Cross-Border Entry in European Retail Financial Services: Determinants, Regulation and the Impact on Competition.

Abstract

Motivation and objectives of the thesisMost retail financial services in the European Community (EC) have for a long time been characterised by a low degree of cross-border penetration and competition. This market fragmentation stemmed partly from government regulations obstructing free movement of capital, freedom of establishment and provision of services in the EC. Not surprisingly, therefore, the 1988 Cecchini-report concluded that in the European financial services sector "... m arket openness, competition and low cost-efficiency is often deliberately not assured". This lack of cross-border market penetration is supposed to change with the advent of the European internal market in 1993 after the adoption of the Single E uropean Act and various EC Directives concerning financial services. The im plem entation of these measures in the financial services sector is predicted to lead to overall price reductions by 10% and a rise in European GDP by 1.5 % over a five-year period which accounts for a third of the total projected effects of the 1992 programme.1 In addition, the changes in the regulatory regime are expected to im pact significantly the current structure, conduct and performance of the financial services industry. As the Banking Advisory Committee of the Commission of the EC (1988, p. 13) comments, for example, the new Directives "will result in the banking system undergoing fundamental and perhaps dramatic changes". Similarly, for insurance services, a practitioner claims that "operators will face dramatic changes in the near future ... which can be summarized by just these two single words: increased competition" (Bebear, 1990, p.359). Other academic com m entators predict that "w hether the 1992 deadline is m et or not, financial m arkets will dramatically change to the point of bearing little resemblance to w hat they used to be" (Huveneers and Steinherr, 1990, p.3). Are such predictions realistic or do they overestimate the potential impact of regulatory reform?Consider the mechanism which is supposed to bring about the changes in European financial services. According to the Price Waterhouse study on financial services which is part of the 'Cecchini Report', the large-scale economic study on the costs of market barriers between the EC countries, price differences across Member States will be gradually eliminated as the EC moves closer to financial integration. The report envisages two prerequisites for attaining greater price convergence: first, a "legislative {EC} programme 1 See Cecchini-Report, European Economy, 35,1988, p. 86. 7 Tirole (1988) notes that "industrial organisation theorists have often felt more comfortable with case studies than with statistical analysis -perhaps because it may be easier to recover the industry's basic conditions and behavior from rich case studies than from selective statistics ...". ® Neven (1990, p.175), for example, notes that "the United States could be a laboratory experiment for European deregulation".In the sixth chapter statistical data on the extent o...