 2009.

There is a mutual benefitfor the industry andthe FATF as policymakersto exchange views.

Consultation periods needto allow for a reasonableand substantive response.

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As the standard setter to generate the necessary political will to bring about legislativeand regulatory reforms in these areas, the FATF has published 40 recommendations onmoney laundering195 and nine special recommendations on terrorist financing.196

The 40 Recommendations, updated in 2003, contain measures against money laundering– covering the criminal justice system and law enforcement, the financial system and itsregulation, and international co-operation.

To guarantee a swift implementation of the nine special recommendations on terroristfinancing, the FATF issued an action plan.197 In taking its action plan forward, the FATFwill intensify its cooperation with the FATF-style regional bodies and internationalorganisations, such as the United Nations, the Egmont Group of Financial IntelligenceUnits198, the G-20, and International Financial Institutions that support and contribute tothe international effort against money laundering and terrorist financing.

In early 2008, the FATF created the Consultative Forum aimed at establishing a successfuland workable format for exchanges of views between policymakers and the industry.

ESBG views

The work in the area of anti-money laundering and proliferation financing is of greatimportance and there are vast opportunities as well as benefits from working incollaboration with the FATF. It is certainly of mutual benefit for the industry andpolicymakers to exchange views on the legal, technical and practical aspects of anymeasure to reach the underlying aims. The Consultative Forum is one example of howthe FATF has managed to establish a successful and workable format for such exchangesof views. ESBG very much welcomes those efforts.

Looking forward, ESBG and its members would like to see an even more enhanced andintensified cooperation between the industry and the FATF. As a starting point, theconsultation periods need to be long enough to allow for a reasonable and substantiveresponse to be provided. At present the consultation timelines are very limited andtherefore do not allow any in-depth assessment. Thus, the industries’ contributions to thedebate are rather general and in some cases explicitly provisional. The situation isregrettable and recent consultations cannot be considered as proper consultations assuch. This is important not only in order to create practicable and targeted measures butalso to ensure efficient, timely and effective implementation of the policy measures.

9.4. Proliferation financing

Background

Although there is no official definition, the FATF describes proliferation financing in its last“Proliferation Financing Report” as “providing financial services for the transfer andexport of nuclear, chemical or biological weapons; their means of delivery and relatedmaterials.”199

The FATF report on Proliferation Financing, published in 2008, makes a generalassessment of the threat of proliferation financing including a number of risk factorswhich makes a jurisdiction vulnerable. The section on “witting and unwitting” actorsaddresses issues particularly relevant for financial institutions such as risk managementand customer due diligence, correspondent banks, reviewing and monitoring transactions,as well as identifying suspicious activity. In the annex, the report provides typologieswhich are elements indicating proliferation financing. These so-called red-flag indicatorsprovide general scenarios where there may be reasons to suspect proliferation financing.

Several countries have undertaken different strategies and measures to disrupt thefinancing of terrorism – including (among others) by identifying and blocking the sourcesof funding for terrorism, freezing the assets of terrorists and denying terrorists access tothe international financial system. The multilateral financial prohibitions contained in theUnited Nations Security Council Resolution 1540 of 2004200 introduce an additional toolthat complements existing counter proliferation regimes.

Regarding the EU’s action in this field, the European Commission considers it a priority tointensify efforts to prevent and sanction the financing of proliferation. In this regard, theCommission asked Member States to raise the awareness of financial institutions and tostrengthen their machinery for combating the financing of proliferation. Moreover, theCommission called for improving the cooperation between administrative authorities andfinancial supervisory authorities.

199 Financial Action Task Force (FATF-GAFI). 2008. Proliferation Financing Report. Paris [http://www.fatf-gafi.org/dataoecd/14/21/41146580.pdf]. Accessed June 2009. Fore specific details see pp. 9-23.

200 Resolution 1540 (2004) adopted by the Security Council on 28 April 2004 [S/RES/1540 (2004)], 28 April.

Key messages

n Financial institutions do not usually have the insight in the underlying business transaction and detailsrequired to pass judgment on the possibility of Proliferation Financing as being the underlying aim of thefinancial transaction.

n There are difficulties in identifying suspicious transactions with “dual-use” goods, serving several purposes.n Despite severe industry feedback on the FATF proliferation financing report, the industry’s concerns have not

been considered appropriately. n There is a need for indicators describing characteristics in clear and unambiguous terms, not containing

elements requiring further individual assessment.

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Banks generally cannot passjudgement on the possibilityof proliferation financing.

Customs authoritiesare more likely to detectsuspicious activity.

Industry concerns onproliferation have not beenappropriately consideredby the FATF.

Clear indicators not requiringfurther individual assessmentand/or judgment are needed.

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ESBG views

ESBG members are already active in the fight against proliferation of weapons and relatedgoods by applying the existing financial sanctions against specific entities or personsinvolved in these activities. However, the fact that the vast majority of businesstransactions with a proliferation background will involve goods which by themselves areinconspicuous limits the possibility for banks to detect them. In all but the mostexceptional cases, a proliferation connection can therefore only be derived from theoverall context – and even then only by intelligence and proliferation experts, and usuallyonly in hindsight. Financial institutions are only involved in the financial transaction andthus do not have insight into the actual business transaction. Therefore, financialinstitutions regularly do not have the details required to pass judgement on the possibilityof Proliferation Financing as the underlying aim of the transaction. Even if details aboutthe contract goods are provided in the respective documents, financial institutions do notpossess the technical expertise to assess if the goods could be used to produce weaponsof mass destruction. Only specialised experts from the export control authorities areskilled and have the necessary, technical knowledge.

Moreover, many goods are so-called “dual-use” goods, meaning that they can be usedfor several purposes. Among these could be goods necessary for the creation of weaponsof mass destruction whereas another purpose is perhaps construction in general. In anyevent, financial institutions lack the expertise to pass judgement on whether a particulargood is consistent with the business activity of the supposed recipient or with thetechnological level of a country. The same applies correspondingly to inconsistencies withrespect to the pricing of goods and transport.

Any future measures to hinder the financing of proliferation of weapons of massdestruction must put realistic expectations on financial institutions. In areas wherecustoms authorities are more likely to detect such activity, the responsibility shouldcertainly target those actors, not least for efficiency reasons.

As with terrorism, the proliferation of weapons of mass destruction poses a serious andfundamental threat. ESBG members therefore attach great importance to contributing tothe fight against this proliferation. Nevertheless, it is regretful that despite severe industryfeedback on the FATF proliferation financing report, the industry’s concerns have notbeen appropriately considered.

There are large problems in the way that the FATF places responsibility on financialinstitutions in an area where they have little, if any, possibility of control. Along with thefinancial industry, ESBG is in particular concerned that the report intends to provide a listof red-flag indicators. It is not feasible to impose additional control obligations onfinancial institutions as long as certain restricted products and materials are concerned.Financial institutions do not have the necessary knowledge to be able to judge thetechnical background. In this regard, the indicators, in order to be useful, should describeonly such characteristics which are present and noticeable in the information available.Furthermore, the indicators need to describe these characteristics in clear andunambiguous terms and should not contain elements requiring further individualassessment and/or judgment.

The characteristics in question must have actual distinguishing properties, describingcharacteristics for which empirical evidence has been demonstrated to appear with asignificantly higher probability in connection with cases where the risk has materialisedthan in cases where the risk has not materialised.

All of the mentioned “inconsistencies” are relatively common occurrences in legitimateinternational trade transactions. Thus, they are not suitable for identifying transactionswith a potential proliferation background.

Instead of imposing any inefficient new control obligations on financial institutions, theapproach to provide reliable and adequate information about suspicious persons and entitiesshould be strengthened. This approach enables financial institutions to verify if any ofthese persons or entities is a recipient of a financial transaction and to halt the transaction.

9.5. Financial Sanctions

Background

The application of financial sanctions consists of bans on the provision of specific services(brokering, financial services, and technical assistance), prohibitions on investment,payments and capital movements.

Most of the governments as well as the EU are administering financial sanctions throughthe publication of a consolidated list of financial sanction targets. By using these listsbanks and other financial institutions can scan their customer databases and discoverfinancial assets controlled by those who are a listed target.

The EU and its Member States have often imposed financial sanctions, which can bedesigned to target specific persons, groups, and entities responsible for the objectionablepolicies or behavior. Financial institutions and other entities are required to check whetherthey maintain any accounts or hold any funds or economic resources for, or provide financialservices to, the individuals and/or entities subject to related EU financial sanctions.

The implementation difficulties (legal status, incomplete information, etc.) of theelectronic consolidated list of financial sanctions of the European Commission201 havebeen discussed for some time already. As a result, the improvement of the electronicconsolidated list has been identified as a key priority.

201 European Commission. 2009. “Consolidated list of persons, groups and entities subject to EU financial sanctions”.Brussels [http://ec.europa.eu/external_relations/cfsp/sanctions/list/consol-list.htm]. Accessed June 2009.

Key messages

n It seems that relevant authorities do not consider banks’ work in practice while drafting financial sanctions.n Hence, ESBG highly appreciates the established exchange of views with European regulators.

160

202 Council of the European Union. 2005. Guidelines on implementation and evaluation of restrictive measures(sanctions) in the framework of the EU Common Foreign and Security Policy. Brussels[http://register.consilium.europa.eu/pdf/en/05/st15/st15114.en05.pdf]. Accessed July 2009.

Banks and the EU institutionsshould discuss the applicabilityof financial sanctionsfor banks.

Banks need legal securitywhen applying theresolutions in good faith.

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In order to facilitate the application of financial sanctions, the financial industry and theCommission recognised the need for an EU consolidated list of persons, groups andentities subject to related financial sanctions. It was therefore agreed that the financialindustry would set up a database containing the consolidated list for the Commission,which would host and maintain the database and keep it up-to-date. This database wasdeveloped first and foremost to assist the financial industry in their compliance withfinancial sanctions.

At the international level, the United Nations started a first exchange of views withrepresentatives of the financial industry in order to improve the implementation of the UNfinancial sanctions.

ESBG views

There is a general issue that banks and credit institutions are obliged to implementfinancial sanctions which are drafted by authorities, such as the United Nations andthe European Commission, without taking into account the work of credit institutionsin practice.

For that reason, ESBG welcomes the established discussions with the Commission andCouncil representatives on how to improve the applicability of financial sanctions forbanks. Moreover, the requests and recommendations for best practices of the financialindustry have been largely taken into account by legislators in the guidelines toimplement and evaluate sanctions.202

To better implement the UN financial sanctions, ESBG along with the financial industryrecommended that (i) the identification of persons or organisations targeted by financialsanctions should be improved; (ii) the definition and handling of the “freezing of funds”should be improved and made more practicable without favouring targeted account/safedeposit holder, (iii) competent authorities should ensure rapid clarification, unfreezingand authorisation procedures and (iv) the legal security of banks and their staff should beimproved by an exemption from liability when applying the resolutions in good faith.

Setting the scene

Small and medium-sized enterprises (SMEs) are considered the backbone of the Europeaneconomy and serve as principal creators of innovation, jobs and wealth. At the Europeanlevel, an SME is defined as an enterprise with fewer than 250 employees, a turnover ofup to EUR 50 million or a balance sheet of no more than EUR 43 million. SMEs representa major part of the European economy. It is estimated that some 23 million SMEs in theEU provide approximately 75 million jobs. Ninety-nine percent of all enterprises in Europeare SMEs, under the Commission’s definition, and in some industrial sectors SMEsrepresent almost 80% of the total employment. They play a central role in achieving theLisbon goals of the European Union to become the most competitive and dynamicknowledge based economy in the world.

Against this background, SME policy has become a natural priority for the EuropeanCommission seeking to improve the business environment for SMEs in general, to simplifythe regulatory environment for European companies and to tackle the financing problemsthat small and medium-sized enterprises face. This has resulted in a number of initiativeslike the Small Business Act for Europe (SBA) and several financial support systems at theEuropean level, such as the Competitiveness and Innovation Framework Programme(CIP), European Fund for Regional Development (EFRD), European Social Fund (ESF), theJoint European Resources for Micro to Medium Enterprises initiative (JEREMIE), the JointAction to Support Micro Finance Institutions in Europe (JASMINE) and the proposedProgress microfinance facility.

Key messages

n There is a need to coordinate and adapt different EU polices for SMEs to avoid excessive administrative burdens,as these impact more significantly on smaller entities like SMEs, by using the ‘Think Small First Principle’.

n There is a need to facilitate the registration procedure for setting up an SME, the access to the Single Marketfor SMEs and the ability to go cross-border by providing information on Member State registration procedureand taxation.

n There is a need to bring coherence, to communicate and to clearly define the aim and target group ofdifferent European financial support programmes for SMEs.

n There is a need to take a comprehensive and coordinated approach in the provision of microcredit taking intoaccount the principle of subsidiarity.

n There is a need to facilitate the provision of microcredit at the national, regional and local level via targetedbusiness support of, and cooperation between local banks and support organizations.

n There is a need to pay special attention to the follow-up actions and exchange best practices in SME financingactivities.

10. SME FINANCING

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203 European Commission. 2007. Communication from the Commission to the Council, the EuropeanParliament, the European Economic and Social Committee and the Committee of the Regions A EuropeanInitiative for the development of micro-credit in support of growth and employment [COM(2007) 708final/2], 20 December.

204 European Parliament. 2009. Report on European initiative for the development of micro-credit in support ofgrowth and employment (2008/2122(INI)) Committee on Economic and Monetary affairs of 29 January 2009,Rapporteur: Zsolt Laszlo Becsey.

205 European Commission. 2008. Communication from Commission to the Council, the European Parliament,the European Economic and Social Committee and the Committee of the Regions. ‘Think Small First’. ‘A“Small Business Act” for Europe’ [COM(2008) 394 final] SEC(2008) 2101 SEC(2008) 2102, 25 June.

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JASMINE

In November 2007, the European Commission adopted a Communication203 to improveaccess to finance for micro-entrepreneurs and financially excluded people. The proposedinitiative had four different strands:

n improving the legal and institutional environment in the Member States; n changing the climate in favour of entrepreneurship; n promoting the spread of best practices, including training; and n providing additional financial capital for microfinance institutions.

The Communication recommended setting up a dedicated support structure for microcreditwith the view towards developing mentoring services which are essential to supportmicro-borrowers setting up a business, to develop good market practices by creating aspecific microcredit label and a guide of good conduct.

The Communication also put forward a proposal to create, together with the EuropeanInvestment Fund (EIF) and the European Investment Bank (EIB), a facility for financialsupport to microcredit. A microcredit initiative – the so called Microfund – was proposedfor this means. The initiative was planned to be embedded in the JASMINE project, aninstrument developed by DG Regional Policy of the European Commission, the EuropeanInvestment Bank (EIB) and the European Investment Fund (EIF) to increase the range ofmicrocredit available in Europe through supporting the non-bank institutions providingsuch credits.

The JASMINE initiative was launched in September 2008. It covers the provision offunding in a co-finance facility which started to be operational in spring 2009, technicalassistance to be provided to the microfinance institutions by the Euopean Commission,as well as the development of a Code of Conduct for microfinance institutions.

In relation to the Commission’s activities in this field, an own-initative Report onMicrocredit was drafted in the European Parliament’s Committee on Economic andMonetary Affairs (ECON) in 2008 and voted in Plenary in March 2009.204

Small Business Act

The Small Business Act was published in the form of a Commission Communication inJune 2008,205 setting out ten principles, a set of new legislative proposals guided by the“Think Small First” principle, and a commitment to cut administrative burden by 25% by2012. The 10 principles of the SBA are the guidelines to the conception and implementationof SME policies at the EU and Member States’ level. The essential principles aim to createa level playing field for SMEs, applying the ‘Think Small First Principle’ and to improve thelegal and administrative environment for SMEs. Moreover, other principles address theissues of granting a second chance for business failures, facilitating access to finance, andenabling SMEs to turn environmental challenges into opportunities.

206 French Presidency Council of the European Union. 2008. Competitiveness Council: Political Agreement onthe SBA, establishment of an antion plan for European SMEs. Brussels [http://www.eu2008.fr/impressionP D F e 9 3 d . p d f ? u r l = % 2 F P F U E % 2 F l a n g % 2 F e n % 2 F a c c u e i l % 2 F P F U E - 1 2 _ 2 0 0 8 % 2 F P F U E -01.12.2008%2Fconseil_competitivite__principaux_resultats]. Accessed June 2009.

207 European Parliament. 2009. European Parliament resolution of 10 March 2009 on the Small Business Act(2008/2237(INI)).

208 European Commission. 2009. Communication from the Commission to the Council, the EuropeanParliament, the European Economic and Social Committee and the Committee of the Regions. A SharedCommitment for Employment [COM(2009) 257 final], 3 June.

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In addition, the SBA outlines the time needed to start a new company, the maximum timeto obtain business licenses and the ‘One-Stop-Shops’ to facilitate start-up andrecruitment procedures. The SBA seeks new ways to stimulate interest in SMEs and familybusinesses and new ways to cultivate a more entrepreneurial mindset for innovation andupgrade of skills. The SBA also contains four legislative proposals:

1) The simplification of state aid rule and increase of investment for SMEs; 2) The establishment of a European Private Company Statute (EPC); 3) The reduction of value added tax (VAT) for labour intensive and/or locally supplied

services; and 4) An amendment to the Directive on late payments.

The proposal was adopted by the ministers of the Competitiveness Council in December2008, supplemented by an action plan committing the Commission and the MemberStates to a number of priority actions. In the context of the economic slowdown,the actions aim to facilitate access to finance for SMEs, reducing their administrativeburden and enabling them to fully benefit from the opportunities offered by Europeanand international markets.

The Member States made a commitment to efficiently applying the "Think Small First"principle when formulating and implementing policies.206 They will also use the "SMETest" when assessing the impact of forthcoming regulation on SMEs. The Plenary of theEuropean Parliament adopted a resolution on a “Small Business Act” in March 2009.207

Progress Microfinance Facility

On 2 July 2009, the Commission issued a proposal for a Decision to establish a EuropeanMicrofinance Facility for Employment and Social Inclusion. The so-called ProgressMircofinance Facility was one of the actions announced by the CommiissionCommunication ‘A shared commitment for Employment’.208 In order to fund the newfacility, the Commission will reallocate EUR 100 million from the existing EU budget andaims to leverage up to EUR 500 million in cooperation with international financialinstitutions and in particular the European Investment Bank (EIB) Group. The facility isopen to public and private bodies established in Member States which providemicrofinance to persons and micro enterprises in the EU. It will facilitate access tomicrocredit by providing equity and debt financing. In addition, it will also supportmeasures such as training and mentoring. The Progress Microfinance Facility is expectedto be approved by the end of 2009 and be operational in 2010.

ESBG Views

ESBG in general welcomes the measures taken by the European Commission towardsimproving the business environment for SMEs. Nevertheless, there is still work to be donein the area of administrative rules and regulations, the access to finance in the form offinancial support programmes, microcredit and lending, cross-border activities and CSRfor SMEs.

Savings Banks are importantpartners of SMEs throughout

their lifecycle.

For all SBA measures the‘Think Small First” principle

has to be strictly applied.

EU policies to alleviateadministrative burdens need

better coordination.

EU policies should beadapted to small

business entitities.

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ESBG members are traditionally natural business partners of SMEs, following theirbusiness development throughout the SME’s lifecycle, tackling problems that may ariseand sharing successes. Indeed, it is predominantly the savings banks’ “proximity model”of local presence, in combination with their clear focus on retail banking which is at theroot of the close relationship between savings banks and local businesses. As a result,savings banks belong to Europe’s most important providers of SME finance, and arefurthermore important partners to micro enterprises. They provide the whole range offinancial products to SMEs at local level, giving access to loans, guarantees, microcreditsas well as to the equity and capital markets. In addition, savings banks often try tosupport SMEs from the very onset of their existence, or at later stages by providingalternative services, such as private equity. Given the close and long-standing businessrelationships between SMEs and savings banks, ESBG is committed to taking an activepart in the work in this field, and to assist the Commission in its work towards a betterbusiness and financial environment for European SMEs.

The Small Business Act

ESBG considers it very important to improve the business environment and financingfor SMEs. The measures proposed in the SBA are undeniably in line with the general goalto cut administrative burden for SMEs. ESBG would however have preferred theCommission to include far reaching measures in the SBA which would have strengthenedthe value of the statements made in the Act. Such an action could have included anofficial recognition at the national level to the “think small first” principle and beincorporated into all policy making targeted towards SMEs. Nevertheless, ESBG welcomesthe commitment made by Member States during the Competitiveness Council meetingto apply the “Think Small First” principle.

In this context, it is important to avoid any overlapping measures. There is a need tocoordinate different EU policies in order to avoid excessive administrative burden forEuropean SMEs. This is not least of great importance when it comes to providing EUfinancial support for SMEs and micro enterprises.

Regarding the administrative burden on SMEs which is caused by EU legislation, it isimportant to acknowledge that the imposed administration, as such, tends to have amore significant impact on smaller entities than on larger corporations. SMEs are smallentities, and by their nature, these entities face different problems than those of largercorporations. A preferred solution would be to adapt EU legislation to smaller enterprises,where possible. At the same time, the smaller enterprises are also more likely to focustheir business activities on their national, regional or – in many cases – local markets.This calls for a different approach towards the support provided for SMEs. The proximity ofthe services provided by ESBG members to their SME clients has proven a successful tool.

The setting up of SMEs,their registration andtransfers should befacilitated.

CSR should be promotedfor SMEs.

SMEs should be ableto operate easily withinthe Single Market.

ESBG’s International Businessnetwork assists SMEs inoperating within the EU.

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Another issue for attention is the administration for the creation of an enterprise whichvaries greatly across the EU. In order to facilitate business creation, the time and cost forregistration needs to be addressed. In this regard, the Commission should play a role infacilitating the registration procedures. Measures already undertaken by the Commissionlike the initiative “Business start-ups in one week” of 2007, should be carried on andfostered with the SBA to make SMEs able to compete not only on their home market.Transfer of businesses from one generation to another has also become increasinglyimportant. Work to facilitate such transfers is important as too complicated procedurescould result in a loss of already built up, functioning enterprises. Thus, the question ofsubsidiarity arises and overlapping measures with already existing initiatives in theMember States must be avoided.

The idea of the Commission presented in its SBA, to turn the environmental challengeinto opportunities for SMEs is very welcome and in line with ESBG’s general approachtowards assisting SMEs in becoming more aware about the environment in which theyoperate. Considering the importance given to social responsibility within their ownorganisations, savings banks take every opportunity to assist their SME clients to improveand promote their respective work carried out in the field of social responsibility.ESBG members have a longstanding contribution to CSR and a number of schemeswithin ESBG member institutions target SMEs specifically.

Supporting SMEs going across borders

Looking ahead, support functions for SMEs are needed not only for creating a favourablebusiness environment in their home markets, but also for SMEs deciding to gointernational. An increasing number of SMEs are entering into cross-border activity andeven small-scale entrepreneurs begin to see the possibilities in expanding their businessesacross national borders. As SME partners, banks need to think ahead and be flexible interms of offering simple solutions that enable SMEs to get in contact with local serviceproviders in prospective new markets.

It is important to facilitate access to the Single Market, not only for larger companies, butalso for SMEs and micro-enterprises. An initial measure, in order to assist SMEs goingacross borders, could be to encourage Member States to provide clear, user-friendlyinformation on the Internet regarding their national registration procedures and taxation.In order to be accessible for foreign SMEs, such information should preferably beavailable in different languages, or at least in the native language and English. The One-Stop-Shop that will be established with the implementation of the Services Directive, alsoelectronically, by the end of 2009 is an important step.

ESBG has over the years put great effort into assisting SMEs that are expandinginternationally. It has in particular set up a joint subsidiary, Tevea International, whichoffers para-banking services for SMEs involved in import/export activities. Moreover, anew service was recently launched, also as part of European savings banks’ effort todevelop business cooperation: the International Business Network (IBN). This network isdesigned to support SME customers in their business abroad with a trans-national serviceoffer. The network also focuses on the provision of quick and easy access to reliable anduseful information on account opening requirements and banking conditions in generalfor SMEs in the destination country.

EU financial supportprogrammes need greatercoherence & coordination,as well as clear definitions.

Target groupsof EU microcredit

programmes should bebetter differentiated and

clearly defined.

Microcredit should first befacilitated at national,

regional and local level.

Risk, costs and consequencesof microcredit should be

better addressed.

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Access to finance

With regards to access to finance and the issue of existing financial EU support systemsfor SMEs, these tend to focus to a large extent on the supply side and neglect an analysisof the needs and demand of SMEs. There are a number of support programmes in placeand thus a wide offer, which are not always easily understandable or accessible to theintended beneficiaries. An increase in the already rather vast offer can thus in some casesbe a part of the problem rather than the solution. In order to clarify and enhance theoutreach of the support measures of the EU (such as: CIP, EFRD, ESF, JEREMIE, JASMINE,PROGRESS) and Member States which are addressing certain target groups, these targetgroups should be clearly defined and communicated.

Microcredit

The savings banks’ activity in providing credits to small and micro enterprises comesnaturally due to their mandate to contribute to their regions and be socially responsibleinstitutions. In this regard, microcredit has in recent times been recognised as animportant tool for growth, jobs and for fighting financial exclusion among Europeanpolicymakers. However, there is a potential lack of coherence between the differentinitiatives at the EU level regarding the target groups for the support envisaged. There isno formal definition of the term “microcredit” although the European Commission hassuggested all loans not exceeding EUR 25,000 be considered microcredits. A more generalprovision of the term is that offering microcredit means extending smaller loans to the pooror to those who cannot access finance through ordinary banking structures. This can bedue to a lack of experience, collateral, or knowledge about the national legal and businessenvironment – for example in the case of migrant entrepreneurs. Therefore, ESBG advocatesfor a clear definition of target groups of microcredit. Their specific hurdles for finance andrequirements for qualification differ widely, depending on whether sustainable andcommercially viable projects, start-ups or projects with a socio-political component areaddressed. Simple “labels”, such as migrants, the unemployed or women, are not usefulas they are not indicative for any decision on credit or business viability.

Tradition and longstanding experience of the local market is crucial for evaluating theviability of a business concept whatever its scope and size, and including small-scaleprojects. Given the local dimension of microcredit, the EU focus should primarily be onfacilitating microcredit at the national, regional or local level – as close to the client aspossible – before looking at the creation of a single market for microcredit per se.For example, this can be done through targeted cooperation between local banks andavailable support organisations (such as economic chambers, promotion agencies,microfinance institutions or start-up initiatives). In such a case, a solution in someEuropean markets could be for the latter to focus on providing support services, leavingbanks with the task of credit provision.

In addition, the increased risks and costs involved in microcredit activity need to becounteracted – for example through additional business support and accompaniment ofthe entrepreneur or through targeted support schemes where the maximisation of profitis not the sole aim of the activity. Specific challenges for micro or start-up credits are insome cases caused by a lack of quality of demand rather than by a lack of supply.The aim must be to integrate clients with adequate potential into the general bankingsystem and not to transfer them to a second credit market, labelling them "non-bankable" and thus stigmatising them.

Financial institutions– especially savings banks –are key providers in financialeducation and advice to SMEs.

EU microdrecit measuresneed proper eligibilitycriteria for borrowers.

JASMINE should target allintermediaries providingmicrocredit.

Follow-up actions &recommendations of EUmicrocredit programmesneed full attention.

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ESBG has participated with great interest in the debate at the EU level on financialeducation. Knowledge about financial matters is an important tool for creating asuccessful enterprise. Many small business entities lack an understanding of basicfinancial services products, and most small enterprises cannot afford expensiveconsultancy services. Although financial education is primarily the responsibility ofMember States, financial institutions can contribute as “educators”, both in variousschemes at the international, national or local level, and in the everyday meeting withtheir SME clients. As the local partners of SMEs, the employees of savings banks oftentake on the role of explaining and guiding SMEs in the financial services field and beyondthroughout their life cycle. Due to the higher risk that smaller entities face resulting froma larger exposure to external risk factors, financial institutions can also play a role inexplaining the use of the risk management products on offer to SMEs. Savings banksacross Europe have operated in this spirit at the local level for more than a century andused microcredit as a means to help entrepreneurs to integrate, or re-integrate into socialand economic life. Specific targeted schemes have developed within savings banksfocussing on increasing the level of financial literacy among European citizens and SMEs.

In this respect it is of utmost importance to recognize that clients whose lack of qualificationas an entrepreneur or lack of a viable business idea are too big to be overcome byadequate support measures, should not be driven into debt through subsidizedmicrocredit offers. Any EU support measures which allow national or regional managingauthorities to enter into uncalculated financing risks at lowest interest rates should thereforebe avoided since such unfair competition makes any existing attempts by private suppliersto provide micro credits and corresponding support in commercial terms fruitless.

Throughout the discussions on microcredit at the EU level, ESBG has been actively involvedand continuously called for a more comprehensive approach towards microcredit. It isimportant to acknowledge that there is a wide-ranging variety of institutions offeringmicrocredit in Europe. All have diverse aims and targets, but all actively contribute toreaching a higher level of financial inclusion in Europe – whether they are banks, non-banks or other types of institutions. Against this background, and in order to reap the fullbenefits of microcredit in the form of growth and job creation, the support measures infavour of microcredit, such as the recently launched JASMINE initiative should be targetedat all intermediaries providing micro-credit.

It would also particularly be required to ensure that all microcredit services initiativesthroughout the EU, whatever the status or the legal structure of the provider involved,are able to develop optimally, and with a view to optimize the advantages brought to thebeneficiaries. In this regard, specific attention will need to be given to the scope and focusof follow-up actions or recommendations eventually launched by the Commission and/orthe Member States. This will be all the more important for promoting the exchange of bestpractices, especially between banks and non banks, as suggested by the Commission.

Setting the scene

During the past few years, the topic of financial inclusion has increasingly been in thefocus of discussions at the EU level. In May 2008, at the initiative of DG Employment,Social Affairs and Equal Opportunities of the European Commission a report on "Financialservices provision and prevention of financial exclusion"209 was commissioned. The reportprovided data on the levels, causes and consequences of financial exclusion in theMember States, described the diversity of policy responses developed in differentMember States in the field of transaction banking services, credit and savings, andproposed a series of potential policy responses to prevent financial exclusion of peoplefacing poverty or social exclusion.

Following a conference publishing this report and a commitment in the Single Market for21st Century Europe210 to ensure that by a certain date nobody is denied access to a basicbank account, DG Internal Market and Services together with DG Employment, Social Affairsand Equal Opportunities of the European Commission launched a public consultation inFebruary 2009. The Consultation “Financial Inclusion: Ensuring Access to a Basic BankAccount”211 described the levels, causes and consequences of financial exclusion in the EU.

Key messages

n ESBG strongly advocates for a strict application of the principle of subsidiarity and for dealing with financialinclusion and access to basic banking services at MS level.

n ESBG sees the need to avoid a national one-size-fits-all approach and to apply different approaches to theproblem of financial exclusion, tailored to each national, regional or even local context and traditions.

n The Commission can play a role in maintaining awareness on financial exclusion, facilitate the sharing ofinformation and best practices.

n Access to a bank account is crucial and requires a clear definition of a basic bank account.n Financial inclusion and access to financial services can also be increased by offering specific adapted products and

services, adequate information, financial education and proximity banking as ESBG members are already providing.n Initiatives to foster financial inclusion and enhance access to basic banking services should always be taken on

a voluntary basis and cannot be imposed on banks.

209 Reseau Financement Alternatif. 2008. Financial Services Provision and Prevention of Financial Exclusion.Report for the European Commission, DG Employment, Social Affairs and Equal Opportunities.[http://ec.europa.eu/employment_social/spsi/docs/social_inclusion/2008/financial_exclusion_study_en.pdf].Accessed July 2009

210 European Commission. 2007. Communication from the Commission to the European Parliament, theCouncil, the European Economic and Social Committee and the Committee of the Regions, A Single Marketfor 21st century Europe [COM(2007)724 final] SEC(2007) 1517 SEC(2007) 1518 SEC(2007) 1519 SEC(2007)1520 SEC(2007) 1521, 20 November.

211 European Commission. 2009. Financial Inclusion. Ensuring Access to a Basic Bank Account ConsultationDocument [MARKT/H3/MI D(2009), 6 February.

11. FINANCIAL INCLUSION

171

212 Also see Annex 2, CSR Case Studies

Promoting financialinclusion of all is a central

ESBG mission.

The principle ofsubsidiarity has to apply

– financial exclusionneeds to be tackled at

the national level.

Avoid a one size-fits allapproach: apply specific

tailored national, regionaland local approaches.

172

Interested parties were invited to comment on the need and format of possible measures,proposed in four general alternative areas of action, namely 1) promoting and sharingbest practices; 2) encouraging self-regulation by the industry; 3) a soft law approach;or 4) a regulatory approach.

ESBG views

Financial Inclusion - Principle of Subsidiarity

Savings banks are by tradition important promoters of financial inclusion of all citizens.The promotion of financial inclusion for all citizens is part of savings banks’ mission.Caring for the general interest of society is the savings banks’ initial purpose and isan integral part of their identity, as a long term commitment towards meeting thecritical needs of society through their daily business. Therefore, ESBG considers that the“bankarization” of citizens is not only desirable in terms of social stability avoidingfinancial exclusion but is also of economic and financial importance as it enlarges the marketand the scope of potential customers. In addition, many ESBG members have introducedspecific, targeted schemes to ensure that also the most vulnerable parts of the populationhave access to necessary basic financial services.212 ESBG welcomes the Commission’s aimto encourage the further development of financial inclusion of all EU citizens. The debateat the European level shows the growing awareness of parties involved.

Considering the important commitment of its members in the field of financial inclusion,ESBG and its members strongly advocate for a strict application of the principle ofsubsidiarity. ESBG agrees with the aim of European policy makers to raise the level offinancial inclusion among all citizens. However, there is a need to deal with the fightagainst financial exclusion first and foremost at the level of Member States. The specificreasons for financial exclusion are manifold and differ widely from country to country dueto different cultural and historical backgrounds, and economic and social circumstances.A lower level of wealth and higher levels of inequality in Member States are two mainreasons. Another important aspect is the issue of trust. A lack of trust in the stability andaccountability of the financial sector can have significant influence on consumers’ choiceto store money in cash. A clear distinction must also always be made between thoseconsumers who are financially excluded and those who, for some reason, choose not tobuy a certain product or who do not make appropriate use of the products available.These diverse situations call for different approaches and subsequently different possiblesolutions taken at the national level.

The most suitable way of handling the problem of financial exclusion is therefore to havemeasures at national level in the countries where the problem of financial exclusion arises– tailored to each context and the traditions of each country. ESBG is convinced thatgovernments of Member States are the most suited to find remedies for possible problems inaccessing financial services depending on the situation in their national markets. In thiscontext, it is also important to recognize that circumstances may not only be nationalbut in many cases regional or even local in order to avoid taking an – ultimately futile –one-size-fits-all approach.

Financial exclusion should beaddressed in the widercontext of social exclusion.

A clear definition of thecoverage of a ‘basic bankaccount’ is necessary.

Financial inclusion needsto be advocated, but notregulated.

Inititatives to to fosterfinancial inclusion shouldalways be voluntary.

173

In addition, it has to be stressed that financial exclusion is one element of the broaderproblem of social exclusion and therefore often closely linked to low income, age,education and status of ethnic minorities or migrants. It is thus not an isolated issue andthe effects of the exclusion will therefore also differ. In those markets where the problemis clearly and almost exclusively related to socially excluded individuals, financial exclusionmight not be solved through additional efforts in the area of information, education,access and availability of financial services and products. If the cause of the problem lieswith problems related to general social exclusion, a more holistic approach to theproblem should be taken. This would mean starting by addressing issues such asemployment, physical and mental health and housing. This does not exclude thepossibility of linking such efforts with the introduction or reintegration into the formalfinancial system.

Access to Basic Banking Services

ESBG welcomes the Commission’s aim to encourage further developments of access tofinancial services to all EU citizens and residents. The access to a bank account is certainlythe most crucial part of financial inclusion. A clear definition of the coverage of such aservice is of utmost importance. For the purpose of responding to the Commissionconsultation on “Financial Inclusion: Ensuring Access to a Basic Bank Account”, ESBGdefined the basic bank account as an account which enables the account holder toreceive a salary and/or social benefit, make a certain number of essential payments,and withdraw cash. The basic bank account can also serve as a savings account or enablethe account holder to make deposits onto a savings account. Access to an overdraft,a credit facility or a payments instrument including the granting of credit – e.g. a creditcard or a deferred debit card – are not considered part of the basic bank account.

In order to ensure and enhance access to basic banking services, ESBG is strongly againstregulation. Applying the better regulation principle, there is no justification for anintervention at the EU level in countries where financial exclusion is not an issue, andneither self-regulation nor regulation should therefore be imposed on Member States.As stated by the Commission in its Consultation on Access to a Basic Bank Account, only2% of consumers do not have access at all. This does not evidence a distortion of theinternal market and therefore, no regulatory action at the European level is required.However, ESBG sees the Commission playing a role in maintaining awareness on thesubject and facilitating the sharing of information and best practices but does neithersee room nor necessity for any regulatory measure for the access to a basic bank accountat the European level. Moreover, in order to objectively assess the current situation,ESBG requests that the Commission balance the Eurobarometer findings used in theconsultation with national, regional and local market studies.

In addition, the existing national regulation in some Member States prove that still nocomplete coverage can be reached by legislative means. Therefore, initiatives in this fieldshould always be taken on a voluntary level, and cannot be imposed on banks.Financial providers should by no means, be obliged to provide financial products orservices as this would interfere with the principle of contractual freedom, privateautonomy and the obligation of each provider to perform risk management. It would alsohamper the innovation of products and services, in particular in the markets wherecitizens already have easy access to bank accounts. Besides, compulsory measures wouldincrease costs to the financial institution and result in an increase of fees or other costswhich would have most likely to be borne by customers.

Proximity banking isa success factor to enhance

financial inclusion.

174

Proximity banking

National governments, the financial industry and consumer oriented organisations havealready been very active in offering specific, targeted programmes and products to ensurethat also the most vulnerable parts of the population have access to necessary basicfinancial services. ESBG and its member are convinced that access to financial services canand should be increased in various ways, by offering specific products and services.Financial institutions need to adapt their products and services, making them availableand accessible for all, through adequate information and through financial education andby improving the level of financial literacy. ESBG members are committed to functioningresponsibly and to serving all strata of society. Through various schemes they targetparticularly vulnerable groups, enabling them to obtain additional support in the form oftailor-made products, services, information and financial education. This shows that ESBGand its member have a longstanding experience to ensure that also the most vulnerableparts of the population have access to necessary basic financial services.

The concept of ensuring financial inclusion includes a wide range of activities next toaccess to a basic banking services and financial education. Proximity banking is also animportant means for increasing the level of financial inclusion. For many consumers, notleast the weaker groups in society, proximity is of crucial importance when choosing theirfinancial service provider. Support, accompaniment and explanations are necessary inorder for consumers to choose the right products and know how to use them correctly.This aspect is becoming increasingly important, as product innovation moves at fastspeed and consumers are asked to take more and more responsibility for their personalfinances, not least regarding their own future pension provision. It has also been shown,particularly in the new Member States, that the level of exclusion is higher in rural areasthan in larger cities. ESBG firmly believes that one of the most important success factorswhen aiming for financial inclusion of all citizens is for the provider to remain close to theclient. In order to live up to this aim, ESBG members work through wide-reachingnetworks, whether via branches or independent entities. This enables them to serveconsumers in cities as well as in more remote geographic areas and to provide all thenecessary support for their clients, tailored to each customer’s specific situation.Thus, proximity banking is not always and exclusively related to less wealthy groups, butalso to offering financial services and products to consumers living in remote or low-populated areas who would suffer from a lower level of proximity banking as costs foraccess to finance would increase.

Setting the scene

Consumer empowerment has been the focus of the European Commission in recentinitiatives targeting the retail financial services sector, such as the Green Paper on RetailFinancial Services213 and the Single Market Review214. Financial education is recognisedas one of the means for achieving a higher level of consumer confidence. It is not onlyapproached as an essential element of consumer protection and consumer information,but also as a priority in the debate on access to finance and responsible lending. As aconsequence, the Commission adopted a Communication on Financial Education inDecember 2007215, providing a number of recommendations to the EU Member Stateson how to address the issue at the national level. In reaction to the CommissionCommunication, the EU Finance Ministers concluded in May 2008 that raising publicawareness about financial issues is seen as being of particular importance as productsbecome more and more complex and consumers need to make an increasing number ofchoices for their personal finance. In addition, the European Commission established theExpert Group on Financial Education (EGFE)216 in 2008 which aims at promoting theexchange of ideas, experiences and best practices.

The European Parliament for its part adopted a Report on “Protecting Consumers:Improving consumer education and awareness on credit and finance”217 in November2008, advocating for a stronger focus on the role of Member States instead of action atthe EU level, and on exchanges of best practices rather than legislation. In addition, theEuropean Commission launched the European Database for Financial Education (EDFE)218

in January 2009. It has been designed as a reference to numerous financial educationprogrammes offered by public or private institutions in the EU.

Key messages

n Provision of financial education should be dealt with at the Member State level. n All stakeholders have a responsibility to foster financial education including parents.n Government and public institutions should provide policy orientation and raise awareness.n Savings banks are involved in creating financial education programmes and schemes, and have the necessary

knowledge and expertise to share best practices.

213 European Commission. 2007. Green Paper on Retail Financial Services in the Single Market [COM 2007 (226)final], 30April.

214 European Commission. 2007. Communication from the Commission to the European Parliament, theCouncil, the European Economic and Social Committee and the Committee of the Regions. A single marketfor 21st century Europe [COM 2007 (724) final]. SEC(2007) 1517 SEC(2007) 1518 SEC(2007) 1519SEC(2007) 1520 SEC(2007) 1521, 20 November; European Commission. 2008. Commission Staff WorkingDocument. The Single Market Review: one year on SEC 2008 (3064), 16 December.

215 European Commission. 2007 Communication from the Commission. Financial Education [COM(2007)808],18 December.

216 European Commission. 2008. First Meeting of the Expert Group on Financial Education. National Strategiesfor Financial Education. Report, 7 October.

217 European Parliament. 2008. European Parliament resolution of 18 November 2008 on protecting theconsumer: improving consumer education and awareness on credit and finance (2007/2288(INI)).

218 European Commission. 2007. European Database for Financial Education. Brussels [http://ec.europa.eu/internal_market/fesis/index.cfm]. Accessed June 2009.

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175

Financial education has beenimportant throughoutsavings banks’ history.

Financial education isimportant to empower

citizens and preventover-indebtedness.

Provision of financialeducations should be

dealt with at national,regional and local level.

All stakeholders havea responsibility to foster

financial education.

Savings banks should beinvolved in drafting financial

education programmes.

176

Ensuring a high level of financial literacy is a matter which has throughout history beenseen as an issue of great importance among savings banks across Europe. Savings banks playa key role in educating people on finance and budget matters, far beyond their actualclientele. Consumers’ lack of insight into and understanding of financial matters can bedetrimental for customers’ confidence and even to customers’ satisfaction. It is consequentlyin the interest of all stakeholders to work together towards improving the situation.

ESBG therefore considers that financial education is an important way to enable citizensto make their own independent judgement as well as conscious choices on the productsoffered to them. Consumers need to have the skills to manage and use their moneywisely and adequately, and to understand the complex products and variety of servicesthat are offered. In developing these skills and enabling consumers to choose theproducts and services that are best tailored to their specific needs, financial educationalso plays an important role to prevent over-indebtedness and to integrate people whoare at risk of financial exclusion.

ESBG views

As financial institutions with a strong commitment to CSR, ESBG members welcome allefforts to ensure that European consumers are knowledgeable and well-informed onfinancial matters. ESBG supports the European institutions’ initiative of placing financialeducation high on the agenda and welcomes the current discussion on European level,reflecting the importance of the topic. Nevertheless, ESBG is convinced that the provisionof financial education is mainly a matter for Member States and should be dealt with atnational level, regional and local level. This way, financial literacy schemes are able to takeinto account the local specificities, such as culture, tradition and languages.

In order to make financial education an efficient and sustainable tool to empowerthe consumer, all interested stakeholders have to be involved. Member States, nationalgovernments, education bodies and authorities, financial regulators and institutions,as well as other stakeholders such as parents, share the responsibility to foster financialeducation amongst Europe’s citizens, helping them to have a better knowledge offinancial issues and to make informed choices. Governments and public institutions havethe responsibility to give the policy orientations, to provide the overall support to financialeducation strategies, to raise awareness on potential financial needs and risks, and toencourage people to anticipate and prevent personal financial difficulties. Financial institutions,including savings banks, are involved in delivering financial education programmes andschemes to increase the level of financial literacy.

Savings banks are close to their clients and well aware of the areas where the lack ofknowledge is most present. They can widely contribute to financial education throughoutcitizens’ lives, and savings banks play a key role all over Europe in educating people onspecific money matters. ESBG members have traditionally been involved to a large extentin creating and participating in various financial literacy schemes at the local level, tailoringthe needs of the target groups and covering literacy programmes in primary, secondaryand higher education.219 They therefore have a significant amount of experience to shareas best practises with other actors. Based on the knowledge of their clients’ needs,savings banks can efficiently bring their expertise to financial education campaigns andprovide technical input for the development of targeted projects focusing on consumer’slife planning aspects – and they can do this successfully on a voluntary basis.

219 Please also see Annex 2 CSR Case Studies

177

Against this background, the ESBG welcomes the two practical initiatives on Europeanlevel to encourage the sharing of experiences and best practices which were outlinedin the Commission’s 2007 Communication on Financial Education: the Expert Group onFinancial Education (EGFE) to which two ESBG members220 participate and the EuropeanDatabase for Financial Education (EDFE) in which a number of schemes initiated andcarried out by ESBG members are presented in the database including the EuropeanStock Market Learning221 initiative – a multinational financial education programme forstudents which is a joint project of savings banks across Europe,. The latter has receivedgreat attention at the EU level for its interdisciplinary approach, involving linguistic,economic, mathematical and cultural science.

220 European Commission. 2008. Members of the Expert Group on Financial Education. National Strategies forFinancial Education, Brussels [http://ec.europa.eu/internal_market/finservices-retail/docs/capability/members_en.pdf]. Accessed June 2009.

221 Deutscher Sparkassen Verlag. 2009. Stock Market Learning, Stuttgart, http://www.planspiel-boerse.com/toplevel/englisch/index.htm]. Accessed June 2009.

While this report was being developed, the financial world was changing dramatically. This report can therefore not be a summaryof conclusions reached in important debates or an attempt to capture the status quo in all different discussions. Rather, we hopethat it will contribute to the ongoing debates and shape them as they move forward. We also hope that the parametersdeveloped here will set future standards for those discussions which currently appear suspended. Regarding our concreterecommendations on retail banking policy, we believe that now is the best time to give them their due consideration and tointegrate them into the ongoing regulatory efforts and into current and upcoming assessments on the need and scope for futureregulation in relevant areas.

Given the richness and diversity of the topics addressed, it is hard to find one concluding and summarising closing line. Also it isdifficult to make projections for the future, since, even at the time of writing, many ‘fashionable wisdoms’ and political prioritieson retail banking and retail banking sector integration are being overthrown. Yet there are three central themes to ourrecommendations which cover a wide range of fields: first, general banking ethics and principles for corrective policy measures,second, economic parameters and sector specificities as they concern the wider vision of an integrated retail banking sector, andthird, detailed and concrete recommendations in specific areas of retail banking:

1) Consequences of the crisis: financial stability as a new focusing point for Europe?

The experience of the current financial and economic crisis opened the eyes of industry participants and policy makers alike tothe risks associated with misguided priorities. Now, globally and at the EU level, efforts are being made to take necessary actionsto address the lessons learned and to increase the stability of financial systems. This is an urgent task, which still requires ajudicious and circumspect approach. Yet, a truly comprehensive approach also needs to include a differentiated discussion of‘what has worked’ and ‘what has not worked’ in the banking sector. As a result, including at the EU level, expectations for banksshould be built based upon their role in the real economy; they should not trigger ambitious and unrealistic politically motivatedgoals. Looking at the efforts already underway, the current revisions to EU regulation and supervision are timely and entail manyimportant insights. Nevertheless policy makers need to be aware of the risks implied by undue haste in taking decisive action.In order to ensure future stability, the most convincing way lies in good and well thought through regulation which is not subjectto short-termism, whether in its goals or in its implementation.

2) European sector integration needs a reality-based approach

The European Union should not (neither now nor in the future) set itself the task to reinvent or remodel Europe’s banking sector.Rather, based on the existing building blocks and by making the best use of their specific strengths, policy makers should reflecton the best possible outcome - keeping in mind that the existing business models have proven their validity and adaptability tothe circumstances in the markets they serve. Traditionally, banking is an economic activity which takes a long time to build, andwhich, by its very nature, combines dynamic reactions to changes in demand and economic circumstances with a long-termoutlook and continuity in strategies. In contrast, politically fashionable views on banking generally alter more frequently. A reality-based policy approach, however, needs to bear in mind that the clear benefits of a pluralistic banking sector survive all changesin political trends.

179

CONCLUDING REMARKS

3) Europe needs a targeted approach to regulation according to the principles of proportionality andcompatibility with national circumstances

Regulation which imposes undue burden or hampers banks’ competitiveness without any clear general benefits is not goodregulation. EU-level regulation is of course often needed for market functioning and for market integration. Yet, it needs to beconsistent, compatible with the different market environments, and concentrated on those areas where it is necessary andgenerates added value. These are general principles, but they particularly apply to retail banking. Not only is retail banking acentral economic activity, it is also thoroughly imbedded in the economy, covers various important activities, and concerns a widerange of stakeholders. In addition, the diversity within the retail banking sector, as well as the diversity of national practices andenvironments, is greater than in many other industries. As a result – at least theoretically – the scope for EU level intervention iswide, but so also is the risk for regulatory action to turn out conflicting or biased.

These central themes carry ESBG’s consistent and continuous messages for the relevant discussions on the European retail bankingsector. Looking ahead, it is our hope that they will be part of the future debates on European retail banking and help set a trendfor the way forward.

180

Statistics

Part 1 – Structural and financial data

Table 1: ESBG membership base

Number of credit

Country ESBG member Institution(s) represented institutions (2007)

Czech Republic Ceska Sporitelna AS 1

Denmark 3 S Group Independent savings banks 11

Germany Deutscher Sparkassen-und Giroverband e.V. (DSGV) Members of Sparkassen Finanzgruppe 453

Greece Greek Post Office Savings Bank 1

Spain Confederación Española de Cajas de Ahorros (CECA) Independent savings banks 45

France Groupe Caisse d'Epargne Caisse Nationale des Caisses d'Epargne 21

Fédération Nationale des Caisses d'Epargne

Italy Assocciazione di Fondazioni e di Casse Italian foundations and savings banks 45

di Risparmio Italiane (ACRI)

Latvia Latvijas Krajbanka 1

Luxembourg Banque et Caisse d'Epargne et de l'Etat (BCEE) 1

Hungary Országos Takarékpénztár és Kereskedelmi Bank Rt. (OTP) 1

Malta Bank of Valletta Plc 1

Netherlands SNS Reaal 1

Austria Österreichischer Sparkassenverband Erste Group and regional savings banks 56

Poland Powszechna Kasa Oszczednosci Bank Polski SA (PKO) 1

Portugal Caixa Económica da Misericórdia de Angra do Heroísmo (CEMAH) 3

Montepio

Caixa Geral de Depósitos

Romania Casa de Economii si Consemnatiuni 1

Slovakia Slovenska Sporitelna AS 1

Finland Säästöpankkiliitto Independent regional savings banks 38

Sweden Swedbank Swedbank and independent savings banks 64

United Kingdom Lloyds TSB Bank plc 1

Croatia Hrvatska poštanska banka d.d. (HPB) (Croatia Postal Bank) 1

Iceland Samband Islenskra Sparisjóda (Icelandic Savings

Banks Association) Independent savings banks 19

Norway Sparebankforeningen i Norge Independent savings banks 122

Turkey VakifBank, Türkkiye Vakiflar Bankasi TAO 1

Note: Throughout this annex, ESBG members are presented according to the names of their countries (following the order used by the European Central Bank).

181

ANNEX 1

Table 2: Number of credit institutions in the EU, 1997-2007

Change Change

1997-2007 2005-2007

1997 1999 2001 2003 2005 2007 (%) (%)

Belgium 131 117 112 108 100 110 -16.03 9.09

Bulgaria 35 34 29 n/a -17.24

Czech Republic 119 77 56 56 n/a 0.00

Denmark 213 210 203 203 197 189 -11.27 -4.23

Germany 3,420 2,992 2,526 2,225 2,089 2,026 -40.76 -3.10

Estonia 7 7 11 15 n/a 26.66

Ireland 71 81 88 80 78 81 14.08 3.70

Greece 55 57 61 59 62 63 14.55 1.58

Spain 416 387 367 348 348 357 -14.18 2.52

France 1,258 1,159 1,050 939 854 808 -35.77 -5.69

Italy 909 890 843 801 792 821 -9.68 3.53

Cyprus 406 408 391 215 n/a -81.86

Latvia 39 23 25 31 n/a 19.35

Lithuania 54 71 78 80 n/a 2.50

Luxembourg 215 211 194 169 155 156 -27.44 0.64

Hungary 240 222 214 206 n/a -3.88

Malta 17 16 19 22 n/a 13.63

Netherlands 648 616 561 481 401 341 -47.38 -17.59

Austria 928 875 836 814 818 803 -13.47 -1.86

Poland 758 660 730 718 n/a -1.67

Portugal 238 224 212 200 186 175 -26.47 -6.28

Romania 39 40 42 n/a 4.76

Slovenia 69 33 25 27 n/a 7.40

Slovakia 21 22 23 26 n/a 11.53

Finland 348 346 369 366 363 360 3.45 -0.83

Sweden 237 148 149 222 200 201 -15.19 0.49

United Kingdom 537 496 452 426 400 390 -27.37 -2.56

EMU 13 (12) 8637 7954 7213 6623 6271 6128

EU 27 (25, 15) 9624 8872 9747 9054 8689 8348

Source: ECB Report on EU Banking Structures (November 2004, October 2008).

Note: For EU / EMU, the changes between 1997-2007 and 2005-2007 have not been calculated, as in both cases enlargements took place during the period under

consideration, altering the composition of the sample. This will apply to all tables in the annex where relevant.

182

Table 3A: Total assets of EU credit institutions, EUR millions, 1997-2007

1997 1999 2001 2003 2005 2007

Belgium 661,487 714,467 776,173 828,557 1,055,270 1,297,788

Bulgaria 9,254 17,447 31,238

Czech Republic 78,188 78,004 100,902 140,004

Denmark 314,739 382,589 454,328 568,848 746,246 977,970

Germany 4,774,748 5,656,443 6,268,700 6,393,503 6,826,534 7,562,431

Estonia 4,372 6,314 11,876 20,603

Ireland 184,808 302,753 422,106 575,168 941,909 1,337,357

Greece 114,628 162,115 202,736 213,171 281,066 383,293

Spain 844,807 1,006,157 1,247,998 1,502,861 2,149,456 2,945,262

France 3,026,370 3,402,082 3,768,943 3,998,554 5,073,388 6,682,335

Italy 1,602,929 1,628,804 1,851,990 2,125,366 2,509,436 3,331,830

Cyprus 42,268 41,890 60,753 91,141

Latvia 7,279 8,482 15,727 30,816

Lithuania 4,361 6,453 13,162 23,817

Luxembourg 516,683 598,536 721,001 655,971 792,418 915,448

Hungary 38,433 n/a 78,289 108,504

Malta 15,762 17,901 27,195 37,808

Netherlands 769,034 983,664 1,265,906 1,473,939 1,695,325 2,195,020

Austria 411,520 486,709 573,384 586,459 721,159 890,747

Poland 133,476 112,174 163,421 236,008

Portugal 222,244 302,824 298,428 348,691 360,190 440,144

Romania 15,000 35,400 72,095

Slovenia 17,782 21,541 30,135 43,493

Slovakia 21,446 23,751 37,834 50,318

Finland 104,969 119,344 162,416 185,846 234,520 287,716

Sweden 389,130 390,628 452,289 519,259 653,176 845,958

United Kingdom 3,851,807 4,501,190 5,829,766 6,288,193 8,526,509 10,093,134

EMU 13 (12) 13,234,227 15,363,898 17,560,781 18,909,627 22,670,806 28,312,864

EU 27 (25, 15) 17,789,903 20,638,305 24,660,532 26,605,149 33,158,743 41,072,276

Source: ECB Report on EU Banking Structures (November 2004, October 2006, October 2008).

183

Table 3B: Total assets of ESBG members, EUR millions, 1997-2007

1997 1999 2001 2003 2005 2007

Czech Republic n/a 10,484 14,775 17,297 22,561 30,861

Denmark n/a 1,984 3,038 3,765 5,778 9,138

Germany 1,702,815 2,070,515 2,254,906 2,345,822 2,379,075 2,632,000

Greece 9,700 9,589 10,612 10,062 11,564 13,182

Spain 278,542 353,223 453,030 556,814 808,536 1,155,001

France 194,486 248,751 285,896 380,675 594,132 601,454

Italy 271,522 290,932 165,541 128,472 140,603 171,487

Latvia 127 174 281 287 349 961

Luxembourg 24,923 29,504 35,644 36,336 39,139 39,421

Hungary 6,420 6,939 8,390 10,335 14,288 20,081

Malta 2,407 3,272 4,303 4,693 4,924 5,388

Netherlands 23,051 32,527 43,761 53,058 68,088 70,584

Austria n/a 191,751 203,214 110,210 127,029 150,351

Poland 11,821 13,955 21,876 18,101 23,138 29,770

Portugal 45,415 62,022 76,793 86,517 100,683 120,261

Romania 837 1,416 1,062 1,033 1,545 2,851

Slovakia 4,432 3,905 4,661 5,087 6,839 9,107

Finland 4,485 5,773 6,971 447 5,358 6,109

Sweden 76,977 97,169 101,355 110,910 126,003 186,468

United Kingdom 236,093 281,165 379,312 362,763 452,658 494,397

Croatia 707 984 1,987

Iceland 880 1,585 1,671 2,030 4,361 6,777

Norway 44,912 60,201 78,658 91,200 180,338 246,251

Turkey 10,462 21,245 24,135

Total ESBG n/a 3,776,836 4,155,750 4,347,083 5,139,218 6,028,022

Source: Figures provided by ESBG members, or from annual reports.

184

Table 4A: Number of employees in the EU banking sector, 1997-2007

Percentage work

force employed

by banking sector

1997 1999 2001 2003 2005 2007 (2007)

Belgium 76,603 76,288 76,104 73,553 69,481 67,080 1.54

Bulgaria n/a 22,945 30,571 0.82

Czech Republic 4,299 39,658 37,943 40,037 0.77

Denmark 48,049 47,974 48,538 46,443 47,579 49,644 1.71

Germany 765,850 772,400 772,100 725,550 705,000 690,900 1.74

Estonia 3,949 4,280 5,029 6,319 0.99

Ireland n/a 37,677 40,928 35,658 37,702 41,865 1.98

Greece 56,722 58,606 59,624 61,074 61,295 64,713 1.38

Spain 245,916 243,509 244,781 243,460 252,831 275,506 1.34

France 414,093 408,571 415,979 420,291 434,354 478,615 1.86

Italy 343,005 340,470 343,814 337,689 335,726 341,538 1.36

Cyprus 10,115 10,480 10,799 11,286 2.93

Latvia 8,172 8,903 10,477 12,826 1.15

Lithuania 8,796 7,557 7,637 10,303 0.67

Luxembourg 19,135 21,197 23,894 22,513 23,224 26,139 7.84

Hungary 34,054 35,725 37,527 41,905 1.00

Malta 3,584 3,416 3,383 3,756 2.36

Netherlands 111,487 124,309 131,420 119,857 120,165 114,424 1.33

Austria 74,321 73,511 74,606 73,308 75,303 77,731 1.92

Poland 168,529 154,569 158,130 173,955 1.15

Portugal 64,554 61,319 55,538 53,931 54,035 60,975 1.19

Romania 46,567 52,452 66,039 0.71

Slovenia 11,578 11,816 11,726 12,051 1.25

Slovakia 20,118 19,812 19,773 19,779 0.91

Finland 26,816 24,721 26,733 26,668 23,644 25,025 1.00

Sweden 43,197 43,222 42,001 39,456 44,943 44,056 0.98

United Kingdom 455,422 486,799 506,278 495,173 461,654 n/a n/a

Source: ECB Report on EU Banking Structures and ECB labour market indicators (November 2004, October 2008).

Notes: Last column: ESBG calculations based on the ECB Report on EU Banking Structures and ECB labour market indicators, for total workforce figures (October 2008).

185

Table 4B: Total Number of employees of ESBG members, 1997-2007

1997 1999 2001 2003 2005 2007

Czech Republic 17,522 16,410 14,539 12,786 11,406 10,048

Denmark 981 981 1,143 1,381 n/a 2,026

Germany 321,084 322,953 325,684 312,406 301,004 293,538

Greece 1,312 1,271 1,280 1,258 1,220 1,260

Spain 90,853 98,372 106,684 110,243 117,890 131,548

France 39,400 42,000 44,000 44,700 54,400 51,200

Italy 75,014 72,411 49,253 34,177 34,111 34,928

Latvia 1,876 1,498 1,218 943 874 949

Luxembourg 1,652 1,627 1,614 1,602 1,581 1,602

Hungary 12,161 8,497 8,293 7,980 7,999 8,494

Malta 1,578 1,601 1,627 1,555 1,492 1,479

Netherlands 4,963 5,603 5,860 5,536 5,336 3,223

Austria 24,294 24,096 24,629 16,164 12,949 13,136

Poland 41,654 39,998 38,341 36,547 33,479 29,000

Portugal 18,987 24,511 20,318 21,445 23,706 16,637

Romania 12,630 13,206 11,180 9,497 7,224 6,801

Slovakia 6,317 6,818 5,861 5,283 4,901 4,728

Finland 1,768 1,892 1,979 1,454 1,106 1,178

Sweden 12,454 12,791 16,068 15,366 16,148 22,148

United Kingdom 82,580 76,056 81,400 71,609 70,000 70,000

Croatia 186 267 446 n/a n/a n/a

Iceland 475 621 710 857 919 875

Norway 10,719 10,813 11,178 10,876 15,582 18,311

Turkey n/a n/a n/a 7,341 7,164 8,557

Total ESBG 780,460 784,293 773,305 731,006 730,491 714,154

Source: Figures provided by ESBG members.

186

Table 5A: Number of local units (branches) of credit institutions in the EU, 1997-2007

Change

1997 1999 2001 2003 2005 2007 1997-2007 (%)

Belgium 7,358 6,982 6,168 4,989 4,564 4,425 -39.86

Bulgaria n/a 5,629 5,827 3.51

Czech Republic* 1,751 1,670 1,825 1,862 6.34

Denmark 2,283 2,294 2,376 2,118 2,112 2,194 -3.90

Germany 63,186 58,546 53,931 47,244 44,044 39,777 -37.05

Estonia* 210 197 230 266 26.67

Ireland 942 977 970 924 910 1,158 22.93

Greece 2,510 2,850 3,134 3,300 3,576 3,850 53.39

Spain 38,039 39,376 39,012 39,750 41,979 45,500 19.61

France 25,464 25,501 26,049 25,789 27,075 39,560 55.36

Italy 25,601 27,134 29,267 30,501 31,498 33,227 29.79

Cyprus* 1,009 983 951 921 -8.72

Latvia* 590 581 586 682 15.59

Lithuania** 156 723 822 970 34.16

Luxembourg 318 345 274 269 246 235 -26.10

Hungary * 2,950 3,003 3,122 3,387 14.81

Malta* 102 104 100 104 1.96

Netherlands 6,800 6,258 4,720 3,883 3,748 3,604 -47.00

Austria 4,691 4,589 4,561 4,395 4,300 4,266 -9.06

Poland** 4,080 8,688 10,074 11,607 33.59

Portugal 4,746 5,401 5,534 5,397 5,427 6,030 27.05

Romania 3,387 3,533 6,340 87.18

Slovenia* 717 720 693 711 -0.84

Slovakia* 1,052 1,057 1,142 1,169 11.12

Finland 1,289 1,193 1,257 1,564 1,616 1,638 27.08

Sweden 2,521 2,140 1,986 1,906 1,910 1,846 -26.78

United Kingdom 16,344 15,387 14,554 14,186 13,694 12,425 -23.98

EMU 13 (12) 180,944 179,152 175,191 168,730 169,644 183,981

EU 27 (25, 15) 202,092 198,973 206,724 206,956 214,925 233,581

Source: ECB Report on EU Banking Structures (November 2004, October 2008).

Notes: For countries marked with * the % change was calculated for 2001-2007.

For countries marked with ** the % change was calculated for 2003-2007, due to changes in the ECB definition of the term “local units” for those countries.

For Romania and Bulgaria the % change was calculated for the longest period available.

187

Table 5B: Number of domestic local units (branches) of ESBG members, 1997-2007

Approximate share

of total

domestic branches

1997 1999 2001 2003 2005 2007 2007 (%)

Czech Republic 1,127 876 684 667 647 636 34.16

Denmark n/a 68 99 116 140 154 7.02

Germany 20,323 20,032 18,884 17,646 16,775 15,932 40.05

Greece 128 132 135 135 136 141 3.66

Spain 16,647 18,350 19,842 20,893 22,445 24,591 54.53

France 4,200 4,715 4,740 4,700 4,337 4,770 17.24

Italy 6,047 5,879 4,437 3,540 3,816 4,050 12.19

Latvia 326 188 119 79 73 107 15.69

Luxembourg 97 96 89 89 87 75 31.91

Hungary 415 440 424 432 377 388 11.46

Malta n/a n/a 58 48 47 46 44.23

Netherlands 303 278 201 529 593 873 24.22

Austria 1,466 1,421 1,445 1,112 1,063 1,010 23.68

Poland 6,979 6,414 5,951 4,812 3,761 3,539 10.67

Portugal 1,117 1,409 1,390 1,408 1,411 1,092 18.10

Romania 2,166 1,825 1,637 1,511 1,406 1,404 22.14

Slovakia 646 346 441 339 302 273 20.85

Finland 246 257 258 200 210 173 10.56

Sweden 1,077 818 951 821 764 724 24.86

United Kingdom 2,900 2,500 2,300 2,200 2,100 2,000 16.09

Croatia n/a 1,116 1,132 n/a

Iceland 51 55 62 n/a 72 63 n/a

Norway 1,012 999 972 920 943 1,260 n/a

Turkey 294 302 360 n/a

Total ESBG 67,273 67,098 65,119 62,491 62,923 63,701

Source: Figures provided by ESBG members.

Notes: For Denmark, the change in the number of domestic units has been calculated for the period 1999-2007.

For Malta, the change in the number of domestic units has been calculated for the period 2001-2007.

For Croatia, the change in the number of domestic units has been calculated for the period 2005-2007.

For Turkey, the change in the number of domestic units has been calculated for the period 2003-2007.

188

Table 6A: Number of ATMs in the EU, 1997-2007

1997 1999 2001 2003 2005 2007

Belgium 4,986 6,229 11,393 12,495 13,543 15,446

Bulgaria 642 1,222 2,779 4,535

Czech Republic 1,923 2,555 3,005 3,357

Denmark 2,387 2,641 2,763 2,873 3,001 3,129

Germany 41,397 46,200 49,620 51,129 53,361 68,321

Estonia 680 747 796 927

Ireland 1,039 1,120 1,335 2,278 2,944 3,240

Greece 2,190 3,054 4,377 5,468 6,155 7,315

Spain 33,940 41,871 46,990 51,978 56,333 60,588

France 27,077 32,445 36,912 41,988 47,827 52,168

Italy 25,546 30,203 36,621 39,059 40,577 48,113

Cyprus 311 367 444 556

Latvia 791 868 877 1,147

Lithuania 689 994 1,056 1,334

Luxembourg 233 310 355 387 405 445

Hungary 2,544 2,975 3,531 4,286

Malta 139 149 154 162

Netherlands 6,397 6,673 7,142 7,556 7,446 8,546

Austria 4,302 5,340 6,622 7,499 7,970 8,105

Poland 6,476 7,575 8,776 11,542

Portugal 6,280 8,850 10,524 11,985 13,841 15,860

Romania 1,290 2,593 4,354 7,452

Slovenia 1,027 1,240 1,490 1,643

Slovakia 1,182 1,505 1,854 2,166

Finland 2,285 2,181 4,332 3,955 3,385 3,218

Sweden 2,370 2,580 2,567 2,676 2,800 2,809

United Kingdom 23,193 27,379 36,666 46,461 58,286 63,420

Source: For 1997-1999 ESBG research (The Future of European Retail Banking Markets, June 2003).

For 2001-2007, ECB Payment Statistics (from Statistical Data Warehouse).

189

Table 6B: Number of ATMs of ESBG members, 1997-2007

Approximate domestic

market share

1997 1999 2001 2003 2005 2007 2007 (%)

Czech Republic 822 870 954 1,067 1,076 1,124 33.48%

Denmark n/a 65 84 98 124 n/a n/a

Germany 16,700 18,700 20,600 21,100 21,060 24,620 36.04%

Greece 0 0 0 55 127 181 2.47%

Spain 18,985 23,381 26,244 29,165 31,703 35,034 57.82%

France 4,400 4,800 5,100 5,275 5,920 7,212 13.82%

Italy 6,239 n/a n/a n/a n/a n/a n/a

Latvia 4 18 117 129 132 117 10.20%

Luxembourg 73 120 126 129 134 134 30.11%

Hungary 661 1,019 1,091 1,305 1,500 1,981 46.22%

Malta n/a n/a 65 70 67 73 45.06%

Netherlands n/a 360 350 344 300 513 6.00%

Austria n/a n/a 2,790 1,591 1,562 n/a n/a

Poland 198 763 1,478 1,734 1,862 2,333 20.21%

Portugal 1,792 2,622 3,693 3,528 4,875 5,271 33.23%

Romania 0 0 0 0 138 597 8.01%

Slovakia 322 356 406 446 519 617 28.49%

*Finland 208 221 219 135 n/a n/a n/a

Sweden 1,176 1,466 1,932 2,097 2,147 2,562 30.79%

United Kingdom n/a n/a 4,300 4,220 4,197 4,100 6.46%

Croatia n/a 137 192 n/a

Iceland n/a n/a 89 91 87 87 n/a

Norway n/a n/a n/a 1,050 2,184 2,272 n/a

Turkey 1,636 1,820 1,953 n/a

Source: Figures provided by ESBG members or collected from annual reports.

Note: *In Finland banks use a common ATM-network called Otto, since 2005.

190

Table 7: ESBG members in context of their national markets, 2007

Number of ATMs located

Domestic local units (branches), Employees in the banking sector, in the country,

per million inhabitants per million inhabitants per million inhabitants

Total ESBG Total ESBG Total ESBG

domestic market member domestic market member domestic market member

Czech Republic 181.0 61.8 3,891.9 976.7 326.3 109.3

Denmark 402.8 28.3 9,113.9 371.9 574.4 n/a

Germany 483.2 193.5 8,393.4 3,566.0 830.0 299.1

Greece 344.6 12.6 5,792.6 112.8 654.8 16.2

Spain 1,023.1 552.9 6,194.7 2,957.8 1,362.3 787.7

France 624.1 75.2 7,550.1 807.7 822.9 113.8

Italy 561.9 68.5 5,775.9 590.7 813.7 n/a

Latvia 299.0 46.9 5,622.2 416.0 502.8 51.3

Luxembourg 493.5 157.5 54,892.3 3,364.2 934.5 281.4

Hungary 336.5 38.5 4,163.0 843.8 425.8 196.8

Malta 255.0 112.8 9,210.2 3,626.7 397.2 179.0

Netherlands 220.3 53.4 6,995.0 197.0 522.4 31.4

Austria 514.0 121.7 9,366.4 1,582.9 976.6 n/a

Poland 304.4 92.8 4,562.7 760.6 302.7 61.2

Portugal 568.9 103.0 5,752.8 1,569.7 1,496.4 497.3

Romania 294.0 65.1 3,062.3 315.4 345.6 27.7

Slovakia 216.7 50.6 3,667.1 876.6 401.6 114.4

Finland 310.4 32.8 4,742.3 223.2 609.8 n/a

Sweden 202.6 79.4 4,834.3 684.3 308.2 94.9

United Kingdom 204.3 32.9 n/a 1,249.7 1,042.8 67.4

Croatia* 254.9 n/a 43.2

Iceland* 204.8 2,843.9 282.8

Norway* 269.2 3,911.7 485.4

Turkey* 5.2 122.8 28.0

Source: ESBG calculations based on ECB Report on EU Banking Structures (October 2008), ECB Payment Statistics (from Statistical Data Warehouse), figures provided

by ESBG members and Eurostat figures (for total population) (updated 15 December 2008, extracted 4 February 2009).

Note: countries marked with " * " are not part of the EU.

191

Table 8: Market shares (%) of ESBG members, 2007

Residential

Non-bank deposits Non-bank loans Consumer credit mortgage loans

Czech Republic 23.6 23.0 53.9 25.7

Denmark n/a n/a n/a n/a

Germany 32.1 21.9 28.1 28.7

Greece 5.8 3.5 9.0 6.7

Spain 50.1 47.5 34.4 57.4

France n/a n/a 6.6 15.3

Italy n/a n/a n/a n/a

Latvia 5.7 2.0 4.9 2.1

Luxembourg n/a n/a n/a n/a

Hungary* 24.1 19.1 24.8 36.7

Malta** 55.0 42.8 47.5

Netherlands 8.3 n/a n/a 7.4

Austria 18.1 16.8 n/a 18.0

Poland n/a 42.6 n/a 29.1

Portugal*** 32.4 26.1 11.4 35.9

Romania n/a n/a n/a n/a

Slovakia n/a n/a n/a n/a

Finland 5.3 3.2 3.3 6.1

Sweden 26.0 26.0 n/a 30.0

United Kingdom**** 7.0 n/a 14.0 8.0

Croatia 5.6 3.6 n/a 0.3

Iceland 6.2 4.6 27.9 17.7

Norway 67.6 64.2 n/a 74.0

Turkey 8.2 8.6 8.5 7.7

Source: Figures from ESBG members, and ESBG calculations based on figures from ESBG members and the ECB for aggregated Member States figures (EU Banking

Structures, October 2008).

Notes: * Hungarian members of the OTP Group.

** Bank of Valetta discloses both consumer credit and residential mortgages together.

*** Added market shares of Caixa Geral de Depositos and Montepio.

**** The categories of market share for Lloyds TSB are the following: savings deposits (as a proxy for non-bank deposits), personal loans (as a proxy for

consumer credit) and mortgages (as a proxy for residential mortgage loans).

192

Table 9A: Non-bank deposits as a percentage of total assets in the EU, 1997-2007

1997 1999 2001 2003 2005 2007

Belgium 34.5 40.4 42.0 44.8 43.8 39.5

Bulgaria n/a 64.3 63.5

Czech Republic 67.5 66.9 66.4

Denmark 69.9 67.6 19.4 18.8 19.2 18.5

Germany 40.9 38.6 38.0 38.3 38.0 38.1

Estonia 54.1 50.9 44.1

Ireland 35.0 32.6 31.1 28.6 25.1 24.5

Greece 70.4 62.9 67.0 65.7 66.7 64.8

Spain 51.7 52.2 56.7 54.5 50.4 51.2

France 29.4 27.8 27.9 30.0 27.0 23.6

Italy 38.9 37.9 36.8 36.1 34.8 33.7

Cyprus 67.2 62.7 57.6

Latvia 31.2 56.7 46.7

Lithuania 63.4 59.2 48.9

Luxembourg 40.0 31.6 30.1 31.6 30.5 32.3

Hungary n/a 52.6 47.1

Malta 45.7 41.3 37.1

Netherlands 44.7 41.1 41.5 38.7 40.3 40.0

Austria 41.1 38.5 36.7 38.3 35.2 33.8

Poland 64.2 64.8 62.4

Portugal 45.4 39.7 45.0 39.9 45.5 43.8

Romania n/a 61.1 53.6

Slovenia 64.6 53.2 45.6

Slovakia n/a 57.9 62.5

Finland 56.2 53.5 42.5 41.3 36.8 35.2

Sweden 27.3 25.5 25.0 24.4 23.5 22.4

United Kingdom 32.8 33.4 31.8 54.0 53.7 58.0

Source: ESBG calculations based on information on total assets, and information on non-bank deposits from the ECB Report on EU Banking Structures (November 2004,

October 2008).

193

Table 9B: Non-bank deposits as a percentage of total assets of ESBG members, 1997-2007

1997 1999 2001 2003 2005 2007

Czech Republic n/a 84.0 79.5 77.4 74.0 72.0

Denmark n/a 70.1 69.4 67.2 66.0 50.0

Germany 44.4 41.7 41.2 42.1 42.0 39.8

Greece 85.5 83.2 84.3 88.4 86.0 84.8

Spain 78.9 75.7 77.1 80.6 67.0 63.0

France 81.8 63.5 56.8 47.6 37.0 30.4

Italy 60.2 61.7 69.0 76.2 76.0 73.0

Latvia 88.3 80.3 79.1 75.5 81.0 87.3

Luxembourg 53.7 40.9 40.8 44.0 43.0 48.9

Hungary 85.6 86.6 87.6 82.9 70.0 59.0

Malta 79.2 74.1 71.4 71.7 71.0 74.2

Netherlands 45.9 40.3 34.2 33.1 29.0 38.0

Austria 42.0 32.9 33.2 36.8 34.0 37.0

Poland 88.0 90.6 86.9 84.8 84.0 79.0

Portugal 74.0 70.5 65.1 61.1 57.6 44.9

Romania 63.7 81.5 18.6 83.2 86.0 80.6

Slovakia 89.0 85.7 85.6 89.0 69.0 75.0

Finland 80.4 76.1 71.0 83.7 84.0 82.0

Sweden 32.5 25.3 25.8 28.3 25.0 33.0

United Kingdom 54.1 52.4 46.1 46.2 42.0 44.3

Croatia 80.6 69.0 70.0

Iceland 60.9 52.2 50.1 58.9 44.0 39.6

Norway 64.2 58.9 56.4 55.4 52.0 47.0

Turkey 71.0 67.0 n/a

Source: ESBG calculations based on information provided by ESBG members and from annual reports.

194

Table 10: Gross household saving rate, 1997-2007 (% share of gross saving to gross disposable income)

1997 1999 2001 2003 2005 2007

Belgium 17.7 17.2 16.4 14.7 12.6 13.7

Bulgaria

Czech Republic 11.0 8.5 7.4 7.4 8.1 8.8

Denmark 5.0 3.8 8.8 9.4 4.5 5.1

Germany 15.9 15.3 15.2 16.0 16.3 16.7

Estonia 6.5 2.6 3.1 -1.6 -3.8 0.8

Ireland 10.6 11.6 9.2

Greece

Spain 11.1 12.0 11.3 10.2

France 15.8 15.1 15.6 15.6 14.6 15.6

Italy 20.2 15.8 16.0 16.0 15.9 14.2

Cyprus

Latvia 1.8 -0.7 -0.4 3.0 1.2 -4.3

Lithuania 3.4 7.8 4.9 2.9 1.3 0.1

Luxembourg

Hungary 13.7 9.2 11.4 n/a

Malta

Netherlands 17.6 13.8 14.5 13.0 12.2 13.4

Austria 12.6 14.5 12.9 14.0 14.5 16.3

Poland 14.1 13.3 14.2 10.0 9.8 8.8

Portugal 10.8 9.8 10.9 10.5 9.2 6.6

Romania

Slovenia 15.5 13.9 17.0 16.4

Slovakia 13.9 11.2 9.1 7.1 6.9 7.7

Finland 9.1 9.3 7.8 8.4 8.0 5.5

Sweden 7.2 6.0 11.8 11.4 9.5 12.0

United Kingdom 9.6 5.2 6.0 5.1 5.1 2.2

EMU 13 (12) 15.6 14.3 14.3 14.6 14.0 13.9

EU 27 (25, 15) 14.1 12.1 12.4 12.2 11.7 10.8

Source: Eurostat "Statistics in Focus" 29/2009 (with data from Eurostat and OECD).

195

Table 11: % share of 5 largest credit institutions in total domestic assets, 1997-2007

1997 1999 2001 2003 2005 2007

Belgium 54.0 76.0 78.0 83.5 85.3 83.4

Bulgaria n/a 50.8 56.7


Denmark 70.0 71.0 68.0 66.6 66.3 64.2

Germany 17.0 19.0 20.0 21.6 21.6 22.0

Estonia 99.2 98.1 95.7

Ireland 41.0 41.0 43.0 44.4 45.7 46.1

Greece 56.0 67.0 67.0 66.9 65.6 67.7

Spain 32.0 41.0 45.0 43.1 42.0 41.0

France 40.0 43.0 47.0 46.7 51.9 51.8

Italy 25.0 25.0 29.0 27.5 26.8 33.1

Cyprus 57.2 59.8 64.8

Latvia 63.1 67.3 67.2

Lithuania 81.0 80.6 80.9

Luxembourg 23.0 26.0 28.0 31.8 30.7 27.9

Hungary 52.1 53.2 54.1

Malta 77.7 75.3 70.1

Netherlands 79.0 82.0 83.0 84.2 84.5 86.3

Austria 44.0 41.0 45.0 44.2 45.0 42.8

Poland 52.0 48.5 46.6

Portugal 46.0 44.0 60.0 62.7 68.8 67.8

Romania 55.2 59.4 56.3

Slovenia 66.4 63.0 59.5

Slovakia 67.5 67.7 68.2

Finland 88.0 86.0 80.0 81.2 82.9 81.2

Sweden 58.0 56.0 55.0 53.8 57.3 61.0

United Kingdom 24.0 28.0 29.0 32.8 36.3 40.7

EMU 13 (12) * 45.0 49.0 52.0 54.2 54.9 54.7

EU 27 (25, 15)** 46.0 50.0 52.0 58.8 59.3 59.4

Source: ECB Report on EU Banking Structures (October 2008, November 2004).

Notes: *for 1997-2001 the average is calculated for EMU 12.

**for 1997-2001 the average is calculated for EU 15.

196

Part 2 – EU Payments Data

Table 1: Cashless Transactions in the EU (per inhabitant), 2007

Cheques (+ bills Credit Total

Credit Direct of exchange Debit (+ delayed E-money ATM cash cashless

transfers debits & others) cards debit) cards purchase withdrawals transactions

Belgium 84.5 22.6 1.0 72.0 9.2 8.5 29.1 226.8

Bulgaria 6.6 0.1 0.0 1.0 0.4 0.0 11.0 19.1

Czech Republic 39.7 26.2 0.0 11.5 1.0 5.8 13.8 98.1

Denmark 50.8 34.0 2.2 145.6 14.7 0.0 3.5 250.8

Germany 62.9 83.9 1.0 21.1 4.1 0.6 23.5 197.3

Estonia 66.8 12.0 0.0 87.3 10.3 0.0 38.2 214.7

Ireland 35.1 22.9 28.5 34.9 25.4 0.0 46.7 193.5

Greece 3.1 1.6 2.7 0.6 6.4 0.0 15.5 29.9

Spain 16.3 49.5 5.0 19.2 24.1 0.0 21.6 135.9

France 41.1 45.8 59.2 96.7 0.0 0.4 24.1 267.3

Italy 18.5 8.6 13.1 13.9 8.5 0.8 8.3 71.6

Cyprus 16.4 14.9 33.2 14.4 18.3 0.0 10.5 107.6

Latvia 52.6 1.8 0.0 28.7 5.0 0.3 23.2 111.5

Lithuania 27.8 2.1 0.1 26.5 1.9 0.0 18.2 76.6

Luxembourg 124.4 26.9 0.5 57.6 36.9 5.0 10.0 261.4

Hungary 56.5 7.8 0.2 11.4 2.0 0.0 11.5 89.4

Malta 10.6 1.9 31.9 12.7 7.2 0.0 23.7 88.0

Netherlands 86.5 71.9 0.0 98.1 4.5 10.7 28.7 300.3

Austria 118.7 86.6 1.0 30.4 7.6 3.5 16.7 264.6

Poland 27.2 0.5 0.0 8.8 3.3 0.0 15.7 55.5

Portugal 12.4 15.3 17.3 75.6 2.8 0.0 39.4 162.9

Romania 12.0 1.1 0.5 1.5 0.7 0.0 7.9 23.8

Slovenia 87.8 20.7 0.2 29.9 21.8 0.0 29.5 189.8

Slovakia 36.1 21.7 0.0 17.8 3.5 0.0 14.6 93.6

Finland 132.5 14.4 0.1 156.3 17.0 0.0 35.9 356.3

Sweden 70.5 22.7 0.1 124.9 21.4 0.0 32.6 272.2

United Kingdom 51.3 48.8 26.3 83.7 34.8 0.0 46.6 291.5

Total euro countries 44.2 46.7 16.1 43.5 7.9 1.3 21.5 181.1

Total non-euro countries 39.2 22.2 9.6 46.5 15.3 0.4 26.0 159.1

Total EU27 42.5 38.3 13.9 44.5 10.4 1.0 23.0 173.6

Source: ECB Blue Book, Addendum incorporating 2008 figures (consolidated).

197

Figure 1: Cashless transactions in the EU, by type of transactions, 2007

Belgium

Bulgaria

Czech Republic

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus

Latvia

Lithuania

Luxembourg

Hungary

Malta

Netherlands

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Finland

Sweden

United Kingdom

Total euro countries

Total non-euro countries

Total EU27

198

0% 20% 40% 60% 80% 100%

n Credit transfers

n Direct debits

n Cheques (+ bills of exchange & others)

n Debit cards

n Credit (+ delayed debit) cards

n E-money purchase

n ATM cash withdrawals

199

Table 2: Inter-bank funds transfer systems penetration rate, 2007(volume processed by retail IFTS in total cashless transactions)

Total Volume processed Inter-bank funds transfer

cashless transactions by retail IFTS systems penetration rate, 2007 (%)

Belgium 2,408.70 2,343.00 97.3

Bulgaria 147 108.5 73.8

Czech Republic 1,012.40 411.2 40.6

Denmark 1,369.60 1,347.20 98.4

Germany 16,227.40 2,343.00 14.4

Estonia 287.7 22.8 7.9

Ireland 843.8 206.8 24.5

Greece 334.1 37 11.1

Spain 6,095.60 143.2 2.3

France 16,991.90 12,303.30 72.4

Italy 4,249.70 1,992.10 46.9

Cyprus 85 46.4 54.6

Latvia 254.3 30.2 11.9

Lithuania 258.9 24.7 9.5

Luxembourg 125.5 0 0.0

Hungary 899.3 219.4 24.4

Malta 36.1 6 16.6

Netherlands 4,919.50 3,802.60 77.3

Austria 2,196.50 0 0.0

Poland 2,115.40 1,057.00 50.0

Portugal 1,728.50 1,622.30 93.9

Romania 512.1 109.1 21.3

Slovenia 383.3 53.7 14.0

Slovakia 505.5 0 0.0

Finland 1,884.60 618.8 32.8

Sweden 2,491.00 852.8 34.2

United Kingdom 17,718.00 6,797.90 38.4

Total euro countries 59,015.60 24,142.00 40.9

Total non-euro countries 27,065.80 10,980.70 40.6

Total EU27 86,081.40 35,122.70 40.8


Figure 2: Inter-bank funds transfer systems penetration rate, 2007

Belgium

Bulgaria

Czech Republic

Denmark

Germany

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus

Latvia

Lithuania

Luxembourg

Hungary

Malta

Netherlands

Austria

Poland

Portugal

Romania

Slovenia

Slovakia

Finland

Sweden

United Kingdom

Total euro countries

Total non-euro countries

Total EU27

n Inter-bank funds transfer systems penetration rate, 2007 (%)

0%

Penetration rate

20% 40% 60% 80% 100%

200

Table 3: Country market share in SEPA-27 (%) 2005-2007

2005 2006 2007

Belgium 2.6 2.6 2.8

Bulgaria 0.2 0.2 0.2


Denmark 1.4 1.5 1.6

Germany 22.6 22.9 18.9

Estonia 0.3 0.3 0.3

Ireland 0.9 0.9 1

Greece 0.4 0.4 0.4

Spain 6.9 6.5 7.1

France 19.3 19.1 19.7

Italy 4.9 4.8 4.9

Cyprus 0.1 0.1 0.1

Latvia 0.2 0.2 0.3

Lithuania 0.2 0.2 0.3

Luxembourg 0.1 0.1 0.1

Hungary 0.9 1.1 1

Malta 0 0 0

Netherlands 5.4 5.5 5.7

Austria 2.5 2.4 2.6

Poland 1.9 2.1 2.5

Portugal 2 1.9 2

Romania 0.4 0.4 0.6

Slovenia 0.4 0.4 0.4

Slovakia 0.3 0.4 0.6

Finland 1.9 2 2.2

Sweden 2.5 2.6 2.9

United Kingdom 20.5 20 20.6

Total euro countries 70.3 70.2 68.6

Total non-euro countries 29.7 29.8 31.4

Total EU27 100 100 100


201

202

Figure 3: Country market share in SEPA-27 (%) 2005-2007

Belgium 2.8%United Kingdom 20.6%

Sweden 2.9%

Finland 2.2%

Slovakia 0.6%

Romania 0.6%

Bulgaria 0.2%

Portugal 2.0%

Poland 2.5%

Austria 2.6%

Netherlands 5.7%

Czech Republic 1.2%

Italy 4.9%Hungary 1.0%

Cyprus 0.1%

Latvia 0.3%

Lithuania 0.3%Luxembourg 0.1%

Denmark 1.6%

Germany 18.9%

Ireland 1.0%

Estonia 0.3%

France 19.7%

Slovenia 0.4%

Spain 7.1%

Greece 0.4%

203

ANNEX 2

1 A scheme by which all Spanish savings banks allocate their net surplus (after paying taxes and allocating provisions and reserves) to the management and financingof community investment programmes (social, cultural, environmental, health, research, etc).

ESBG Charter for Responsible Business

Case Studies

The following presents a number of case studies illustrating how ESBG members implement the principles of the ESBG Charterfor Responsible Business in practice. They are grouped under the six principles of the Charter. The text of the Charter and furtherimplementation case studies can be found on the ESBG website: www.esbg.eu

1. FAIR AND CLEAR RELATIONS WITH CUSTOMERS

n Caja Navarra in Spain: Plan Cantera- “civic rights for customers”

Caja Navarra (CAN) created a different business model in 2004, focussing on the needs of the community and its members.The concept was developed as an action plan to increase customer recognition of its “Obra Social”1 projects and thus todifferentiate themselves in the market. CAN decided to create an emotional link by giving its customers the right to decide wherethe profits of the bank should be invested.

As the second stage of this new business model, CAN launched “Plan Cantera” for the period 2007-2010, focused on socialtrends and on giving clients what they want. This plan includes the initiative “You choose, you decide”, of which “Civic banking”is the key element. It focuses on civic values – including freedom, identity, civic responsibility, diversity, participation andsustainability. Plan Cantera gives clients some important rights such as the right to know how much money the bank is makingfrom the clients’ funds thanks to the “civic contract”, which discloses the amount of money these funds are making for Caja Navarra.In addition, the organisations receiving funds are more transparent and provide clear information on how the funds donated byCAN clients are used in the chosen projects.

Since The Plan Cantera was launched, 1,000,000 clients have been informed of the exact value of their contribution. Ninety-sixpercent of them considered the effort made by the savings bank to be very effective at increasing the transparency of the bank.Clients valued very positively the possibility of knowing how much they contribute to “Obra Social”. In 2008, 10,705 customerschose a civic account; 1,272 projects were selected for funding and 4,193 customers carried out voluntary work on the projectswith 4,007 total hours of service.

n Savings Banks in France: “Bénéfices Futur”

In June 2007, the Caisses d’Epargne launched “Bénéfices Futur” (Future Benefits), a programme designed to place sustainabledevelopment at the very heart of their strategy and banking activities. The aim of this initiative is to reconcile economic performance,social equity and environmental precaution with actions and commitments in four different areas:

1. Responsible Marketing2. Fighting climate change 3. Fostering socially responsible investment4. Solidarity

Further information about “Bénéfices Futur” is available at its dedicated interactive website www.beneficesfutur.fr.

One of the most innovative initiatives taken under the Responsible Marketing pillar of this programme was the labelling of theirproducts. It was decided that all products should be rated on a score from 5 (best) to 1 (worst) according to the following three criteria:

n Financial riskn Corporate social responsibility (CSR) and socially responsible investment (SRI) criteria in the product designn Carbon footprint of the product

In order to implement this ethical labeling initiative, a methodology was developed by the Caisses d’Epargne and a consultancycompany in cooperation with four external partners: ADEME (the French environmental management agency) Friends of theEarth, WWF and a consumer organisation “Testé pour vous”. This initiative came to fruition in 2008 when the savings productsof the Caisses d’Epargne were presented with their label on the website and in the brochures available within branches.

n ASN Bank in the Netherlands publishes the climate impact of its investment funds

The mission of ASN Bank, a fully independent subsidiary of SNS Reaal, ESBG’s Dutch member, is to promote sustainability in society.The financial operations of the bank are guided by this goal. ASN Bank observes special investment criteria and has communicatedits stance on issues such as human rights and climate change through the publication of Issue Papers in 2007 and 2008.

ASN Bank shares the view of the Intergovernmental Panel on Climate Change (IPCC) that climate change is caused by the globalwarming of the earth as a result of greenhouse gases due to human activities. In order to know whether its investment strategywas contributing to global warming, ASN Bank addressed Trucost, an environmental data provider specialized in reporting theenvironmental impact of companies, to measure the CO2 emission of the companies in which their funds invest.

In May 2009, ASN Bank published the results of the research by Trucost. The results show that the combined CO2 emissions ofthe three ASN investment funds were considerably reduced in 2008. In effect, the total combined carbon intensity of its funds is49% lower than the benchmark, the MCSI All World Developed Index. This shows that the customers of ASN Bank invest in muchmore climate-friendly funds than the average investor. Furthermore they are able to assess the carbon intensity of theirinvestments through the published calculations.

n Lloyds TSB in the UK: Reflecting the diversity of customers

Lloyds TSB has taken several initiatives in order to facilitate the opening of a bank account to customers new to the UK and whosefirst language is not English. The management has hired multilingual staff to ensure that their workforce reflects the compositionof the local community. Moreover, the senior business banking managers are being trained to be aware of cultural differencesand to encourage diversity. Thus Lloyds TSB acknowledges that people from ethnic minority communities make a significantcontribution to the UK economy and are very important for the Group.

n Bancaja in Spain: “Bancaja Commitment”

In 2005 Bancaja established the basis for a new relationship with its private clients. This new way of working is called the “BancajaCommitment” and aims to make banking transactions clear and transparent for customers. Under the slogan “If it's not goodfor you, it's not good for us”, Bancaja has pledged to fulfil 17 separate commitments. These have been added progressively since2005 with the objective of fulfilling all the needs that private customers can have in their banking operations. Although it isfocused on private customers, professionals and companies may also benefit from some of the measures.

If Bancaja fails to fulfil a commitment, the client can receive financial compensation. The exact amount of such compensation isstipulated for each of the commitments.

204

2. PROMOTION OF ACCESSIBILITY AND FINANCIAL INCLUSION

n Savings Banks in France: Microcredit programme “Parcours Confiance”

In 2006, the Caisses d’Epargne launched the “Parcours Confiance” (Fresh Start) programme to prevent financial exclusion.The programme aims to help customers suffering from personal and financial problems to have a better understanding of bankingproducts and services. This programme also allows for the possibility of providing the beneficiary with microloans backedby guarantees.

“Parcours Confiance” includes a comprehensive and customized support and follow-up with the cooperation of the organization“Finances and Pédagogie” (a subsidiary of the Caisses d’Epargne dedicated to financial education) and the support of the socialauthorities. In order to offer this service, the Caisses d’Epargne have developed partnerships with a wide range of stakeholderssuch as business creation specialists as well as social assistance and integration organizations. A total of 4,495 micro loans weregranted from when the system was launched in 2006 up to the end of 2008. Of these, 3,275 were personal microloans and1,220 were business microloans.

n Die Zweite Sparkasse in Austria: “The bank for people without a bank”

Die Zweite Sparkasse, “The bank for people without a bank”, is a new model of savings bank operating in Austria. It started in2006 initiated by Erste Foundation in close cooperation with Caritas and a debt counselling service. Its objective is to provide bankaccounts to those people who are no longer banked because of economic and/or social difficulties such as unemployment,over-indebtedness, and homelessness. The service provided is a basic bank account with a bank card, which does not offeroverdraft facilities. It is offered for three years with the perspective that, after this period, beneficiaries can be reintegrated intothe “conventional” banking system.

The distinguishing feature of the Zweite Sparkasse is that it is entirely run by volunteers. Over 400 volunteers of the Erste Bankand the Sparkassen (savings banks) in Austria are involved with the Zweite Sparkasse, which enhances its visibility. Since 2008, ithas been operational in almost all federal states of Austria and 4,000 accounts have been opened. More information is availableat: www.sparkasse.at/diezweitesparkasse.

n Savings banks in Germany: Educating households on financial matters through “Geld und Haushalt”

Over the past 51 years, the Deutscher Sparkassen-und Giroverband (DSGV) (German Savings Banks Association) has beenimproving the financial management skills of people in Germany. Geld und Haushalt (Money and the Private Household) is theadvisory service operated by the German savings banks and provided free of charge to all members of society. With this service,it provides financial literacy training and a whole range of service offers under the theme of private finance and household budgetmanagement. The key objectives are to enhance basic financial know-how, improve the understanding of efficient spending inprivate households and, in this way, help to prevent excessive debt and private insolvencies. More information is available at:www.geldundhaushalt.de.

The German Savings Banks specifically provide:

n an advisory service in the form of publications, as well as internet and mobile phone programmes to plan private budgets; n a lecture service with which information campaigns are organised in cooperation with adult-education centres, welfare

institutions, and the debt-advisory service; and n an individual budget analysis service.

The value of Geld und Haushalt is demonstrated by its designation as an official project of the UN Decade of Education forSustainable Development (2005-2014).

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2 The World Wide Web Consortium (W3C) is an international consortium that produces standards for the World Wide Web. The organisation was formed in the1990s to encourage the evolution and interoperability of the web. In 1997 the W3C created the Web Accessibility Initiative to provide the guidelines and resourcesthat help make the web accessible.

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n SNS Bank in the Netherlands: “Promoting Accessibility”

In 2002, SNS Bank (a part of SNS Reaal) changed its logo and refocused its business strategy on becoming the best bank inconsumer friendliness and on keeping the bank accessible to a broad section of the population. As part of this strategy, SNS Bankdecided to enlarge and improve their self-service offer – including internet product and services – and to make it more accessibleto all people – including persons suffering from visual impairment.

To this effect it started cooperation with Viziris, the Dutch federation of visually handicapped and the blind in 2002 and withUniversity of Twente, an entrepreneurial research university, in 2003. The objective was to improve accessibility by adapting thewebsite, simplifying navigation, improving the search engine, adjusting the online banking token and adapting ATMs. By 2005the website was highly accessible for Braille use and, in 2006, they received a ‘Fakkelprijs’, an award from the Dutch Counsel ofchronic patients and the handicapped. Also in 2006, SNS Bank introduced an advice service via webcam and implemented fifteenof the sixteen World Wide Web consortium2 (W3C) accessibility guidelines. In 2008 they introduced a speaking online bankingtoken. SNS Bank continues to work on improving the accessibility of its services and is launching a new Internet site in 2009.

n La Caixa in Spain: “Obra Social” website awarded AA accessibility

One of the priorities of La Caja de Ahorros y Pensiones de Barcelona, known as “La Caixa”, is to provide wide accessibility for allits financial services and products. In order to fulfil this objective and at the same time to provide an innovative and quality service,La Caixa has developed its “Welfare Project” programme, which focuses on making its financial products available withoutphysical, technological or structural limitations. Specifically, in order to make its website accessible to everyone, irrespective of thetype of hardware, software, network infrastructure, language, culture, location or capacity of users, La Caixa followed therecommendations outlined by the Web Accessibility Initiative (WAI) and in 2006, it obtained the AA rated certification ofaccessibility from the WAI for the contents of its portal.

Since July 2006, the online banking service of La Caixa has been available to people with visual difficulties. In addition, in the“Accessibility Corner” there are videos produced in sign language and with subtitles in Catalan and Spanish for the hearing-impaired. They are available through all distribution channels including ATMs, the Internet, as well as the mobile and telephoneplatform. In addition, since 2006, La Caixa has been collaborating with a Spanish foundation for the blind in order to findsolutions that provide accessibility in some sections of their online banking website. Among other actions, La Caixa is makingonline banking compatible with the computer screen reading programme used by blind people (JAWS). Between 2006 and 2010La Caixa will invest EUR 140 million to make access to its client distribution channels easier for disabled people.

3. ENVIRONMENT–FRIENDLY BUSINESS

n Caja Madrid in Spain: “La Comunidad Ahorra “

In 2005 Caja Madrid launched a programme named “La Comunidad Ahorra” (The Community Saves), which aims to reduce theconsumption of energy among residents’ associations in the region of Madrid. The main objective of this initiative is to encourageenergy-saving measures in homes and common areas owned by communities by raising the awareness of local residents andencouraging the implementation of measures to reduce energy consumption. Since its launch, the programme has had theparticipation of more than 1,300 residents’ associations in the city of Madrid and the municipality of Arganzuela.

The project is divided into two phases. In the first phase, the participating communities enrol in the programme to reduce theirenergy consumption. Upon registering, they receive a brochure with information on different ways to reduce energy consumptionsuch as reducing electricity and gas usage as well as reducing energy used for the heating and cooling of buildings. The totalenergy consumption of the building is measured before and one year after owners have received the brochure. The three bestperformances achieved receive a prize. This prize consists of the installation of 2.5 kilowatts of solar photovoltaic power panelsfree of charge. This facility has a minimum operating guarantee of 25 years and an approximate value of €25,000.

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The second phase starts once the panels have been installed and the community becomes small producers of green energy, whichcan then be used for sale or own consumption. During the first two years of this programme, the six community winners jointlyreduced their emissions by 60 tonnes of CO2 and saved 12,000 kilowatt-hours in electricity. consumption. This means approximatesavings of € 2,000 for each winner.

n Lloyds TSB in the UK: Commitment to reduce carbon emission by 30% by 2012.

Following a study carried out in 2006 with the Carbon Trust – a government sponsored agency promoting energy saving –to develop a carbon management programme, Lloyds TSB announced the target to reduce CO2 emissions by 30% by 2012, using2002 as the baseline. Lloyds TSB committed itself to attaining this target and has progressively diminished its CO2 footprint bymore than 64,000 tons since 2002. This was done mainly by improving properties and through buying renewable energy, and,from 2006, by using energy from good quality combined heat and power sources (CHP). CHP is a highly fuel efficient technologythat puts to use waste heat produced as a by-product of generating electricity. Cutting out unnecessary travel and promotingalternatives such as audio and video conferences also made up an important component of the reduction strategy.

Lloyds TSB recognises that it will take the commitment of all staff to help the Group achieve this target and it seeks to inspireemployees to rise to the challenge. The commitment starts at the top with the Chairman, Group Chief Executive and managingdirectors of Group Property Management, Group Procurement, Group IT and Group Operational Services who have all given apersonal commitment to achieve the target. Furthermore, the Group has created a sustainability network for employees acrossthe business that are committed to helping the company achieve its environmental objectives. Lloyds TSB considers that raisingawareness of the climate programme helps attract and hold on to the best people. Research shows that employees want to workfor a company that cares for the environment.

n Bayern LB in Germany: Environmental and social considerations in project finance

Financial institutions can play an important role in the fight against climate change, especially in the financing of markets forrenewable energies. Bayern LB, a member of the German Savings Banks Group which is active in the field of sustainable lending,is very much interested in and dedicated to financing renewable energy projects. However, even before providing funds in thismarket segment, the environmental and social risks involved have to be taken into account. In line with the bank’s credit riskstrategy, Bayern LB’s financing solutions have to comply with the World Bank standards which set out that:

1) Environmental and social management systems are to be structured to avoid or minimise potential negative impact. 2) Population groups affected by a project should be brought in to the project process.3) Biotopes and habitats need to be protected.4) Human rights of indigenous peoples must be respected.

This compliance is necessary irrespective of the character of the financing (corporate banking, project finance, export finance) andthe financing volume. Further information on Bayern LB’s policy in this matter is available at: http://www.bayernlb.de/internet/en/meta/Ueber_uns/Corporate_Responsibi/Sustainability_Mgm/Sustainable_lending.html.

The story of the Ilisu Dam project in Southern Anatolia in Turkey demonstrates Bayern LB’s environmental and socialconsiderations in project financing. Bayern LB was invited to join a German exporter and finance technical equipment for a waterpower project called Ilisu. The Ilisu hydro-electric power project was to be located on the Tigris River, 65 km upstream from theborders with Syria and Iraq. From the bank’s point of view, the Ilisu dam project – located in Turkey – did not comply with theWorld Bank standards as there were no appropriate resettlement action plans for the affected population (approx. 60,000 Kurds),there were no consultations with the riparian zone states Iraq and Syria, there was no appropriate action plan regardingHasankeyf – a 10,000 year-old ancient city which is declared a natural conservation area – that would be flooded if the Ilisu hydro-electric power project was carried out. Although this was a renewable energy financing project, Bayern LB finally decided not toparticipate in this project due to the adverse environmental and social effects.

n Bilbao Bizkaia Kuxta (BBK) in Spain: Green product offers

Bilbao Bizkaia Kuxta (BBK) is one of the first financial institutions in Spain to offer green credit lines for a wide range of products.It is the result of a new corporate strategy aimed not only at addressing the opportunities that climate change offers to financialinstitutions, but also at contributing to the objectives of the Kyoto Protocol. They have created three green credit lines for financingcars, home improvement loans, and equipment and green mortgages. These products are mainly addressed to private customers.

Concerning green loans for financing cars, BBK launched this product in January 2008 and offers an interest rate discount of0.5% for cars with CO2 emissions below or equal to 120 grams/km. The green loans designated to improve homes were broughtto the market on 1 August 2008 and include three product categories: i) renewable energy equipment, ii) home improvementsto enhance comfort and energy efficiency and iii) the purchase of energy efficient domestic appliances. All loans provided for anyof the aforementioned categories benefit from a 0.5% interest rate reduction. Renewable energy measures include solar thermalenergy (STE), wind energy, biomass and solar photovoltaic products connected to the national grid for energy productionpurposes or for individual use. In terms of home renovation, loans for clients are provided mainly for insulation purposes.Finally, related to domestic appliances only the products labelled with the A+ category benefit from interest rate reductions.

BBK’s green mortgages have been a success and were very well received among clients and the press since their launch in May2008. They do not provide an interest rate reduction, but rather a financial bonus of up to EUR 1,000 per purchase of new housesand apartments dating from 2007 that have received an energy efficiency label. Given that there was no Spanish regulation inthis field, Kuxta had to develop its own energy efficiency label application. They did this with the help of architects, civil engineersand plumbers to define an appropriate set of indicators. Under this scheme, Kuxta gives a cheque to its customer for an amountof EUR 1,000 if the certification obtained is energy class A, EUR 750 for an energy class B certification and EUR 500 for an energyclass C certification.

4. MAKING A RESPONSIBLE CONTRIBUTION TO THE COMMUNITY

n Savings banks in Germany: Business Angels and Customer Information Centres

In recent years over half of all start-up business in Germany were financed by institutions belonging to the German savings banksgroup – the Sparkassen-Finanzgruppe. Entrepreneurial success is not only a matter of creativity, but also one of experience.Therefore the German savings banks cooperate with Business Angels Netzwerk Deutschland (BAND) and assign “business angels”to new companies. These business angels are knowledgeable business managers, who not only have a wealth of experience tooffer to new companies but can also share a network of contacts to help new enterprises on their way. More information isavailable at: http://www.business-angels.de/.

The Sparkassen-Finanzgruppe has also taken its own Business Angels initiatives in addition to cooperation with BAND. A good case inpoint is the Business Angels Investment Company of Sparkasse Hannover which was the first company in the Sparkassen-Finanzgruppeto focus exclusively on Business Angels. This approach complies with the declared objective of the Sparkassen-Finanzgruppe tooffer new companies a secure and sustainable future.

In addition, a central backup-service called EuropaService has been launched by the Sparkassen-Finanzgruppe to provide support,advice and information to corporate customers with regard to conducting business in the European market. It covers informationon the economic, legal and social aspects of the internal market. Furthermore, it focuses on EU funding and financingprogrammes, country information for investment and trade and searches for business partners via the Enterprise Europe Network– accredited by the European Commission – to which it is connected. As such, EuropaService is well placed to provide companieswith competent advice and information on European matters.

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n Savings Bank Foundations in Italy: Social Housing Projects

As philanthropic entities, the 88 banking foundations affiliated with ACRI (the Italian savings banks association) provide grantsreaching over €1.5 billion per year. They operate according to subsidiarity principles, and intervene on behalf of the needs ofpeople and specific territories, by giving grants in various sectors.

In recent years, the Italian savings bank foundations have also been addressing the growing issue of emergency housing. Through theindividual work of single foundations, working autonomously in their local areas, the foundations as a whole have acquired variedexperience in all facets of social housing. Social housing comprises various types of intervention ultimately aimed at achieving thevery same objectives, such as:

n the activation of real estate funds dedicated to encouraging access to affordable housing for disadvantaged people, involvingprivate partners (Fondo Abitare Sociale of Fondazione Cariplo; Fondazione CR Torino’s new initiative of ” venture philanthropy”and numerous other funds);

n the creation of construction companies (Fondazione Cassa di Risparmio di Alessandria);n financial support given to social housing projects developed in conjunction with local authorities (Fondazione Monte dei Paschi

di Siena, Fondazione Cassa di Risparmio di Parma e Monte di Credito su Pegno di Busseto, Fondazione Cassa di Risparmio inBologna, Fondazione Cassa di Risparmio di Modena, Fondazione Cassa di Risparmio di Forlì);

n the construction of rent-controlled temporary accommodation to be rented to disadvantaged individuals (Fondazione Cariplo,Compagnia di San Paolo);

n the creation of revolving funds, providing low interest rates on mortgages to disadvantaged people on their first homes(Fondazione Cassa di Risparmio di Padova e Rovigo);

n the creation of guarantee funds to cover eventual insolvencies on mortgage repayments (Fondazione Cassa di Risparmio diPadova e Rovigo).

n Montepio in Portugal: Solidarity with vulnerable parts of the population

In 2008, the foundation of Montepio Bank funded 123 innovative projects of solidarity institutions active in the areas of charity,health, social affairs, education and environment for a total amount of EUR 1 million. The main focus of these projects was onthe most vulnerable parts of Portuguese society and persons suffering severe socio-economic difficulties. The general objectivewas to improve the living conditions of these people.

Montepio Foundation specifically supported institutions that host or work with children from disadvantaged households or whohave been deprived of a normal family environment. With this funding from Montepio, these institutions were able to improve theirhosting facilities, train families and their staff, and guarantee access for disadvantaged children to playing and learning activities.

The foundation has also acknowledged the demographic changes and the increasing difficulties that most elderly citizens face.Accordingly, it has provided funds to institutions for the replacement of equipment in retirement homes, the provision ofinformation and training sessions for elderly people and activities to fight against loneliness.

Furthermore, the foundation has entered into partnerships with national health care associations contributing to the realisationof health information campaigns for citizens. In this context, the foundation published a “Small guide of topics and advice” whichaims to transmit valuable knowledge in the area of nutrition and health. More information is available in Portuguese at:http://www.montepio.pt/ePortal/v10/PT/jsp/montepio/ResponsabilidadeSocial/ProjectosApoiados.jsp.

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n Sparkasse Leipzig in Germany: Prize for freedom and future of media

Freedom of speech and diversity of opinions are basic principles of democratic societies. In particular, the historical experiences in20th century Germany with two totalitarian political systems have highlighted the need for critical journalism.

To encourage journalists, publishers, and media institutions to show willingness to take risks, personal engagement, courage, andconviction for freedom of speech, Sparkasse Leipzig has awarded a “Prize for freedom and future of media” since 2001. Leipzig is alsoa symbolic location for awarding the prize as the peaceful revolution of 1989, which overthrew the communist system of EasternGermany, started in Leipzig’s Nikolaikirche. Sparkasse Leipzig wants to promote the democratic tradition and has thereforedecided to donate this prize. So far, the winners of the prize have included journalists from Germany, Italy, the Czech Republic,Russia, Ukraine, Moldavia, Palestine, Israel, the USA, the United Kingdom and Myanmar as well as several media institutions.

5. RESPONSIBLE EMPLOYERS

n Swedbank in Sweden: The “55+ Concept”

To increase the development of the competence of its staff members and their wellbeing, Swedbank has invented a competencemodel and designed a concept for staff aged 55 years and above. The aim of the programme is to create efficiency, to preserve allcompetence throughout the company, and to make the company an attractive employer for employees of all ages. The “55+Concept”involves keep-fit and competence development activities for employees aged 55 years and over. When employees reach the ageof 58 years, they can take advantage of the “Ease Down” and “PlusTime” programmes.

The “Ease Down” offer entitles employees over 58 years of age to work 80% of regular working hours with 90% pay and theoccupational pension maintained at 100%. As an alternative to this offer “PlusTime” gives employees who continue working fulltime after the age of 58 or part-time employees who work 80% or more, the opportunity to take three additional days of leaveper year. This offer was initiated to promote a balance in life and to create additional time for employees to enable them to bemore effective and more creative at work. A survey conducted among Swedbank employees aged over 58 years of age showsthat the “Ease Down” programme in particular has had a positive impact on the way that these employees find their workinglife conditions.

n Savings Banks in France: Fighting discrimination and promoting equal rights and opportunities

The Caisses d’Epargne have signed a collective national agreement for 2006-2008 in order to underline their commitment to fightall forms of social isolation and promote equal rights and opportunities. This accord is the first step of a continuous andsustainable effort for the employment and integration of disabled people. Over this period 200 disabled employees were recruitedfor long-term careers, far better than the initial target of 170 jobs.

Moreover, approximately 2000 initiatives were taken in collaboration with the Human Resources Department such as “Introduction ofBanking Business” programmes and the creation of a multimedia tool to facilitate the integration of a disabled person into ateam. In addition, the Caisses d’Epargne have experimented and developed new recruitment methods to reinforce theircommitment to diversity. These include recruitment by simulation and testing adapted to the individual’s specific characteristics.

n Saving Bank in Luxembourg: Programme for wellbeing at work

In 2006, the Luxembourg State Savings Bank the Banque et Caisse d’Epargne de l’Etat (BCEE), celebrated its 150th anniversary.The main motto of the celebration was “Wellbeing at work and long term development of the workforce”. Conferences, workshopsand activities were organised to develop this main topic and to get workers involved in the anniversary celebrations. The effortsof the BCEE were recognized in 2006 by the European Club for Health in Brussels with the award for Luxembourg of the “PrixSante et Enterprise”.

3 At the time of writing, these included Erste Bank in Austria, Groupe Caisse d’Epargne, a number of German Sparkassen, OTP Bank in Hungary, Banque et Caissed’Epargne de l’Etat in Luxembourg, Montepio in Portugal, CECA and 15 Cajas de Ahorros in Spain as well as Lloyds TSB in the UK.

4 At the time of writing, these included Erste Bank, CECA and 25 Spanish Cajas, Groupe Caisse d’Epargne, SNS Reaal, Swedbank as well as two WSBI Latin Americanmembers: Banco Estado Chile and Caixa Economica Federal, Brazil.

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The activities organised by the BCEE in the context of this initiative included the installation of fitness centres, the visits ofergonomic experts to the bank premises and the entitlement of each employer to a voluntary medical check-up paid by the BCEE.The success of this initiative has been so important that the bank decided to continue the programme to maintain and developa high quality workplace at BCEE. The programme is still in place today.

n Savings banks in Austria: New salary and career system for employees

In 2000, the Austrian Savings Banks Association, the Sparkassenverband, elaborated and concluded a new salary and careerssystem in joint collaboration with the Federal Savings Banks Committee of the Austrian Trade Union Federation. The new systemcreated an ideal balance between job security and possibilities of change for individual and career development. Moreover, thissystem addressed the encouragement of obtaining qualifications and having a motivated and experienced workforce and it wasaccompanied and strengthened by a series of measures for staff promotion. Furthermore, this system complied with therequirements for CSR and introduced elements of certain CSR principles previously unknown at the Austrian Sparkassenverband.

The individual Sparkassen reinforced the above-mentioned salary and career system with their own individual measures in termsof family and health policy. For example, Erste Bank initiated the LIFETIME project as a means of preparing for the progressiveaging of society to be reflected in its workforce. Steiermärkische Sparkasse Bank AG won the European Work & Family Audit in2007. In 2008, Sparkasse Neuhofen won the title of “Austria's Best Employer” by the European Great Place to Work Instituteand ranked Sixth Best Employer in Europe (in the category 50 to 500 employees). In addition, sBausparkasse was ranked 13th inthe “Best employer in Austria” contest and achieved a special prize for the promotion of older employees from the Great Placeto Work Institute in 2009.

COMMUNICATION

Transparency and consistent communication with customers and other stakeholders is a key component of the savings and retailbanking sector. ESBG and its members are also becoming increasingly aware of the importance of non-financial reporting and arecommitted to communicating on their activities as socially responsible companies and on the implementation of the principles ofthe ESBG Charter for Responsible Business. As part of this commitment ESBG and a number of its members have also joinedEuropean and international CSR initiatives.

At a European level, ESBG, on behalf of its member banks, has expressed its support to the European Alliance on CSR, which waslaunched by the European Commission in 2006. Some of its individual members have also officially become supporters.3

ESBG and its members are active participants in this forum and have organised laboratory meetings, which form part of CSREurope’s Toolbox.

At an international level, this commitment to communication on its CSR activities is evidenced by the subscription of ESBG, itssister organisation WSBI, as well as a number of its members to the United Nations Global Compact, the world's largest voluntarycorporate responsibility initiative. As a business organization ESBG/WSBI provides input to improve the uptake, implementationand strategic orientation of UN Global Compact principles into its members’ business activities. Its participation also reinforcesthe engagement of its members – some of whom already participate on an individual basis.4

Furthermore, some ESBG members, such as Erste Bank, Lloyds TSB and Swedbank, also subscribe to international reportingprojects such as the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI).

ESBG members communicate in different ways on their CSR activities and achievements. The majority of ESBG member bankspublish information regarding their CSR activities within their annual reports. In addition, some of them dedicate specific sectionson their websites to CSR activities. This is the case of the Caisses d’Epargne (which publish all of their CSR activities on the“Bénéfices Futur” website), Swedbank, and Lloyds TSB. In Germany, several savings banks publish a list of their CSR activities ontheir websites. All of the Spanish savings banks dedicate a special section on their websites to inform about their CSR activitiesand, in addition, CECA, the Confederation of Spanish Savings Banks has developed a website dedicated to the “Obra Social”activities of its members.

Moreover, some ESBG members produce specific CSR reports. This is the case for Lloyds TSB, Swedbank and SNS Reaal whichpublish annual reports on their CSR activities, which are also available on their websites. The majority of the Spanish savings banksalso produce individual CSR reports and, in addition, CECA publishes an annual report with aggregated data on the CSR activitiesof its members. It should be noted that SNS Reaal, Swedbank and some 29 Spanish savings banks publish their CSR reportsaccording to the Global Reporting Initiative (GRI). The latter have reached the highest possible level in terms of internationalrecognition from the GRI: “A+ GRI Checked”.

Finally, it should be noted that the Spanish Caja Navarra (CAN) is a remarkable example of CSR reporting. It is the first companyin the world to have written its CSR report in XBRL (eXtensible Business Reporting Language), which facilitates the comparisonof financial information. XBRL had not, however, been used for CSR reports until CAN published its 2008 CSR report.

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1. Existing Legislation (Treaties and Protocols, Regulations, Directives, Decisions,Recommendations)

1.1. Treaties and Protocols

Treaty on European Union, OJ C 191, 29.07.1992.

1.2. Regulations

- Regulation (EC) No 2560/2001 of the European Parliament and of the Council of 19 December 2001 on cross-border paymentsin euro, OJ L 344, 28.12.2001.

- Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of internationalaccounting standards, OJ L 243, 11.09.2002.

- Regulation (EC) No x/2009 of the European Parliament and of the Council on credit rating agencies, awaiting publication inthe OJ.

1.3. Directives

- Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on annual accounts of certain types ofcompanies, OJ L 222, 14.8.1978.

- Council Directive 79/279/EEC of 5 March 1979 coordinating the conditions for the admission of securities to official stockexchange listing, OJ L 066, 16.03.1979.

- Council Directive 82/121/EEC of 15 February 1982 on information to be published on a regular basis by companies the sharesof which have been admitted to official stock-exchange listing, OJ L 48, 20.02.1982.

- Council Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of the Treaty on consolidated accounts, OJ L 193,18.07.1983.

- Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws, regulations and administrative provisionsrelating to undertakings for collective investment in transferable securities (UCITS), OJ L 375, 31.12.1985.

- Council Directive 88/627/EEC of 12 December 1988 on the information to be published when a major holding in a listedcompany is acquired or disposed of, OJ L 348, 17.12.1988.

- Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrativeprovisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L386, 30.12.1989.

- Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of moneylaundering, OJ L 166, 28.6.1991.

- Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field, OJ L 141, 11.06.1993. - Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes, OJ L 135,

31.05.1994- Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with

regard to processing of personal data and on the free movement of such data, OJ L 281, 23.11.1995.- Directive 97/7/EC of the European Parliament and the Council of 20 May 1997 on the protection of consumers in respect of

distance contracts, OJ L 144, 4.6.1997.

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BIBLIOGRAPHY

- Directive 2001/34/EC of the European Parliament and of the Council of 28 May 2001 on the admission of securities to officialstock exchange listing and on information to be published on those securities, OJ L 184, 06.07.2001.

- Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Directive 91/308/EEC onprevention of the use of the financial system for the purpose of money laundering, OJ L 344, 28.12.2001.

- Directive 2001/107/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EECon the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment intransferable securities (UCITS), with a view to regulating management companies and simplified prospectuses, OJ L 41, 13.02.2002.

- Directive 2001/108/EC of the European Parliament and of the Council of 21 January 2002 amending Council Directive 85/611/EECon the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferablesecurities (UCITS), with regard to investments of UCITS, OJ L 41, 13.02.2002.

- Directive 2002/65/EC of the European Parliament and the Council of 23 September 2002 concerning the distance marketingof consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC, OJ L 271,9.10.2002.

- Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation(market abuse), OJ L 96, 12.04.2003.

- Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be publishedwhen securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ L 345, 31.12.2003.

- Directive 2004/39/EC of the European Parliament and Council of 21 April 2004 on markets in financial instruments amendingCouncil Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealingCouncil Directive 93/22/EEC, OJ L 145, 30.04.2004.

- Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparencyrequirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amendingDirective 2001/34/EC, OJ L 390, 31.12.2004.

- Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of thefinancial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005.

- Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit ofthe business of credit institutions (recast), OJ L 177, 30.06.2006 [Capital Requirements Directive].

- Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internalmarket amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC Text with EEArelevance, OJ L 319, 05.12.2007.

- Directive 2008/48/EC of the European Parliament and of the Council on credit agreements for consumers, OJ L 133, 23.04.2008.- Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 amending Directive 94/19/EC on

deposit-guarantee schemes as regards the coverage level and the payout delay, OJ L 68, 13.03.2009.- Directive 2009/…/EC of the European Parliament and of the Council on the coordination of laws, regulations and administrative

provisions relating to undertakings for collective investment in transferable securities (UCITS), (recast), 2008/0153 (COD),19.06.2009.

1.4. Commission Regulations and Directives

- Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards inaccordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, OJ L 261, 13.10.2003.

- Commission Regulation (EC) No 707/2004 of 6 April 2004 amending Regulation (EC) No 1725/2003 adopting certaininternational accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of theCouncil, OJ L 111, 17.04.2004.

- Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliamentand of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency,admission of financial instruments to trading, and defined terms for the purposes of that Directive, OJ L 241, 02.09.2006.

- Commission Regulation (EC) No 1004/2008 of 15 October 2008 amending Regulation (EC) No 1725/2003 adopting certaininternational accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of theCouncil as regards International Accounting Standard (IAS) 39 and International Financial Reporting Standard (IFRS) 7, OJ L 275,16.10.2008.

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- Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive 2005/60/EC as regardsthe definition of ‘politically exposed person’ and the technical criteria for simplified customer due diligence procedures and forexemption on grounds of a financial activity conducted on an occasional or very limited basis, OJ L 214, 4.8.2006.

- Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and ofthe Council as regards organisational requirements and operating conditions for investment firms and defined terms for thepurposes of that Directive, OJ L 241, 02.09.2006.

- Commission Directive 2007/16/EC of 19 March 2007 implementing Council Directive 85/611/EEC on the coordination of laws,regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) asregards the clarification of certain definitions, OJ L 79, 20.03.2007.

1.5. Decisions

- European Council Framework Decision (2002/475/JHA) of 13 June 2002 on combating terrorism, OJ L164, 22.06.2002.

1.6. Recommendations

- Commission Recommendation 2001/193/EC of 1 March 2001 on pre-contractual information to be given to consumers bylenders offering home loans, C(2001) 477), OJ L 069, 10.03.2001.

- Commission Recommendation 2003/361/EC of 16 May 2003 concerning the definition of micro, small and medium enterprises,OJ L124, 20.05.2003.

- Commission Recommendation 2009/384/EC of 30 April 2009 on remuneration policies in the financial services sector, OJ L 120,15.5.2009.

2. European Parliament (reports, resolutions and decisions)

- European Parliament. 2007. Draft Report on International Financial reporting Standards (IFRS) and the Governance of the IASB(2006/2248(INI)). Committee on Economic and Monetary Affairs of 24 September 2007. Rapporteur: Alexander Radwan.

- European Parliament. 2008. Report on International Financial reporting Standards (IFRS) and the Governance of the IASB(2006/2248(INI)). Committee on Economic and Monetary Affairs of 5 February 2008. Rapporteur: Alexander Radwan.

- European Parliament. 2008. European Parliament resolution of 24 April 2008 on International Financial Reporting Standards(IFRS) and the Governance of the International Accounting Standards Board (IASB) (2006/2248(INI)).

- European Parliament. 2008. European Parliament resolution on competition: sector inquiry on retail banking (A6-0185/2008 /P6_TA-PROV(2008)0260). Committee on Economic and Monetary Affairs of 5 June 2008, Rapporteur: Gianni Pittella.

- European Parliament. 2008. European Parliament resolution on the Green Paper on retail financial services in the SingleMarket (A6-0187/2008 / P6-TA-PORV(2008)026). Committee on Economic and Monetary Affairs of 5 June 2008, Rapporteur:Othmar Karas.

- European Parliament. 2008. European Parliament resolution of 18 November 2008 on protecting the consumer: improvingconsumer education and awareness on credit and finance (2007/2288(INI)).

- European Parliament. 2009. European Parliament Report on European initiative for the development of micro-credit in supportof growth and employment (2008/2122(INI)) Committee on Economic and Monetary affairs of 29 January 2009, Rapporteur:Zsolt Laszlo Becsey.

- European Parliament. 2009. European Parliament resolution of 10 March 2009 on the Small Business Act (2008/2237(INI)).- European Parliament. 2009. European Parliament legislative resolution of 6 May 2009 on the proposal for a directive of the

European Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to centralinstitutions, certain own funds items, large exposures, supervisory arrangements, and crisis management P6_TA-PROV(2009)-0367, 8.05.2009 [CRD 2].

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3. Non-legislative texts published by EU institutions and bodies

- Basel Committee on Banking Supervision. 2005. Basel II: International Convergence of Capital Measurement and CapitalStandards: a Revised Framework, June 2004, revised in November 2005 [Basel II framework].

- Committee of European Banking Supervisors. 2008. Second part of technical advice to the European Commission on liquidityrisk management.

- Committee of European Banking Supervisors. 2009. High Level Principles on Remuneration Policies.- Committee of European Securities Regulators. 2009. Guidelines on Market Abuse Directive Level 3 – Third set of CESR guidance

and information on the common operation of the Directive to the market, CESR/09-219, 15 May.- Council of the European Union. 2005. Guidelines on implementation and evaluation of restrictive measures (sanctions) in the

framework of the EU Common Foreign and Security Policy. Brussels [http://register.consilium.europa.eu/pdf/en/05/st15/st15114.en05.pdf]. Accessed July 2009.

- Council of the European Union. 2009. Presidency Conclusions meeting June 18th /19th, (11225/09).- efama. 2008. efama Fact Book. Trend in European Investment Funds 6th edition.- European Central Bank. 2004. Report on EU Banking Structures, November 2004. - European Central Bank. 2008. Report on EU Banking Structures, November 2008. - European Central Bank. 2008. Payment Statistics, November 2008. - European Central Bank. 2008. Blue Book, Addendum incorporating 2008 figures.- European Central Bank. 2008. “Population-Labour market indicators- Prices, output, demand, and labour market.” Statistical

data warehouse. Frankfurt. [http://sdw.ecb.europa.eu/browse.do?node=2120803]. Accessed August 2009. - European Central Bank. 2009. SEPA High-Level Meeting Issues Note, 8 May 2009.- European Central Bank. 2009. Financial Stability Review, June 2009.- European Central Bank. 2009. Bank Lending Survey, July 2009.- European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: Action Plan, Communication

of the Commission [COM(1999) 232], 11 May. - European Commission. 2000. Communication from the Commission to the European Parliament and the Council. EU Financial

Reporting Strategy: the way forward [COM(2000) 359 final] 13 June. - European Commission. 2000. Communication to the European Parliament and the Council Upgrading the Investment Services

Directive (93/22/EEC) [COM(2000)729 final], 15 November.- European Commission. 2003. Communication to the European Parliament and the Council. A more Coherent European Contract

Law. An Action Plan [COM (2003) 68 final], 12 February.- European Commission. 2004. The Integration of EU Mortgage Credit Markets. Report by the Forum Group on Mortgage Credit.

[http://ec.europa.eu/internal_market/finservices-retail/docs/home-loans/2004-report-integration_en.pdf ]. Accessed June 2009.- European Commission. 2005. Green Paper on Mortgage Credit in the EU [COM (2005) 327 final], 19 July.- European Commission. 2005. White Paper on Financial Services Policy 2005-2010 [COM(2005) 629 final]. 1 December.- European Commission. 2006. Communication from the Commission. Review of Directive 2002/65 of the European Parliament and

the Council of 23 September 2002 on the distance marketing of consumer financial services [COM (2006) 161 final], 6 April.- European Commission. 2006. Terms of References. Mortgage Funding Expert Group. [http://ec.europa.eu/internal_market/

finservices-retail/docs/home-loans/mfeg/tor-en.pdf]. Accessed June 2009.- European Commission. 2006. Terms of References. Mortgage Industry and Consumer Expert Group. [http://ec.europa.eu/

internal_market/finservices-retail/docs/home-loans/miceg/tor-en.pdf]. Accessed June 2009.- European Commission. 2006. Communication from the Commission to the European Parliament and the Council concerning

the review of Directive 94/19/EC on Deposit Guarantee Schemes- European Commission. 2006. Communication from the Commission to the Council, the European Parliament, the Economic

and Social Committee and Committee of the Regions. A strategic review of Better Regulation in the European Union [COM(2006) 689 final], 14 November.

- European Commission. 2007. Communication from the Commission to the Council, the European parliament, the Economicand Social Committee and Committee of the Regions Action Programme for Reducing Administrative Burdens in the EU[COM(2007) 23 final], 24 January.

- European Commission, DG Competition. 2007. Report on the retail banking sector inquiry. Commission Staff Working Document.SEC(2007) 106, 31 January.

- European Commission. 2007. Green Paper on the Review of the Consumer [COM (2006) 744 final], 8 February.- European Commission. 2007. Green Paper on Retail Financial Services in the Single Market [COM 2007 (226) final], 30April.

216

- European Commission. 2007. European Database for Financial Education. Brussels [http://ec.europa.eu/internal_market/fesis/index.cfm]. Accessed June 2009.

- European Commission. 2007. Communication from the Commission on a simplified business environment for the companiesin the areas of company law, accounting and auditing [COM( 2007) 394], 10 July.

- European Commission. 2007. Communication from the Commission to the European Parliament, the Council, the EuropeanEconomic and Social Committee and the Committee of the Regions. A single market for 21st century Europe [COM 2007 (724)final]. SEC(2007) 1517 SEC(2007) 1518 SEC(2007) 1519 SEC(2007) 1520 SEC(2007) 1521, 20 November.

- European Commission. 2007 Communication from the Commission. Financial Education [COM(2007)808], 18 December.- European Commission. 2007. White paper on the integration of EU mortgage credit markets [COM(2007) 807 final], SEC(2007)

1683 SEC(2007) 1684, 18 December.- European Commission. 2007. Communication from the Commission to the Council, the European Parliament, the European

Economic and Social Committee and the Committee of the Regions. A European Initiative for the development of micro-creditin support of growth and employment [COM(2007) 708 final/2], 20 December.

- European Commission. 2008. White Paper on Damages action for breach of the EC antitrust rules [COM (2008) 165 final]SEC(2008) 404 SEC(2008) 405 SEC(2008) 406, 2 April.

- European Commission. 2008. “IAS 39 Temporary Carve out as of January 2008.” Brussels: [http://ec.europa.eu/internal_market/accounting/docs/ias/ias_39_carve-out.pdf]. Accessed July 2009.

- Commission Decision 2008/542/EC of 13 June 2008 setting up an Expert Group on Credit Histories, OJ L73, 3.7.2008.- European Commission. 2008. Communication from Commission to the Council, the European Parliament, the European

Economic and Social Committee and the Committee of the Regions. ‘Think Small First’. ‘A “Small Business Act” for Europe’[COM(2008) 394 final] SEC(2008) 2101 SEC(2008) 2102, 25 June.

- European Commission. 2008. Proposal for a Directive of the European Parliament and of the Council on consumer rights [COM(2008) 614/3 final] SEC(2008) 2544 SEC(2008) 2545 SEC(2008) 2547, 8 October.

- European Commission. 2008. Special Eurobarometer 298. Consumer Protection in the Internal Market, Fieldwork February –March 2008. October 2008.

- European Commission. 2008. Green Paper On Consumer Collective Redress [COM (2008) 794 final], 27 November.- European Commission. 2008. Proposal for a Directive of the European Parliament and the Council amending Council Directives

78/660/EEC and 83/349/EEC as regards certain disclosures requirements for medium-sized companies and obligations to drawup consolidated accounts [COM(2008) 195 final, 2008/0084(COD)], 17 April.

- European Commission. 2008. MiFID Transposition Quality Check Results of call for evidence from market participants.- European Commission. 2008. Members of the Expert Group on Financial Education. National Strategies for Financial Education,

Brussels [http://ec.europa.eu/internal_market/finservices-retail/docs/capability/members_en.pdf]. Accessed June 2009.- European Commission. 2008. First Meeting of the Expert Group on Financial Education. National Strategies for Financial

Education. Report, 7 October.- European Commission. 2008. Communication from the Commission — The application of State aid rules to measures taken in

relation to financial institutions in the context of the current global financial crisis. OJ C 270/8, 25.10.2008.- European Commission. 2008. Commission Staff Working Document. The Single Market Review: one year on SEC 2008 (3064),

16 December. - European Commission. 2008. Communication from the Commission — The recapitalisation of financial institutions in the current

financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition. OJ C 10,15.01.2009.

- European Commission. 2009. Financial Inclusion. Ensuring Access to a Basic Bank Account Consultation Document[MARKT/H3/MI D(2009), 6 February.

- European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council on Alternative InvestmentFund Managers and amending Directives 2004/39/EC and 2009/…/EC [COM(2009) 207 final], SEC(2009)576 SEC(2009)577,30 April.

- European Commission. 2009. Communication from the Commission to the European Parliament and the Council. PackagedRetail Investment Products [COM(2009) 204 final], SEC(2009) 556 SEC(2009) 557, 30 April.

- European Commission. 2009. European Financial Integration Report. Commission Staff Working Document, SEC(2009) 19 final.- European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council amending Directive

78/660/EEC on the annual accounts of certain types of companies as regards micro entities [COM(2009) 83 2009/0035(COD)],26 February.

- European Commission. 2009. “Review of the Accounting Directives” Brussels: [http://ec.europa.eu/internal_market/accounting/sme_accounting/review_directives_en.htm]. Accessed July 2009.

217

- European Commission. 2009. “Results of the Consultation on the Review of the Accounting Directives”. PowerPoint presentation.June. Brussels: [http://ec.europa.eu/internal_market/accounting/docs/2009-results-consultation-review_en.pdf]. Accessed July2009.

- European Commission. 2009. Communication for the Spring European Council. Driving European recovery. Volume 1, COM(2009) 114 final, 4 March.

- European Commission. 2009. Communication for the Spring European Council. Driving European recovery. Volume 2: Annexes,COM (2009) 114 final, 4 March.

- European Commission. 2009. ICT Policy Initiatives of the European Commission presentation by Costas Andropoulos, Brussels9 March.

- European Commission. 2009. Speech by Jörgen Holmquist at Friends of Europe Roundtable on Electronic Payments andCompetition in Europe, Brussels 17 March 2009

- European Commission. 2009. Communication on the Treatment of Impaired Assets in the Community Banking Sector, OJ C 72,26.03.2009.

- European Commission. 2009. Communication - The return to viability and the assessment of restructuring measures in thefinancial sector in the current crisis under the State aid rules.

- European Commission. 2009. White Paper final by the European Commission on Professional Cross-Border Transportation ofEuro Cash by Road between Member States in the Euro Area, COM(2009) 214, 18 May 2009.

- European Commission. 2009. Communication on European Financial Supervision, COM(2009) 252 final, 27 May.- European Commission. 2009. Communication from the Commission to the Council, the European Parliament, the European

Economic and Social Committee and the Committee of the Regions. A Shared Commitment for Employment [COM(2009) 257final], 3 June.

- European Commission. 2009. Consultation of the European Commission Internal Market and Services DG on PossibleEnd-Date(s) for SEPA Migration, MARKT/H3/VM D(2009), 8 June.

- European Commission. 2009. Working Document of the Commission Services (DG Markt). Consultation Paper on the UCITSDepositary Function.

- European Commission, DG Competition. 2009. DG Competition’s review on guarantee and recapitalization schemes in thefinancial sector in the current crisis.

- European Commission. 2009. “Consolidated list of persons, groups and entities subject to EU financial sanctions”. Brussels[http://ec.europa.eu/external_relations/cfsp/sanctions/list/consol-list.htm]. Accessed June 2009.

- European Commission. 2009. Mortgage Credit. Studies. Brussels [http://ec.europa.eu/internal_market/finservices-retail/credit/mortgage_en.htm#studies]. Accessed June 2009.

- European Commission. 2009. DG Internal Market and Services Study on Credit Intermediaries in the Internal Market. FinalReport by Europe Economics. [http://ec.europa.eu/internal_market/finservices-retail/docs/credit/credit_intermediaries_report_en.pdf].Accessed June 2009.

- European Commission. 2009. Mortgage Credit. Archives. Brussels [http://ec.europa.eu/internal_market/finservices-retail/credit/mortgage_en.htm#archives]. Accessed June 2009.

- European Commission. 2009. Study on Equity Release Schemes in the EU. Part 1: General Report. By Institut für Finanazdienst -leistungen e.V. [http://ec.europa.eu/internal_market/finservices-retail/docs/credit/equity_release_part1_en.pdf]. Accessed June 2009.

- European Commission. 2009. Consultation Document. Review of Directive 94/19/EC on Deposit Guarantee Schemes.- European Commission. 2009. Consultation on a draft proposal for a Directive of the European Parliament and of the Council

amending Directives 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted totrading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whosesecurities are admitted to trading on a regulated market.

- European Commission. 2009. Call for evidence. Review of Directive 2003/6/EC on insider dealing and market manipulation.- European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council amending Directives

2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures,supervisory arrangements, and crisis management [SEC(2008) 2532] [SEC(2008) 2533]; European Parliament Resolution adoptedon 6 May 2009; forthcoming publication in the OJ. [CRD 2]

- European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council amending Directives2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisoryreview of remuneration policies SEC(2009) 974 final SEC(2009) 975 final; 13.07.2009 [CRD 3].

- European Commission. 2009. Consultation regarding further possible changes to the Capital Requirements Directive[Consultation for CRD 4], 24 July.

218

- European Commission. 2009. Code of Conduct. Brussels [http://ec.europa.eu/internal_market/finservices-retail/home-loans/code_en.htm]. Accessed June 2009.

- European Commission. 2009. FIN-NET. Financial Dispute Resolution Network. [http://ec.europa.eu/internal_market/fin-net/docs_en.htm]. Accessed in June 2009.

- European Commission and European Central Bank. 2009. Joint statement by the European Commission and the EuropeanCentral Bank clarifying certain principles underlying a future SEPA direct debit (SDD) business model. SEC (2009) 397, 24 March.

- European Commission. 2009. Commission Communication to the European Parliament, the Council, the European Social andEconomic Committee and the Committee of the Regions on Europe’s Digital Competitiveness Report – Main achievements ofthe i2010 strategy 2005-2009, COM(2009) 390, 4 August.

- European Financial reporting Advisory Group (EFRAG). 2008. “Re: ED of a Proposed IFRS for Small and Medium-sized Entities”.Letter February 7. Brussels: [http://www.efrag.org/files/EFRAG%20public%20letters/IFRS%20for%20SMEs/EFRAG%20Output/EFRAG%20CL%20on%20ED%20IFRS%20for%20SMEs%20(07.02.2008).pdf] Accessed July 2009.

- European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2007. Conclusions of the 2813th meeting of 10 July2007. 11464/07 (Presse 160).

- European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2008. Conclusions of the 2894th meeting of7 October 2008. 13784/08 (Presse 279).

- European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009.Conclusions of the 2922nd meeting of10 February 2009. 6069/09 (Presse 32).

- European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. Conclusions of the 2948th meeting on9 June 2009. 10737/09 (Presse 168).

- European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. June 9th ECOFIN report to the EuropeanCouncil as regards the effectiveness of the financial support systems. 10772/09 and 10772/09 Addendum.

- Eurostat. 2008. “Total Population at 1 January.” Site 3-TGM table. Frankfurt. [http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tps00001]. Accessed August 2009.

- Eurostat. 2009. Statistics in Focus.- French Presidency Council of the European Union. 2008. Competitiveness Council: Political Agreement on the SBA, establishment

of an antion plan for European SMEs. Brussels [http://www.eu2008.fr/impressionPDFe93d.pdf?url=%2FPFUE%2Flang%2Fen%2Faccueil%2FPFUE-12_2008%2FPFUE-01.12.2008%2Fconseil_competitivite__principaux_resultats]. Accessed June 2009.

- Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group). 2009. Principles, Definitionsand Model Rules of European Private Law. Draft Common Frame of Reference (DCFR). Outline Edition, Munich[http://webh01.ua.ac.be/storme/2009_02_DCFR_OutlineEdition.pdf]. Accessed June 2009.

4. Non-Legislative texts adopted by international organizations and bodies

- Financial Accounting Standards Board (FASB). 2009. “Proposed FSP FAS 157-e, Determining Whether a Market Is Not Activeand a Transaction Is Not Distressed.” Board Meeting Handout. April 2. Connecticut; USA: [http://www.fasb.org/board_handouts/04-02-09.pdf]. Accessed July 2009.

- International Accounting Standards Board (IASB). 2007. “IASB published draft IFRS for SMEs”. Press Release February 15.London: [http://www.iasb.org/NR/rdonlyres/CFC99B13-BF3C-4B71-AEF8-5B2960C16C2C/0/PRonSMEsED15Feb07.pdf].Accessed July 2009.

- International Accounting Standards Board (IASB). 2007. “IASB launches field tests of SME exposure draft”. Press Release June18. London: [http://www.iasb.org/NR/rdonlyres/B60A8709-0388-4B3A-8865-6A8081481D87/0/PRonSMEfieldtests.pdf ].Accessed July 2009.

- International Accounting Standards Board (IASB). 2007. Exposure Draft International Financial Reporting Standard for Small andMedium-sized Entities, Comments to be received by 1 October 2007. London: [http://www.iasb.org/NR/rdonlyres/DFF3CB5E-7C89-4D0B-AB85-BC099E84470F/0/SMEProposed26095.pdf]. Accessed July 2009.

- International Accounting Standards Board (IASB). 2009. Exposure Draft Financial Instruments: Classification and Measurement,Comments to be received by 14 September 2009. London: [http://www.iasb.org/NR/rdonlyres/D1598224-3609-4F0A-82D0-6DC598C3249B/0/EDFinancialInstrumentsClassificationandMeasurement.pdf]. Accessed July 2009.

219

- International Accounting Standards Board (IASB). 2009. Exposure Draft ED/2009/5 Fair Value Measurement, comments to bereceived by 28 September 2009. London: [http://www.iasb.org/NR/rdonlyres/C4096A25-F830-401D-8E2E-9286B194798E/0/EDFairValueMeasurement_website.pdf]. Accessed July 2009.

- International Accounting Standards Board (IASB). 2009. Basis for Conclusions on Exposure Draft, Fair Value Measurement,Comments to be received by 28 September 2009. London: [http://www.iasb.org/NR/rdonlyres/D55E0BA1-5420-456B-8CCC-EB488BAD5B80/0/EDFairValueMeasurementBC_website.pdf]. Accessed July 2009.

- International Accounting Standards Board (IASB). 2009. “IFRS for SMEs”. London: [http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm]. Accessed July 2009.

- International Accounting Standards Board (IASB). 2009. IASB publishes IFRS for SMEs Press release. London[http://www.iasb.org/NR/rdonlyres/F4FFF721-62A4-4E02-BCB7-A0BD7A6D4FF8/0/PRIFRSforSMEs.pdf] July 2009.

- International Accounting Standards Board (IASB). 2009. “IFRS for SMEs”. London: [http://www.iasb.org/Current+Projects/IASB+Projects/Small+and+Medium-sized+Entities/Small+and+Medium-sized+Entities.htm]. Accessed July 2009.

- Security Council. 2004. Resolution 1540 (2004) adopted by the Security Council on 28 April 2004 [S/RES/1540 (2004)], 28 April.- The International Organization of Securities Commissions (IOSCO). 2008. Amendments to the Code of Conduct Fundamentals

for Credit Rating Agencies (Code of Conduct), IOSCO/MR/006/2008, 28 May.

5. Other Literature and any other sources

- Amundsen, E. and D. Kalsone. 2009. “E-Payment products and value-added services – moving towards an innovative Europeaninternal market” (25 March 2009), Danmarks Nationalbank Working Paper.

- Ayadi, Rym, Reinhard H. Schmidt and Santiago Carbó Valverde. 2009. Investigating Diversity in the Banking Sector in Europe:The Performance and Role of Savings Banks. Centre for European Studies.

- Brunnermeier, M., A. Crockett, C. Goodhart, A. Persaud and H. Shin. 2009. The Fundamental Principles of Financial Regulation.London, Centre for Economic Policy Research.

- Capgemini Consulting. 2008. SEPA: Potential Benefits at Stake - Researching the impact of SEPA on the payments market andits stakeholders.

- Civic Consulting. 2009. Analysis of the Economic Impact of Directive 2002/65/EC concerning the distance marketing of consumerfinancial services on the conclusion of cross-border contracts for financial services between suppliers and consumers within theInternal Market. Final Report to the European Commission, DG Health and Consumer Affairs.

- de Larosière, J., L. Balcerowicz, O. Issing, R. Masera, C. Mc Carthy, L. Nyberg, J. Pérez and O. Ruding. 2009. Report by the HighLevel Group on Financial Supervision in the EU [de Larosière Report].

- Deutscher Sparkassen Verlag. 2009. Stock Market Learning, Stuttgart. [http://www.planspiel-boerse.com/toplevel/englisch/index.htm]. Accessed June 2009.

- Egmont Group. 2009. “The Egmont Group”.[www.egmontgroup.org]. Accessed June 2009.- ESBG. 2006. ESBG Response to the European Commission’s Consultation on the Interim Report II: Current Accounts and Related

Services, in context of the European’s sector inquiry into retail banking (completed in 2007). http://www.esbg.eu/uploadedFiles/Position_papers/2006-02588.pdf.

- ESBG. 2007. Examples of WBI members’ initiatives in the field of financial education, Brussels [http://www.wsbi.org/uploaded-Files/Publications_and_Research_(WSBI_only)/financialeducation%20wsbi%20screen.pdf]. Accessed June 2009.

- European Payments Council. 2005. Crowne Plaza declaration. Brussels, 17 March 2005.- European Payments Council. 2006. SEPA Cards Framework Version 2 (Cards-027/05 version 2.0). - European Payments Council. 2008. SEPA Credit Transfer Scheme Rulebook (EPC125-05 version 3.2).- European Payments Council. 2009. SEPA Core Direct Debit Scheme (EPC016-06 version 3.3). - European Payments Council. 2009. Consultation: Draft SEPA e-Payment Framework Service Description issued 4 June

(EPC283-08 Version 1.0 draft 0.14).- European Payments Council. 2009. Consultation: Draft SEPA e-Payments Framework e-Operating Model - High Level Definition

issued 30 April 2009 (EPC084-09 Version 1.0 draft 1.5).- Fidessa fragmentation index. 2009. http://fragmentation.fidessa.com/stats/ Report for week ending 5 June. - Financial Action Task Force (FATF-GAFI). 2002. “Terrorist Financing. FATF Action Plan against Terrorist Financing”. Paris

[www.fatf-gafi.org/pages/0,3417,en_32250379_32236947_1_1_1_1_1,00.html#actionplan]. Accessed June 2009.- Financial Action Task Force (FATF-GAFI). 2003. “40 Recommendations”. Paris [www.fatf-gafi.org/document/28/

0,3343,en_32250379_32236930_33658140_1_1_1_1,00.html]. Accessed June 2009.

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- Financial Action Task Force (FATF-GAFI). 2003. Financial Action Task Force on Money Laundering. The Forthy Recommendations.Paris [www.fatf-gafi.org/dataoecd/7/40/34849567.PDF]. Accessed June 2009.

- Financial Action Task Force (FATF-GAFI). 2004. Financial Action Task Force on Money Laundering. Paris [www.fatf-gafi.org/dataoecd/8/17/34849466.pdf]. Accessed June 2009.

- Financial Action Task Force (FATF-GAFI). 2008. Proliferation Financing Report. Paris [http://www.fatf-gafi.org/dataoecd/14/21/41146580.pdf]. Accessed June 2009. Fore specific details see pp. 9-23.

- Financial Action Task Force (FATF-GAFI). 2009. “FATF Home”. Paris [http://www.fatf-gafi.org/pages/0,2987,en_32250379_32235720_1_1_1_1_1,00.html]. Accessed June 2009.

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ESBG – The European Voice of Savings and Retail Banking

ESBG (European Savings Banks Group) is an international banking association that representsone of the largest European retail banking networks, comprising about one third ofthe retail banking market in Europe, with total assets of € 5,972 billion (1 January 2008).It represents the interests of its members vis-à-vis the EU Institutions and generates,facilitates and manages high quality cross-border banking projects.

ESBG members are typically savings and retail banks or associations thereof. They areoften organised in decentralised networks and offer their services throughout theirregion. ESBG member banks have reinvested responsibly in their region for many decadesand are one distinct benchmark for corporate social responsibility activities throughoutEurope and the world.

Rue Marie-Thérèse, 11 n B-1000 Brussels n Tel: +32 2 211 11 11 n Fax: +32 2 211 11 [email protected] n www.savings-banks.comPublished by ESBG. Copyright September 2009 ISSN 1782-396x

The European Voice of Savings and Retail Banking

Retail Banking in Europe

Business

Transcript of Retail Banking in Europe