A borderless European banking system

The banking union seeks to break the doom loop between sovereign debt – debt from a country’s government – and banking risk. This link increased significantly during the crisis and translated into greater financial fragmentation in the euro zone, especially from 2008 to the summer of 2012. One of the most visible effects was that banks offered different financing conditions depending on their country of origin. Institutions from periphery countries like Spain had to pay much more to issue debt in wholesale markets than countries in the center of Europe.

Progress has been impressive since the banking union was launched in June 2012. In only four years we now have a Single Supervisory Mechanism and Single Resolution Mechanism, as well as a common rulebook in Europe.  The third pillar of the banking union – a European Deposit Insurance Scheme – is currently under discussion.

However, a true Banking Union means there is a single market in which consumers and providers buy and sell financial products and services, whether they are mortgages, credit cards or checking accounts, from anywhere in the EU. We are still far from this goal.

BBVA’s Executive Director José Manuel González-Páramo recently published an article in Eurofi magazine, where he said, “Technology has the potential to significantly alter this situation, since banks are now able to cost-effectively reach new geographically dispersed customers through digital channels, without having to expand their physical presence.” However, he notes that regulatory and administrative differences between EU member states impose significant compliance costs and prevent financial institutions from making full use of the digital capabilities to offer their services across the EU. Consumer and investor protection laws differ across the 28 Member States and companies need to act in most cases in accordance with the requirements of each of the countries where they offer their products.

Another key obstacle is the difficulty in complying with Anti-Money Laundering (AML) regulations. National transpositions of the EU AML Directive and national supervisory criteria lead to differences across countries in the methods banks may use to remotely verify the identity of new customers. Not all member states allow the use of real-time and easy to implement methods (e.g. video call or biometric solutions). This makes it difficult for banks to remotely verify the identity of cross-border customers,” indicates BBVA’s Executive Director. Moreover, the use of national eID systems is currently restricted for the private sector across the EU.

Aware of this problem, the European Commission launched a Green Paper on retail financial services in December 2015, aimed at overcoming the existing EU market fragmentation. The Commission plans to release an Action Plan this fall. “This plan should promote further regulatory harmonization to simplify the cross-border provision of services through digital channels and to ensure an equivalent level of consumer protection across the EU,” maintains José Manuel González-Páramo.

Without a doubt, “a true Single Market is needed to materialize the endpoint of the banking union. Digital technologies can certainly help, but enabling regulatory framework is needed,” concludes the author of the article, published as part of his participation in the 2016 Eurofi Financial Forum, held last week in Bratislava (Slovakia).