European Integration
Banking deregulation

The progressive implementation of the single-market programme and a variety of Community directives on banking will have a major influence on the design of the regulatory framework for European banking in the 1990s. In Discussion Paper No. 703, Research Fellows Jordi Gual and Damien Neven assess the experience of banking deregulation in the 1980s in Belgium, France, Germany, Italy, the Netherlands, Spain and the UK. They find that regulation significantly affected the structure and competitiveness of the industry; strongly regulated markets feature rather high interest margins, unusually profitable banks, excessive wages and high costs. Conduct regulations, like interest rate ceilings, also tend to favour extensive branching. Most of the restructuring triggered by deregulation (mainly in Belgium, France and Spain) took place in the product rather than the capital market, and within rather than across industries.

Mergers and acquisitions have concerned only small fractions of the industry's capital and involved companies in similar activities, while falling interest margins indicate increased competition in product markets. Only in the Netherlands did restructuring lead to an increased concentration that could be associated with a reduction in rivalry, however, and cross-border competition played a significant role in fostering rivalry, as trade in banking services developed rapidly. The liberalization of capital flows within Europe may further enhance competition in markets such as Italy, Portugal and Spain, and improving foreign firms' market access is most effective when accompanied by deregulation that is initiated domestically. Gual and Neven conclude that deregulation improves performance by reducing both profits and costs, while excessive wages persist. Given that the franchise value of banks has fallen, this casts some doubt over whether current regulatory arrangements provide adequate safeguards for the financial system's stability.

Deregulation of the European Banking Industry (1980-1991)
Jordi Gual and Damien Neven

Discussion Paper No. 703, August 1992 (AM)