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 banking drives 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 other ESBG working bodies for their input: Coordination Committee Economic Affairs Committee Payments Committee Supervision and Capital Requirements Committee Accounting and Audit Committee Corporate Social Responsibility Committee Financial Regulation Committee Task Force Capital Markets Regulation Task Force Consumer Policy Task Force SMEs Task Force on Anti-Money Laundering and Counter Terrorist Financing Statisticians Network Disclaimer The opinions and views expressed in this report do not necessarily reflect the individual views of all ESBG Members; they are the result of a consultation process involving ESBG committees and other ESBG working bodies. Given current ongoing discussions with the European Commission, Lloyds TSB believes that it is not appropriate for it to comment publicly on European regulatory issues for the time being, and is therefore not a party to this report.

FOREWORD These are interesting and uncertain times, and we cannot tell yet where they will lead us. The financial world is changing and it is to be expected that banking itself – whether globally or in the EU – will undergo a significant transformation. Now is not the time for concrete predictions, yet we look ahead with optimism and with the confidence that also in the times to come, Europe’s savings and regionally oriented retail banks will drive economic growth and development, as indeed they always have. The aim of this report is to work towards this goal by stimulating and contributing to the various relevant debates and initiatives, which are 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 stands improving the regulation of Europe’s financial sector in all those areas where regulatory shortcomings are now recognised as having contributed to – or as not having effectively prevented – the build-up to the crisis. For the same reasons, Europe’s supervisory architecture is currently under revision. In parallel, however, it would be of similar importance to extend the ongoing political discussions to Europe’s financial players themselves and to reassess the priorities of banks as regards their role in the economy. The events of the last two years prove that, in Europe and also in the US, such a discussion on bank priorities is long overdue. As representatives of savings banks and regionally oriented retail banks we feel that it is our role to stimulate such a debate, 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 retail financial services continues. This debate on the ‘growing together’ of Europe’s national retail banking markets and on the economic aspects of market integration is of greatest importance for the sector and for Europe. As a matter of fact, the current supervisory and regulatory revisions will reset some of the underlying conditions for this debate, in ways which cannot yet be anticipated. However, there are persisting central factors that determine the building blocks for any sound and reality-based vision or strategy for the future of Europe’s retail financial services markets. As savings banks are among the oldest and most deeply embedded providers of retail financial services, we feel compelled to point out certain core parameters which are fundamental for 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’s retail financial markets in practice. This applies to areas like the core retail banking business, payments, capital markets, financial inclusion and education, and accounting. Even with the ongoing crisis, in these areas a large part of the dialogue between policy makers and industry is in fact ‘business as usual’. Consequently, we use the occasion of this report to provide our recommendations for the ‘retail banking’ specific policy areas currently on regulators’ agenda, and take this opportunity to present 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 longstanding positions and convictions. For both banks and banking regulators, a reality based approach is essential. For banks this reality based approach implies the need for responsible and sustainable business models; for policy makers it means recognising and respecting business realities and fundamental market conditions. Furthermore it goes hand in hand with internalising and maximising the value of Europe’s pluralistic banking sector, not only for the sake of Europe’s banks but even more so for the sake of its citizens, regions and the economy as a whole. The clear and objective goal of Europe is to make the most of its strengths. 5

With this insight, of course, the questions do not end. Rather, as a result of the current crisis, new questions arise, while already established answers to old questions are being revised. Central among the new questions is whether the current economic slow-down will lead to a change in the pace and direction of the integration debate. Looking back, during the past period of economic growth and prosperity until the onset of the crisis in mid-2007, the approach to European market integration taken by most EU policy makers was very ambitious and dynamic – even bullish – but unfortunately not unbiased. However, during the last two years of financial and economic crisis and the experience of fragilities in the financial system, ensuring stable national financial 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 years redirect market players themselves towards their home-markets or change their approach to market-entry and expansion? Is sector integration, in the way previously understood and targeted by policy makers and market players, no longer a priority? Will market 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 priorities for the future of the European retail banking market. Until two years ago, the debate was dominated by the central objective of integration, defined as the removal of barriers to the creation of ever bigger banks. Now this approach is being counterbalanced by the recognition that financial stability cannot be taken for granted. At the same time, there are the new additional priorities of promoting financial inclusion, increasing consumer confidence, and achieving responsible business practices. It can therefore be expected that regulators and policy makers will adopt – much more so than they did in the past – holistic and balanced strategies 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 and regionally oriented retail banks have always been critical towards a one-sided approach to integration: it neither internalised the stabilising impact of Europe’s pluralistic banking landscape and its beneficial effects for competition, nor did it take sufficient account of the socioeconomic role of banks and the necessity of guaranteeing financial stability. The events of the last two years have clearly demonstrated that Europe needs a pluralistic banking sector as well as a circumspect and balanced approach by policy makers. For all these reasons the new direction in the integration debate appears promising and could ensure that the benefits of an integrated European financial market will be more equally distributed. Furthermore, there is reason to hope that integration will 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 retail banking sector itself. Both bankers and policy makers are learning necessary lessons. By building on realistic foundations, Europe and its banks will move forward carefully, but also with confidence. Heinrich Haasis Chris De Noose ESBG President Managing Director WSBI/ESBG 6

TABLE OF CONTENT Foreword 5 Executive Summary 9 Who is ESBG? 17 1. ESBG – The European voice of savings and retail banking: identity, values and tradition 17 2. ESBG members in the European banking landscape 17 2.1. ESBG members – integrated within the European banking sector 18 2.2. 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-messages and 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 ethics and state aid 27 1.1. Retail banking and the real economy – bank lending during the crisis 28 1.2. Views on banks revisited – back to the roots of the business? 31 1.3. 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 37 2.1. EU actions as part of the global approach to crisis prevention – revision of existing regulatory and supervisory frameworks 38 2.2. 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’s retail banking markets 45 1. Retail banking realities and their implications for market integration 47 1.1. Local demand for retail banking products and services 48 1.2. Distribution of retail banking products: does retail banking become ‘less local’? 51 1.3. Competition in retail banking 54 2. Diversity: heritage and future for the European retail banking market 59 2.1. Banking practices: EU comparisons – EU diversity 60 2.2. Europe – rich in market players 63 2.3. Pluralism in the EU retail banking market 65 7

Part 3 – EU retail banking policy: ESBG contributions and recommendations 69 Setting the scene: the EU approach to financial sector policy and ESBG’s contributions on the basis of the ‘Market Model’ 71 1. Banking supervision 73 1.1. The EU institutional arrangements for supervision 74 1.2. The EU regulatory framework 80 1.3. Deposit Guarantee Schemes 87 2. Financial reporting I – Fair value accounting 91 3. Financial reporting II - IFRS and SMEs 97 4. Wholesale payments and settlements infrastructure 103 5. Capital Markets I – Securities 109 5.1. Markets in Financial Instruments Directive (MiFID) 109 5.2. Prospectus Directive 114 5.3. Market Abuse Directive 116 5.4. Transparency Directive 117 6. Capital Markets II – Asset management and investment funds 119 6.1. UCITS 119 6.2. Alternative investment fund managers 121 6.3. Packaged retail investment products 122 7. Consumer policy in the area of retail financial services 125 7.1. Consumer credit 127 7.2. Mortgage credit 129 7.3. Distance marketing of consumer financial services 133 7.4. Consumer redress 135 7.5. European contract law 137 7.6. Consumer rights 139 8. Retail payments 141 9. Anti-money laundering, counter terrorist financing and financial institutions 151 9.1. The third anti-money laundering directive 152 9.2. Compliance at group level 155 9.3. Financial action task force – FATF 156 9.4. Proliferation financing 158 9.5. Financial sanctions 160 10. SME financing 163 11. Financial inclusion 171 12. Financial education 175 Concluding remarks 179 Annex 1 181 Part 1 – Structural and financial data 181 Part 2 – EU Payments Data 197 Annex 2 203 ESBG Charter for Responsible Business 203 Bibliography 213 8

EXECUTIVE SUMMARY Who is ESBG? ESBG is the voice of Europe’s savings and regionally oriented retail banks. ESBG’s members share a long European banking tradition and form an integral and substantial part of Europe’s retail banking landscape. True to their origins, they subscribe to the principles of responsible retail banking, as summarised in the ESBG Charter for Responsible Business. The ongoing financial and economic crisis challenges many long held views on the financial sector itself and on the appropriate regulatory and supervisory framework. At the same time, the long-lasting EU debate on financial sector integration continues at both the political and the policy level. As the European voice of savings and regionally oriented retail banks, ESBG is taking this opportunity to present its contributions on the different retail banking related issues to the new European Parliament and the new 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 to ongoing political debates. n The second part of the report takes a long term view and names and explains core parameters for retail banking sector integration, 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 recommendations in 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 take unprecedented 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-down in bank lending to the real economy have not materialized. This is largely due to the stabilizing and balancing characteristics of Europe’s banking sector, and in particular to its pluralistic structure in which different bank types and business models compete and coexist. By contributing to the overall stability of the financial system, pluralism in the banking sector truly confirms its value for Europe’s economy and markets. In the retail banking area, many ESBG members have maintained or even increased lending to the real economy since the onset of the crisis. This underlines the stabilising effect of regionally active and committed retail banks and the importance of locally made banking decisions for adequate and stable financing of the local economy. 9

The crisis demonstrates that fundamental mismatches between the banking sector and the real economy are not sustainable. The suddenly exposed fragility of the financial system demonstrates that the priorities of banks need to be aligned with their true purpose in the economy. This fundamental idea is embodied in the traditional savings banks model. On a general level, 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 and products to the real economy. Correspondingly, a uniform banking sector whose behaviour imperils the wider economy can no longer be an acceptable vision for policy makers nor for some parts of the banking sector. It is the duty and responsibility of policy makers to safeguard 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 national governments to support financial institutions and to guarantee financial stability are important, necessary and adequate. Still, a central criterion is that state-aid must be granted with the clear objective to achieve or maintain the overall health of the banking sector – it may not carry a cost to sound and healthy institutions. Any state aid measure must be designed in order to fit with the national circumstances and needs to be adaptable to the challenges individual institutions are facing. Yet there remains some concern that national state-aid measures can translate into persistent competitive imbalances both across markets and within markets. Therefore policy makers need to exert all efforts to prevent state aid from affecting competition between beneficiaries and non-recipients. This is also important as it is unrealistic to expect that competition distortions and damages to the sound parts of 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 regulatory and supervisory framework. The analysis of the reasons and dynamics behind the current financial markets crisis has been progressing with great strides. EU policy makers have not hesitated to act on the lessons learned and to initiate corrections in those areas where they have identified the need and scope for corrections. While the ongoing approach tackles a rather wide range of policy objectives, the paramount goal of legislative initiatives is to safeguard future financial stability. Looking at the initiatives under way it is important to note that, while great efforts are being taken to improve existing legislation and institutional frameworks, a substantial part of the discussion also focuses on extending regulatory coverage to previously unregulated entities and activities. Looking at the ongoing revisions of the EU supervisory and regulatory framework, EU policy makers rightly aim to build on existing foundations and make the best use of past achievements. ESBG would like to stress that in order to adequately take account of the interlinkages between the different areas under the spot light, a holistic approach is vital. It is also important that EU policy makers keep the ambition to regulate Europe’s financial sectors in a way which promotes its strengths and takes due consideration of the diversity of its financial sector. The application of common rules under the guidance of an overarching proportionality 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 financial intermediaries, but also by regulators and policy makers. A clear distinction needs to be maintained between measures addressing immediate concerns and long-term improvements to the regulatory framework. The implementation of corrective measures needs to be carefully adjusted to the real economic environment and to the pace at which the European economy overcomes the current crisis. 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 necessary response to the lessons Europe and the world have been forced to learn in the last two years. Policy makers are rightly extending regulation to those formerly unregulated financial market participants whose actions have contributed significantly to the crisis or whose activities could pose future systemic risks to financial market stability. Especially the EU regulation of credit rating agencies is long overdue, given their fundamental role in the financial sector and the potential implications for financial stability. 10

PART 2 European 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 the report, 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 banking is local and the business itself builds on personal contact between banks and customers (relationship banking). With regard to SMEs the local dimension of retail banking is even more crucial, since an adequate bank-customer relationship builds on detailed knowledge of the SME and its business environment. Consequently, branch networks are essential for comprehensive retail banking. Online banking facilities are becoming increasingly wide-spread; they complement, but do not reduce, the importance of proximity. Not only does the local character of retail banking set the rules for banks’ business strategies, competition and market entry, also the financial inclusion of Europe’s regions builds on full coverage of branch networks. For the further integration of Europe’s retail banking markets the importance of proximity means that successful entry into new markets requires substantial 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 proposition due 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 bank branches. Looking at the natural constraints of the ‘direct banking’ business model (with its near exclusive reliance on the internet as a basis for contact with customers), it becomes apparent that its economic benefits can be dubious – especially in a cross-border context. It neither promises comprehensive coverage in terms of retail banking services, nor is it certain that the consumers’ 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 banking competition is multi-dimensional. A vital part of competition goes beyond prices (fees and interest rates) and works via customer 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 has to compete not only in terms of prices, but also to meet a range of wider criteria demanded by customers. Furthermore, at the national level, Europe’s banking markets are already characterized by high levels of competition. Since retail banking is local, this translates 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 banking sector is striking. This richness in retail banking practices and the pluralism of market players are the results of different banking traditions 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 cultural and socioeconomic factors, savings cultures, housing and labour market specifities and government policies. Differences in banking practices, in product design or pricing patterns consequently stem from an adaptation to specific features of demand and underlying conditions. Similarly, in each country the structure of the financial sector reflects the needs of the producing sector and citizens, and therefore 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 of its parts’. As regards the integration of Europe’s retail banking market, it is therefore essential for Europe to make the most of its strengths and to develop an integration strategy which respects and appreciates the diversity of market players. 11

PART 3 EU 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 events have, 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 to ensure 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 ‘European Supervisory Authorities’. The financial crisis has also revealed weaknesses in the current prudential regulatory framework. Yet, this does not mean that it is necessary to completely overhaul the rules in place. EU policy makers should correct the identified weaknesses by building on 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 long run 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 the same time, it has to be ensured that the new rules envisaged are a true response to the identified problems and do not endanger practices 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 the importance of Deposit Guarantee Schemes for stability in financial markets and consumer confidence. As regards the additional changes to the Directive currently envisaged, the different national Deposit Guarantee Schemes should be maintained, as they have the important advantage of attributing local responsibility and social control. Finally, no further reduction of the payout delay, 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 for financial services. One of the objectives was to obtain a single set of accounting standards for all European listed companies that was better adapted to the increased use of financial instruments. The standards chosen were the International Financial Reporting 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 be re-evaluated on a regular basis according to their current market value. Fair value encountered a lot of attention from both sides of the Atlantic in light of the financial crisis. During autumn 2008, numerous changes in the standards related to the valuation of financial instruments at fair value (mostly concerning the accounting standard called IAS 39) were introduced. All of these changes aimed to provide flexibility in the application of fair value – especially concerning the measure of financial instruments in illiquid markets. 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 concern the pro-cyclicality effect of fair value, the valuation of illiquid assets and the fair value classification rules in balance sheets. 12

ESBG strongly supports a more flexible application of fair value when it comes to illiquid financial instruments but also defends a practical approach to the relationship between fair value accounting and the economic downturn. Over-reliance on market value not only 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 harmonisation between fair value requirements is demanded by financial reports and those required by supervisory regulations. Better transparency would benefit both users and preparers of financial standards as it will diminish their workload and strengthen the European Single Market. Finally, it is very important for the EU to adopt measures on fair value that take the exceptional circumstances in the markets into account and are in line with the measures taken in the United States. Thorough reconsideration of the existing accounting practices 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 natural business partners. In order to improve the Single Market, the European Commission has proposed adapting accounting requirements for SMEs and for publicly traded companies. The Commission’s initiatives include a reduction of the reporting burden for SMEs and the endorsement of a common set of accounting rules for listed companies – the International Financial Reporting Standards (IFRS). The International Accounting Standards Board (IASB) took the initiative to propose an extension and a simplification of IFRS accounting rules for SMEs. This initiative raised controversial discussions amongst stakeholders and policy 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 or on an international accounting standard specifically designed for SMEs. Therefore, ESBG’s major interest is to ensure that SMEs benefit 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 requirements are still necessary. With regard to the IASB proposal to revise the standards every three years, the time frame for modifications and 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-flow and solvency oriented approach. Finally, the scope of entities obliged to report in accordance with full IFRS should not be expanded to include banks and insurance companies 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 bank infrastructure that effectively enables finality and certainty. Yet the public good dimension of these initiatives should not be lost from sight, as this is one of the core factors which distinguish them from commercial initiatives. As a consequence, particular care should be paid to ensuring that the level playing field is not even inadvertently jeopardized, for example by constraints that make direct 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 and accessibility of Europe’s financial markets. Important pieces of legislation include MiFID, the Prospectuses Directive, the Market Abuse Directive and the Transparency Directive. After a phase of adoption and implementation, the time has now come to review these texts: the best should be made out of this opportunity to correct errors and assess the effects of the measures in place. 13

It is still premature to draw final conclusions on the Markets in Financial Instruments Directive (MiFID). This being said, and also due to the heavy cost associated with compliance, a period of continuity and contemplation is now necessary so that the full effects of MiFID can unfold and be assessed. This is the case not only for the conduct of business related aspects of MiFID, but also for all the provisions which will undoubtedly significantly change the shape and structure of Europe’s financial markets. A subsequent and realistic assessment of MiFID should not only aim at identifying weaknesses and reducing any excess burden; it also should honestly take stock as to whether MiFID equally benefited all market participants and whether the principles of subsidiarity and proportionality were fully respected. The Prospectus Directive has already demonstrated its viability and has brought about some improvements. Therefore, its upcoming revision should focus on further reducing burden, also taking due account of the retail banking realities and of the specificities of smaller banks. This would imply raising the size-threshold for the exemption of smaller credit institutions, given the substantial burden associated with providing a prospectus. As regards the recent developments relating to asset management and investment funds, ESBG welcomes UCITS IV, which benefits investors and further improves the internal market for collective investment in transferable securities. Looking ahead, it is 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 of vague elements in the Commission’s proposal for a Directive, which is currently being assessed. Furthermore, ESBG welcomes the ongoing initiative to explore how a framework for all packaged retail investment products could work in practice, anticipating already 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 increasing consumers’ confidence in the European Single Market and promoting a level playing field for competition within the financial sector. 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 appropriate degree 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 of the annual percentage rate of charge, early repayment and the right of withdrawal. Therefore, further clarifications of these aspects 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 future developments 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 different policy options for mortgage, the study on land registration, property valuation and foreclosure procedures, credit histories and the announced package on responsible lending and borrowing. Generally, ESBG welcomes the voluntary self-binding approach of the industry to meet consumers’ actual needs and notes that future mandatory rules should not aim at going beyond those needs. Against this background, the package on responsible lending and borrowing should achieve a fair spread of responsibilities between consumers and lending institutions. Concerning consumer redress, ESBG supports the Commission’s initiatives to reinforce the provisions of effective and efficient dispute resolution and redress mechanisms for consumers. ESBG favours out-of-court settlement procedures and stresses the need 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 and consistent European legislative framework. Nevertheless, for a future Common Frame of Reference an open exchange of views as well as an appropriate impact assessment are called for. Furthermore, there is concern about the legal basis for the Common Frame of Reference. 14

In general, ESBG supports the initiatives of the Commission to simplify and to make European consumer rights legislation consistent, but believes in the need to strike the right balance between consumer protection and the industry’s competitiveness and 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 and legislation. 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 – legislative innovation. In concrete terms, the success of SEPA, first and foremost depends on the adoption of SEPA payments instruments by national authorities. Ultimately, however, the goal of the SEPA project must be to fulfill the interests of those who are to become 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, the prevention of money laundering and of the financing of terrorism is essential. In Europe, the creation of the Single Market provides advantages 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 owner which can be difficult. Credit institutions do not have access to sufficient and reliable information to carry out such an intensive identification. Moreover, there is a need for clearer guidelines on the extent of investigation which banks need to undergo in order 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 often do not have the insight into the underlying business transaction and details required to pass a judgement on the possibility of proliferation financing as being the underlying aim of the financial transaction. In this respect, the red-flag indicators of the Financial 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 further individual assessment. During the drafting process of the financial sanctions, European regulators and international organisations should take the work of 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’s experiences 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 and important partners to microenterprises. Therefore, ESBG in general welcomes the measures taken by the European Commission towards improving the business environment for SMEs. However, there is still work to be done in the area of administrative rules and 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 be coordinated at the EU level and should be subject to the ‘Think Small First’ principle in order to avoid excessive administrative burdens for SMEs. 15

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 communicate and to clearly define the aim and target groups of different existing European financial support programmes. With regards to the 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 JASMINE initiative should be targeted to all intermediaries in order to reap the full benefits of microcredit in the form of growth and job 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 are well-informed in financial matters and who have access to the financial system. Therefore, ESBG generally welcomes the current discussions 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 of subsidiarity 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 even local contexts and traditions are needed where the problem of financial exclusion occurs. Financial institutions should offer specific adapted products and services, provide adequate information and financial education. However, 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 by regulation. As a representative of financial institutions with a strong commitment to Corporate Social Responsibility (CSR) ensuring the empowerment of consumers, ESBG considers that the financial education of citizens is a task to be dealt with at the national level. Stakeholders have a responsibility in fostering financial education. Government and public institutions should provide policy orientation and raise awareness, while financial institutions should be involved in creating financial education programmes and schemes. Here, many savings banks play a key role in educating people on finance and budget matters, far beyond their actual clientèle. These savings banks have the necessary knowledge and expertise to share best practices. 16

WHO IS ESBG? 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 members represent 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 pluralistic banking sector, which is distinguished by its diversity of banking traditions and business models. At the same time, ESBG members do not form one uniform block and a ‘proto-type’ savings bank does not exist. Rather the savings banks’ universe itself is very diverse. This diversity reflects differences not only in the evolution of the savings banks themselves, but also in the underlying economic and political conditions in their national markets. Overarching this diversity, however, is a shared business approach and shared 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 for socially 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 their organizational structure differs from country to country, they have evolved from common roots and a tradition established in many parts of Europe in the 19th century. This tradition fostered a culture of savings among the poorer classes of the population so as to create some level of financial security in times of adversity and old age. The savings that were collected in this way were reinvested 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 retail banks 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 and national economies and form an important part of Europe’s pluralistic banking landscape. This is underlined by the data presented in 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 as the different credit institutions represented by ESBG at the EU level are presented in Table 1. In the following, information on ESBG members is juxtaposed onto data on the EU banking sector as a whole, drawing mainly on data collected by the ECB. 17

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 differ strongly.1 In part, of course, this is a result of differences in country size and in the importance of the financial sector as an industry. Nevertheless, structural differences play a role also. In several countries the banking sector is characterised by the presence 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 by ESBG in selected countries largely reflect the structural characteristics of the national banking markets. This demonstrates that the 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 banks sector. Yet, looking only at the time-span between 2005 and 2007, many Member States (and not only new Member States) have in fact experienced an increase in the number of banks. The general trend of consolidation in the national banking sectors is strong, 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 of the economy, and also by the importance of the national financial industry as an economic and export sector.2 These factors are also reflected in the size of ESBG members in terms of assets.3 Furthermore, to grasp correctly the importance of ESBG members in the banking sector (as regards assets) it must be taken into account that they traditionally focus on retail banking, and that hence many of them may hold a smaller share of wholesale financial assets than other market participants. All in all the numbers confirm 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 the banking sector as a share of total domestic employment is comparatively stable across Member States – with the obvious exception of those markets which specialise in and ‘export’ financial services. Yet, different banking activities differ in employment terms and, compared to other forms of financial services activity, retail banking is particularly labour intensive. Therefore it is not surprising 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 retail banking focus it is therefore natural that ESBG members run large branch networks.7 They also are well represented within their national markets, as indicated by their generally substantial share of total branches within the domestic banking markets. In more general 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 steady increase in the number of ATMs. ESBG members’ often substantial shares of the total number of ATMs in a given national market are 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 per million 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. 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. 18

Looking at ESBG members’ market shares, the importance of Europe’s savings banks and regionally oriented retail banks in their traditional 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 and residential 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 and environmental 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 been formalised with the adoption of the ESBG Charter for Responsible Business by the ESBG General Assembly in May 2008. At the same time, the ESBG General Assembly adopted a Resolution on the Environment. The texts of the Charter and of the Resolution are 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 well as the activities already undertaken by ESBG member institutions. Below are some examples of how ESBG members apply these principles, including those related to environmentally-friendly business, in their local and regional business areas. Further examples can 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 transparency in 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. 10 See Table 8. 11 For the EU see Table 9A, for ESBG members see Table 9B. 19

One particularly innovative example is the following: 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 to differentiate themselves in the market. CAN decided to create an emotional link by giving its customers the rights to decide where the profits of the bank should be invested. The Plan Cantera for the period 2007-2010 was the second stage of this 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 each customer and the specific contribution each customer makes to their chosen social project(s) (see Annex 2). 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 mission and is demonstrated in the way they conduct their daily business. ESBG is certain that access to finance can and should be increased. This can be done by offering specific products and services, by providing adequate information and by providing financial education. Many ESBG members have introduced specific, targeted schemes to ensure that the most vulnerable parts of the 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: Microcredit programme in France – “Parcours Confiance” In 2006, the French Caisses d’Epargne launched the “Parcours Confiance” (eng. “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 banking products and services. This programme also allows for the possibility to provide the beneficiary with microloans backed by guarantees. Until the end of 2008 4,495 microloans have been granted since the system was launched in 2006. The breakdown was 3,275 personal microloans and 1,220 business microloans (See Annex 2). Environment-friendly business As part of their community investment activities, ESBG members have a longstanding commitment to supporting environmental projects 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 with recognized external environmental and social standards, certification with ISO 14001 (the international environmental management standard), etc; n Supporting national and international initiatives in favour of a greener financial sector: e.g. through the United Nations Environment Programme Finance Initiative, the Carbon Disclosure Project, subscribing to the Equator principles, etc.; 12 Scheme by which all Spanish savings banks allocate their net surplus (after paying taxes and allocating provisions and reserves) to the management and financing of community investment programmes (social, cultural, environmental, health, research, etc). 20

n Developing specific lines of financing for environmental projects for both private and business clients: e.g. for improving insulation 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. “Climatic Awareness Bonds” issued by the European Investment Bank that the Spanish savings banks sell to their clients as an environmental 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 social objectives, 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 actions with employees and customers. 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 in various 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 responsible investment (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. Further case study examples of the commitment of ESBG members in the area of environmentally friendly business can be found in 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 of stakeholders 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 interact with the various categories of stakeholders, ensuring that their views are sought and given consideration at the various stages of a 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, which they have mobilised to reinvest and develop their surrounding communities. Building on their proximity network and their deep knowledge of local needs, they evolved naturally to become privileged financial partners for local and regional economic projects and have built business relationships with major actors for local development and growth. Thus, they have become the drivers of local economic dynamism – both for the financing of infrastructure through partnership with the local authorities and for micro projects aimed at creating jobs and reducing social exclusion. Over time, savings banks have strengthened their relationship with local development actors by upgrading their services to adapt them to their evolving needs. 13 See definition in the previous footnote. 21

This commitment is illustrated by the example below: 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 German savings banks group – the Sparkassen-Finanzgruppe. Entrepreneurial success often hinges not just on creativity, but also on experience. Therefore, savings banks are increasingly assigning “business angels” to new companies via Business Angels Netzwerk 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). Responsible employers The 870 institutions which ESBG represents in 25 countries employ just over 970,000 people. One of the defining characteristics of 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. This commitment is illustrated by the example below: 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 and above. The programme aims to improve efficiency, preserve competence throughout the company, and make Swedbank an attractive employer for all ages. The programme involves keep-fit and competence development activities for employees aged 55 and above and the opportunity to “Ease Down” by working less after the age of 58. This initiative has had a significantly positive impact on the way these employees find their working life conditions (See Annex 2). Communication Transparency and consistent communication with customers and other stakeholders is a key component of the savings and retail banking sector. The communication of activities and policies plays an important role for responsible business. Therefore, ESBG and its members are committed to communicating with the public and stakeholders regarding their activities as socially responsible companies and the implementation of the Charter principles. Since 2006, ESBG/WSBI has communicated publicly on the implementation of the United Nations Global Compact Principles through 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 the individual members as well as on reports on conformity with other international reporting initiatives such as the Carbon Disclosure Project (For more: see Annex 2 and http://www.esbg.eu/). 22

Part 1 The Financial and Economic Crisis: ESBG Key Messages and Contributions

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SETTING THE SCENE The current financial and economic crisis – an unprecedented experience The current financial markets crisis is approaching its second anniversary. It has long outgrown its original nature as a ‘subprime’ crisis, and has developed into a global financial and economic crisis, which many have come to call the worst economic crisis since the Great Depression. For two years, central bankers and policy makers around the world have been making unprecedented efforts to stabilize national financial systems and to prevent an economic downturn of unpredictable depth. Furthermore, large-scale economic plans and fiscal programmes were initiated in order to pave the way to economic recovery. By any standard, these interventions have reached a scale which previously would have been beyond imagination. In this report, ESBG does not aim to provide a comprehensive overview of the reasons and developments behind the current crisis.14 Rather, the focus is on the immediate and long-term consequences as seen from a retail banking perspective and as far as they concern ESBG’s members. Therefore the key messages brought forward will mainly address market structures, competition aspects and changes in regulation and the supervisory architecture. ESBG’s contributions on these issues need, of course, to be seen in context of 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 global financial sector will significantly shrink in scope and scale, though banks will nevertheless play an even more important role in financial intermediation than at present. In many arenas such a trend is considered part of the necessary correction of past excesses and of the over-stretching of many banks regarding their activities and size. However, it is necessary to distinguish between retail banking on the one hand and investment banking and wholesale banking on the other. In fact, comparing the extent of the mismatch between 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 and real economy are much smaller. Also, the market dynamics which contributed to the current crisis were largely driven by developments and practices in wholesale financial markets. It is therefore the wholesale financial market and related areas on which regulators are now focusing – and rightly so – in order to guarantee that such a crisis will not 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”). 25

In this context it is also necessary to take full account of the fact that one of the trends contributing to this crisis was excessive trust in a financial market where the leading banks 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 accepting excessively 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 banking practices. This view was also taken by several policy makers valuing extraordinary returns as signs of greater efficiency and progress. For these reasons it is now time to reassess the purpose and performance of credit institutions in particular and of the financial sector in general. Looking ahead, the way in which Europe redefines its ‘vision of banking’ will strongly drive the stabilization measures used and the way in which they will ultimately be implemented at both the national and the European level. Such a vision will also substantially shape the trade-offs Europe will still be willing to make in order to return to financial and economic stability. Given that Europe will have to live with the consequences of those trade-offs for the unforeseeable future, such decisions are not made easily. However, it is of utmost importance that those parts of the financial sector which have proved stable and sustainable are not disadvantaged or unduly burdened by any of the schemes and actions under way or already implemented. In parallel to political discussions and immediate stabilisation measures, steps are being taken towards forward looking and corrective regulation initiatives. The current regulation initiatives strongly draw on an ongoing analysis of the role played by financial sector regulation, inter-institutional dynamics and intra-institutional decision making. On the basis of these insights, regulators and policy makers strive to correct the weaknesses and shortcomings of the financial regulatory framework. Furthermore it has become a declared goal to improve the supervisory structures in place in order to ensure that supervisors will keep abreast of the developments in the financial sector and are in the position to take effective measures if they deem it necessary. In this context it also is a key priority to achieve even more stability for the integrated European financial market. Here, the differences between large banks (with potentially systemic risks and cross-border activities) and regionally oriented institutions (involved in retail banking) need to be acknowledged 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 clear and consistent vision of the future priorities of the European financial sector. It is on this basis that ESBG contributes its views to the current discussions. Chapter 1 will explain and assess the need for ‘revisiting’ expectations of the banking sector. Also addressed are the current trade-offs Europe is currently making, in particular regarding competition on and the structure of financial and banking markets. Chapter 2 summarizes ESBG’s contributions on the currently ongoing policy measures and the discussions on the European supervisory architecture. 26

1. CRISIS, BANKS AND ECONOMY – ESBG VIEWS ON LENDING, BUSINESS ETHICS AND STATE AID The financial and economic crisis is inextricably linked with the role of banks in the real economy. This relationship is highly complex and for the present purpose ESBG would like to focus on the following issues: First, a differentiated view on the banking sector is particularly important when it comes to assessing banks’ ability to maintain lending in economically difficult times. Since last autumn the spectre of a European ‘credit crunch’ as a result of the crisis has been omnipresent. While such a credit crunch – had it occurred – would indeed have had grave consequences, the approach taken in the general political debate was overly simplistic in its treatment of banks. At least initially it was widely overlooked that different bank types are not only affected differently by financial market events, but also have different priorities and business orientations. Furthermore, the special characteristics of Europe’s retail banking market deserve greater recognition since they play an important role in maintaining 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 in general. 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, whose values and orientation differ significantly. Especially in the case of banks, objectives and positioning within the real economy drive their behaviour as lenders and their long-run strategies. The crisis has only confirmed the values and business approaches of Europe’s savings and regionally oriented retail banks, which should urgently be taken into account in 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 place in an unprecedented manner and scale. At the EU level, these interventions are necessary for the stabilisation of Europe’s financial system and are being coordinated based upon guidelines laid out by the European Commission. Yet, these interventions may alter or create new conditions for sector integration and competition for the years to come. Therefore, a differentiated approach is necessary given the effect the large-scale interventions may have on national financial sectors (See Section 1.3). 27

1.1. Retail banking and the real economy – bank lending during the crisis 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’s banking sector: Pluralism is risk diversification. n Observed decreases in lending or tightening of lending standards need to be seen in context of a recession which affects overall demand for credit and increases the economic risks associated with lending. Background: dramatic developments after the Lehman Brothers Collapse and the 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 confidence tumbled to new depths. In Europe, renewed concerns arose regarding the soundness of several banks, which had strongly relied on financing from financial markets. Indeed, the very future of several systemically important European banks suddenly seemed uncertain. Under these circumstances it was questioned to what extent Europe’s financial sector would still be able to fulfil one of its key functions – the provision of credit to the real economy – 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 enterprises and industry. In this environment several things happened: First, Europe’s national policy makers undertook efforts on an unprecedented scale in order to support the financial sector directly and in a coordinated manner, while following guidelines issued by the European Commission. Second, the Commission extended the possibility for governments to undertake interventions in the form of state aid to SMEs, also including measures designed to stimulate bank lending to SMEs. Yet, in spite of these measures, the fear of a wider credit crunch and the ensuing great damage to the real economy remain prominent in the public discussion. However, there are different interpretations of what exactly would constitute a credit crunch. For some parties, a tightening in banks’ lending standards or a rise in interest rates already is equivalent to a crunch scenario; others expect unaffordable loans and credit-lines, a shrinking of overall 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 crunch is defined. Equally, it is important to differentiate between the potential victims of the credit crunch. Actors in the real economy are of great diversity, which leads to different exposure 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 in their relationship with banks or other creditors. 28

This being said, over the last year ESBG members’ experience is clear: A severe case of a A severe Europe-wide credit Europe-wide credit crunch (i.e. a wide supply-driven breakdown of lending to the real crunch has not materialised. economy) has not materialised.15 Indeed, especially as concerns the retail financial area, ESBG finds that the European banking sector has shown a remarkable degree of resilience. 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 pluralistic structure The non-manifestation of a severe ‘credit crunch’ is, of course, partially an achievement of the decisive actions by governments to support the financial sector and to promote SME lending. Fundamentally, however, the observed stability in lending stems from the resilience 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 not turn into a retail banking crisis, given that for Europe’s retail banking sector wholesale funding plays a less decisive role than in other parts of the world. Rather, for many retail and savings banks, customers’ bank deposits are the dominant source of funding. Secondly, looking more closely at European market realities, it is evident that the stability of the sector is a consequence of its pluralistic structure, characterised by the competition of 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 pluralism Pluralism is risk diversification and the diversity of Europe’s banking sector are key-reasons why aggressive and – now and contributes to financial evidently short-lived – business strategies were not the prevalent banking practice in stability. Europe. In fact, pluralism is risk diversification, as the diversity in business models and in market 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 therefore also due to the pluralistic market culture that there are many banks which are able to maintain and even to increase lending to the economy. Hence it is the pluralism of Europe’s banking sector which gives Europe’s economy the necessary balance and the long breath it will need for recovery. Another distinguishing feature of Europe’s pluralistic retail banking sector is that a large Regionally committed banks part of the sector consists of regionally focused credit institutions, which sometimes form make regional and local networks at a national level. This structure has a direct impact on bank lending as crucial decisions: less chances of decisions are taken locally, according to local responsibility and judgement. Drawing on a credit crunch. input from its members, but also by observing national banking trends, ESBG firmly believes that ultimately Europe was also spared a severe credit crunch because locally active and locally informed retail banks were able and willing to maintain or increase lending – in particular if they had access to strong and stable funding through local deposits. It is therefore evident that traditional banking elements like proximity, sustainability and relationship-banking are critical factors to ensure that credit institutions are able to fulfil their functions as robust lenders to the real economy in a crisis situation. 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-side factors 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, and corporate restructuring.” (European Central Bank. 2009. Financial Stability Review June 2009. pp 56-57). 29

ESBG members maintain ESBG’s members have proved able and willing to continue and even extend lending. or even increase lending. This is a result of their long-standing relationships with their clients which have earned them a competitive advantage in the correct appraisal of risks. In concrete terms, ESBG members, who value their relationships with their SME clients, consider it their responsibility to support them with appropriate liquidity and funding for running their business. Of course this 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 bank lending still depends on real economic conditions and prospects which influence demand for credit, lending standards and mid-term lending policy. Therefore a differentiated approach is necessary when assessing banks’ lending behaviour. Real economic factors Based on real economic prospects, established entrepreneurs decide on profitable have an ambiguous effect expansion strategies or future entrepreneurs assess the expected success of start-ups. on demand for loans. Also the timing of mergers and acquisitions – which generally both need financing – depends on growth prospects and stability in demand. On this basis the ongoing recession and the low levels of optimism mean that demand for credit will remain low until an economic recovery is clearly on the horizon. All these factors contribute to lower observed levels of bank lending. On the other hand, of course, entrepreneurs may need bridge loans, other forms of liquidity provision, or loans from banks in order to endure the 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 on observed bank lending, is difficult to identify. Lending standards Regarding lending standards, it is necessary to appreciate the impact of wider economic are driven by wider conditions on credit risk. As banks have a responsibility towards their depositors, they have economic conditions. to maintain the quality of the loans they make, base their decisions on sound assessments and price risk soundly. Therefore, lending or pricing decisions which may at first appear as a tightening in lending or credit standards are in reality a reaction to greater credit risk as a result of deteriorating economic circumstances. Naturally, it is also incompatible with banks’ responsibility towards their depositors and their other creditors to lend to clients who 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 and for banks to correctly assess credit worthiness, to grant loans, and to price risk. Ultimately banks’ ability Due to the very nature of banking, banks’ performance is inextricably linked with the to lend is tied to economy, and therefore the business of banks contracts in a prolonged recession. Of course, the ‘real’ economy. a bank’s business model and business outlook are decisive factors for the smoothness of a contraction and the bank’s sensitivity to economic downturns. In particular, a strong deposit base, a strong focus on relationship banking (i.e. close ties with clients), the importance of long-term objectives, and the regional commitment of a bank all give greater continuity to banks’ lending. In this sense, traditional banking models are characterised by comparatively little pro-cyclicality. Yet, in general retail bank performance cannot decouple from the state of the real economy. 30

1.2. Views on banks revisited – back to the roots of the business? Key messages n Priorities of banks need to be realigned with their fundamental role in the economy – an excessive mismatch between 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. Background: Why is a mismatch between banking sector and real economy problematic? The current crisis shows that banks are not like any other industry. First, the consequences of a failure of the banking system for the entire economy can turn disastrous. Second, the financial sector’s possibilities for growth and profits are ultimately constrained by underlying economic conditions – yet, due to pricing bubbles, the limits to sustainable growth of the financial sector may not be recognized in time. Indeed, it is widely recognized that the current crisis is a consequence of an over-stretching of the financial sector beyond what the real economy could support. For both reasons the priorities 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 many Neglecting stability international and European banks’ business models are much less stable than originally and sustainability thought. By now it is universally acknowledged that many banks’ strategies were driven proves costly. by excessively ambitious short-term objectives combined with excessive risk taking. Simultaneously, excessive risk taking was supported by excessive trust in the ability of mathematical models and sophisticated innovation to correctly assess and eliminate asset risk. 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 were not sustainable. They were not compatible with realistic long-term perspectives and did not reflect the very purpose of financial services provision – which is to serve the real economy. In fact, solely pressing for ever higher returns and only focussing on short-term profits led to business and investment strategies which rather served the banks themselves, but not necessarily the real economy. ESBG members have never shared this philosophy and the last two years confirm their long-standing apprehensions regarding the practice of ‘myopic banking’. The fundamental role of banks in the economy implies that, in the medium and long-term, A realistic approach to the business of banks is determined by real economic demand. The returns and profits of banking is based on real retail banks are the result of ‘real’ economic factors. As a result any long-lasting mismatch economic possibilities. between the goals of the banking sector and the needs of the real economy will correct itself, 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 recognize that the purpose of retail banking does not lie in a race for ‘fast’ and unsustainable profits, but in the efficient and conscientious provision of financial services and products to the real economy. 31

Retail banking needs The current crisis has laid bare weaknesses of several banking practices and business a reorientation of values. philosophies. However, it also has proven the validity of selected banking approaches and in 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 not to know and understand their customers. Yet, successful relationship banking is a knowledge-intensive business and takes time to build. Therefore, leaning on savings banks’ 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 be internalised and encouraged by policy makers. Differentiation within Looking at Europe’s retail banking sector, the need for a differentiated approach to retail the banking sector banks is evident. This also means recognizing the importance of Europe’s pluralistic is crucial. banking tradition. In fact, the diversity in business models is an integral part of the European banking landscape and ensures the comprehensive provision of retail financial services throughout Europe, while driving competition in the banking sector. Here, it is reassuring that some policy makers’ bias towards one particular banking model seems to have vanished. Also the precariousness of an over-reliance on aggressive short-term strategies has finally been recognised. In fact, the crisis at last demonstrates that a uniform banking sector whose behaviour imperils the rest of the economy can no longer be acceptable. It is therefore the duty and responsibility of policy makers to safeguard a pluralistic banking sector in which the principles of comprehensiveness, responsibility and sustainability are well represented. Unfettered competition Policy makers also need to take a more critical view of unfettered competition in the retail carries a cost and cannot be banking sector. While competition without a doubt has great benefits, it should certainly a goal for Europe. not take a form which could endanger the profitability of sound and comprehensive business models. This, for instance, can be the case if entrants aggressively target only the 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 competitive pressure in the form of “cherry picking” does not reflect greater efficiency of the competitor. Rather it is the result of a narrow business focus which does not incur the costs 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 customers and the economy. On the contrary, greater losses to economy and society could occur if the pressured ‘all-round’ banks are no longer able to continue providing the same level and quality of services because their possibilities of doing so are systematically undermined. Such possible undesirable consequences are neglected by an uncritical and exclusive focus on the immediate price-effects arising from unfettered competition. 32

1.3. State support to the banks and related trade-offs – which approach should be taken? 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. Background: Widespread national state aid to financial institutions Since autumn 2008, when the situation on financial markets deteriorated further as a consequence of the Lehman Brothers bankruptcy, EU Members States have undertaken coordinated steps in order to restore confidence between citizens and banks, as well as among banks themselves.16 These steps were designed in order to prevent bank-runs and to restore the functioning of inter-bank markets – in short, to maintain and secure the functioning of the national banking sectors. As the various support measures to the financial industry constitute state aid, the European Commission, DG Competition, provided guidelines17 in order to ensure the compatibility of such actions with the existing EU competition rules. These guidelines set out the acceptable measures national governments can take and establish criteria for the applicability, necessity and size of such interventions. They aim to prevent distortions to competition between beneficiaries of state aid and banks which are not drawing on state-support. Looking ahead, the guidelines also seek to ensure that the beneficiaries of state-aid return to viability in the mid to long term. Between October 2008 and mid-July 2009, the Commission has assessed and approved state aid schemes as well as ad-hoc interventions at individual institutions in a majority of Member States. The large majority of the national state aid schemes are guarantee schemes (16) and recapitalisation schemes (11) – in five cases a combination of both measures was approved. Furthermore, outside these schemes, over 40 additional measures directed at individual institutions were approved.18 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 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. Commission Communication on the Treatment of Impaired Assets in the Community Banking Sector, OJ C 72, 26.03.2009. European Commission. 2009. Commission Communication – The return to viability and the assessment of restructuring 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 recapitalization schemes in the financial sector in the current crisis. 33

Banks receiving state aid Given the different national situations, the sizes of the rescue and support packages vary compete with banks significantly across markets. Furthermore, while some countries establish very large without state-support. national support schemes, others spend significant amounts on the support of selected larger financial institutions. In addition, even if state-wide support schemes exist, if given the choice, many healthy banks so far decided not to draw on such support, mainly due to its stringent conditions and out of a preference for keeping their independence intact. ESBG views: state aid to financial institutions – the need for balance and differentiation ESBG members appreciate the efforts undertaken to maintain the stability and functioning of the European financial system which remains a top priority and is of the utmost importance for general economic stability. The speed and decisiveness of the actions of national governments and EU policy makers alike are truly impressive and it is to their great merit that Europe’s financial system has escaped the acute danger it faced over the past year. The European Commission has played a central role in these efforts by devising different sets of state aid guidelines which capture core principles according to which state aid shall be carried out. On the basis of these guidelines, ESBG would like to underline the importance of a differentiated approach and undiscriminating objectives. It is necessary to differentiate When it comes to state aid, banks can be roughly divided into four categories: among beneficiaries of state aid. 1. Banks which – due to their own prudence, quality of risk management, operations in stable economic environments etc. – neither need nor desire state aid but may accept state support in order to increase their capital base; 2. Banks with business models which in itself are sound and sustainable, but which have been – or could soon be – affected by the economic repercussions of the financial crisis and 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 of their business model; 4. The (rare) case of banks, which are affiliated with other sectors of industry (such as the auto industry) and whose recourse to state aid needs to be considered against the background of potential problems their parent companies may be facing. The central goal of state aid The different characteristics of the national financial sectors are fundamental for the way must be to achieve a healthy national schemes and individual interventions are designed, implemented and maintained. banking sector. In examining the different recipients of state-aid it is essential that unviable banks be restructured or wound-down, that viable and sound banks are supported adequately, and that healthy banks not drawing on state aid do not have any reason to regret their decision. Looking at the fourth group – those banks affiliated with other sectors of industry – opportunism must be counteracted and the subsidisation of parent companies must be avoided. No disadvantages should be allowed to arise for the ‘real’ banking industry. The governing objective of state aid must be a healthy banking sector, not the cure of selected banks at the cost of others. 34

State aid therefore has to strike a fragile balance. On the one hand, it needs to effectively State aid strikes and lastingly help the affected financial institutions or pre-emptively signal a bank’s a fragile balance. stability in order to prevent any upcoming disturbances. On the other hand, when state aid 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 the financial services markets are not reorganised at the cost of those banks which have proven functional and necessary. The Commission also seeks to ensure that state aid does not prevent necessary Restructuring needs to corrections to banks’ business models or the winding-down of unviable institutions. follow economic principles. These are important principles and the restructuring of unsustainable banks can have advantages for the sector as a whole. Nevertheless it is important that restructuring is only 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; restructuring should 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 financial Differences in national state sector, they also have striven to reduce to the minimum the undesirable consequences of aid schemes are necessary state intervention. As part of these efforts, the national state aid measures rightly avoid but may affect the level- a ‘one-size-fits-all’ approach and reflect the national market conditions and the playing field. requirements of the afflicted banks. On the downside, a substantial heterogeneity in scope and size of state aid measures can bring about greater inequality among national banking sectors in the mid and long term. National differences in state aid schemes may therefore impair the European level playing field for competition. The state aid guidelines by the European Commission spell out several provisions in order Distortions to competition to prevent distortions to competition arising from that aid. Still, within national banking need to be counteracted. sectors, abuses of state aid – when they occur – need to be counteracted strongly. Especially problematic are situations where state aid is granted to banks seeking access mainly in order to achieve competitive advantages (hence, in cases where it is not motivated solely by reasons of guaranteeing stability or of strengthening the capital base). Such distortions can occur immediately due to strategic decisions to abuse granted aid, for example by outbidding competitors in the retail deposit area or by advertising bank safety as a result of government guarantees. In the longer run, recapitalization measures may lead to competitive advantages for benefiting banks (in terms of market funding, granting of loans, development of future plans), or pave the way towards aggressive expansion once balance sheets are repaired. While such distortions gradually unfold over time, they can cause lasting change in the competitive landscape and need to be limited wherever possible. 35

Sound banks may In the public debate Europe is often made out to be a hospital full of financial institutions. not be undermined. However, it is important not to forget that a large number of – often smaller – credit institutions are in good health and sound enough not to need taxpayers’ help. This must remain so. Therefore it is unacceptable that healthy and prudent credit institutions should suffer due to aggressive competition by other banks, which do not draw their competitiveness from their own merits but instead profit from external help. It is the duty of governments and competition authorities to counteract and minimize such distortions decisively and without bias. It cannot become a European principle that excessive risk taking or overstretching of balance sheets by banks will be ultimately rewarded by government 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 banks which did not need rescuing in the first place. This would not only lead to unjust distortions to competition and incentives, but also to distortions in the very balance of the banking sector and the weakening of inherently sound and prudent institutions. Long-term consequences It is extremely myopic to assume that the damage to competition and to the balance of for competition are the financial system would be a fair price to pay in order to ensure short-term financial determined now. stability of the system. It is equally wrong to assume that Europe can only choose between a financial meltdown and an uncritical support of all imperilled institutions. Furthermore, it is unrealistic to expect that competition and damages to the sound parts of the banking sector can be repaired at leisure after the crisis is overcome. Such a hope also unduly postpones facing the consequences of important decisions when they are made. All these are reasons why the trade-offs Europe makes now between the leeway given to supported banks and the overall and long-term consequences for competition need to be made consciously and with full efforts to minimize the damages they can cause. 36

2. POLICY RESPONSES AT THE EU LEVEL – ESBG VIEWS ON THE CHOSEN APPROACHES The clear consensus between policy makers, regulators and the financial sector worldwide is that a crisis like the current one must not repeat itself. Accordingly great efforts are being taken to identify the factors and dynamics which led to the build-up of the crisis. Drawing on these insights, the general aim is to devise the most suitable and effective actions and responses in order to correct problematic weaknesses. The global dimension of the crisis also implies that international bodies play a significant role. Not only do they serve as important platforms for exchange and for a coordinated outlook into the future, but they also are important in their own right as economic actors and contributors to global solutions. The creation of the G20 as a political force and the steps taken to increase the role of the IMF are part of the global effort not only to combat the current crisis but also to improve the political ability to act in order to prevent future crisis or to meet such a global challenge should it occur again. Regarding financial sector regulation at the global level, the Basel Committee on Banking Supervision will continue its central work as initiator of globally applicable guidelines on banking supervision, also on the basis of a substantially extended membership base. Furthermore, the newly created Financial Stability Board (established in April 2009 as the successor to the Financial Stability Forum) has the mandate to promote financial stability. This mandate includes serving as a mechanism for national authorities, standard setting bodies and international financial institutions in order to address vulnerabilities and develop and implement strong regulatory, supervisory and other policies in the interest of financial stability. While ultimately the unifying goal of politicians worldwide is to improve the safety of financial markets on a global scale, it is the current initiatives at the EU level with which ESBG is most immediately concerned. In the EU, too, the central objective of regulators and policy makers is to increase financial safety and stability. With this goal, policy makers have set out to correct malfunctions in existing market regulation, to strengthen supervision, and to extend the range of financial actors subject to EU regulation. The political decision was also made to reduce the vulnerability to financial markets events of depositors and investors – thus assuring citizens that they will be sheltered from financial market developments beyond their control. Looking at the most important current developments from a political vantage point,19 there are a number of observations 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. 19 Concrete policy contributions on banking supervision and capital requirements regulation can be found in Part 3 Chapter 1. 37

2.1. EU actions as part of the global approach to crisis prevention – revision of existing regulatory and supervisory frameworks Key messages n In their efforts to correct perceived weaknesses in the existing frameworks, EU policy makers need to take due account 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. Background – central ongoing regulatory efforts At the time of writing, among the central efforts to improve EU regulation for financial institutions stands the revision of the Capital Requirements Directive (CRD), which transposes the Basel II Framework on capital requirements into EU law. The ongoing discussions on the CRD reflect EU policy makers’ approach for addressing the weaknesses revealed by the crisis. It is therefore not surprising that the measures recently adopted and the proposals currently under consideration address issues such as the ‘originate to distribute’ model, the prudential treatment of complex financial products (including resecuritisations), capital requirements for banks’ trading books, remuneration (and hence incentives linked to compensation policies), pro-cyclicality and leverage. Also at the centre of the ongoing debates is the question of the most appropriate EU supervisory architecture, which considers improvements as regards the prudential supervision of individual entities (‘micro-prudential supervision’) and its adaptation to dealing with the macro-economic dimension of financial sector risk (‘macro-prudential supervision’). At the time of writing, the recommendations of ‘de Larosière Report’, published in February 2009, have been firmly established as the guiding principles for a European supervisory architecture. True to the evolutionary approach pursued in all efforts to address the supervisory needs arising at EU level, the recommendations of the de Larosière Report build on the existing supervisory bodies and practices, targeting greater cooperation and coordination among national authorities, with the help of 3 newly created ‘Authorities’. Furthermore, it recommends extending EU-level supervision to a macro-prudential dimension, notably through the establishment of a new ‘European Systemic Risk Board’. EU policy makers are currently working on concrete legislative proposals on the basis of these recommendations, with the objective to have the proposed changes implemented and working by 2010. Furthermore, as a direct response to the sudden deterioration of the situation in financial markets in autumn 2008 (as a consequence of the Lehman Brothers bankruptcy), a number of EU Members States – initially without coordination – decided to increase the level of protection for bank deposits. At EU level it was subsequently decided to revise the EU Deposit Guarantee Schemes Directive to take account of these developments (the revised Directive was adopted in February 2009). The direct objective was to reassure depositors, also as to prevent spiralling deposit withdrawals by retail clients and to secure the system against bank-run dynamics. 38

ESBG observations: which path does the EU choose? The concrete ESBG views on the above-mentioned developments will be presented in detail in the third part of this report. Yet the current initiatives and efforts also have a broad political dimension and direction, on which ESBG would like to share some observations, which may capture new trends for future developments. The crisis is the result of interconnected problems, where substantial inadequacies were EU policy makers need unveiled in regulation, supervision, as well as in crisis management and crisis resolution. to take a holistic approach These areas are largely interwoven, and they all carry a considerable weight in the when making corrections. working of the banking market. Neglecting the important inter-linkages and aiming at self-contained solutions in isolation of the surrounding environment carries the risk of proving more harmful than helpful. Most important therefore is the awareness that individual amendments to regulation, supervision or crisis management and resolution will inevitably have an impact in each of these areas, whilst their very effectiveness ultimately depends on their interaction. Therefore, concrete policy measures in one field should consistently consider the potential impact in other areas. Regulatory or policy repair should duly address concomitantly the entire policy framework for banking in the EU. The EU regulatory and supervisory framework is the outcome of an evolutionary EU policy makers’ corrective approach, which, over time, has carefully balanced and calibrated common interests actions rightly build on while duly considering national specificities. For the consistency of our EU-level policy existing foundations. making it is of great importance to not take drastic overhauls that risk creating undesired disruptions. The damages of any drastic overhaul may easily outweigh its intended benefits, as the possibilities for ‘collateral’ damage are simply too manifold. Consequently, it is particularly important that regulatory repair builds on the prudential philosophy underlying the Basel II Accord/the CRD. It should reinforce the three pillar structure and the risk-sensitive approach, whilst appropriately addressing shortcomings unveiled by the crisis. Equally, it is most welcomed that the proposed supervisory repair relies 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 EU proposal on crisis management and resolution observes the distribution of fiscal responsibilities among Member States. Among the strengths of the European banking sector is its considerable diversity and the Valuable diversity in coexistence of a large variety of financial actors with different business policies and of the EU banking market different sizes. This diversity also counts among the assets which mitigated the danger of can be protected via the a collapse of the financial system. It is therefore of paramount importance that the parts of proportionality principle. the European banking sector which have demonstrated their viability and their necessity shall not be put at a disadvantage. This means that any re-regulation must be compatible with Europe’s pluralistic banking sector and must take full account of the essentiality of Europe’s regional banks and banking networks. Any other approach will erode the basis for Europe’s economic strength and financial stability, and thereby also undermine the basis for recovery and future growth. A tried and tested way for regulators and supervisors to account for such diversity is to apply proportionality as an overarching principle. Accordingly the concrete application of EU rules and the effective supervision of banks are proportionate to the size, complexity, business strategy and riskiness of an institution. 39

EU policy makers must At the peak of the current crisis, the political and economic pressure for policy makers to separate short-term priorities intervene in and stabilize the financial sector, but also to address the reasons behind the from long-term corrections. market malfunctioning was substantial. Therefore, for a time there was the danger that these two very different challenges would be perceived as one task. While this danger has abated, now the main risk is the paradox that a premature implementation of some of the envisaged corrective measures (designed to increase stability for the future) will lead to greater current instability. For instance imposing drastically higher capital requirements for banks before the crisis is safely overcome would be counterproductive to any efforts to stimulate bank lending and to revive the economy. The implementation date for any revised measures must therefore be carefully calibrated and timed with ‘real’ economic developments. The banking industry The banking industry can contribute with precious input to the design of quality financial needs to be in a position to regulation, given its valuable concrete expertise and first-hand insights. Furthermore, the contribute to the discussions acceptability and effectiveness of regulatory measures is substantially enhanced if the on the policy repair. addressees 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’ efforts towards more open and participatory rule-making and that motivate their commitment towards better regulation. It is crucial that this established and well-functioning approach be not abandoned. Urgency considerations in the legislative process should not be systematically invoked to reduce drastically the possibility of the industry to effectively contribute to the regulatory outcome. Furthermore, in view of the ongoing reforms of the EU 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 Key messages n Policy makers rightly extend regulation to those formerly unregulated financial market participants whose actions 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 in the financial sector and their implication for financial stability. Background – central efforts to regulate the unregulated The initiatives by European policy makers are not limited to those financial actors which already were subject to regulation before the onset of the crisis in 2007. In fact, a significant feature of the political and regulatory response has been to extend the reach of regulation to those previously unregulated parties whose actions have in the meanwhile been identified as contributing to the crisis. 40

One of the first actions taken at the EU level was to initiate and adopt a new Regulation on Credit Rating Agencies (CRAs), whose responsibility related to the pervasive mis-pricing and misperception of risk had been early established. Concerns were exacerbated not only by their central position in the financial markets, but also by the role they have been granted by regulation as regards the determination of banks’ capital requirements. The EU Regulation20 not only seeks to eliminate conflicts of interest affecting credit ratings, 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 and important actors, like hedge funds, are now in the process of being subjected to binding rules and oversight at EU level for the first time. In particular, the potential pro-cyclical role of hedge funds was found to be a risk to the stability of the financial system, implying that closer prudential oversight is warranted. Accordingly, the Commission proposal for a Regulation 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 be subject 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 in detail in the third part of this Report. Yet the current initiatives and efforts also have a broad political dimension and direction, described below. The current steps being taken to extend regulatory reach are important and reflect the Extending regulatory lessons which Europe and the world have been forced to learn in the past two years. coverage is a straightforward They are an integral part of tightening the safety belt of the global financial system, and consistent reaction to even if this means putting a regulatory leash around those actors which formerly were the lessons learned. constrained only by market forces. Especially as regulation for the already regulated parts of the financial industry is becoming stricter, it could not be an acceptable decision to allow the results of these financial soundness and safety increasing measures to be endangered by omissions in other relevant areas. The formal regulation of CRA’s is indeed overdue. The central character – combined with CRAs needed to be regulated the lack of accountability – of CRAs means that they are too important to operate given their central role in without rules and to remain without oversight. It has been demonstrated that the financial system. consistently erroneous ratings – in particular in relation to complex structured products – present a danger to financial stability. Furthermore, mis-priced risks undermine the correct assessment of the trade-off between risk and return by individual investors. 20 Regulation 2009/x/EC of the European Parliament and of the Council on credit rating agencies, awaiting publication in the Official Journal. 41

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Part 2 European Retail Banking Market Integration: Core Parameters for a Reality-based Approach

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SETTING THE SCENE The long-run debate on the integration of Europe’s retail banking markets At the time of writing, overcoming the current financial and economic crisis still is an immediate priority. Yet, the long term integration of Europe’s markets into one ‘Single Market’ remains at the heart of all political debates. Indeed it is part of, and even synonymous for, the wider quest for a European identity, where two central questions dominate: the first question is which goals Europe ultimately should aim for; the second question is how they should be achieved. Just as the integration of Europe’s markets advances, both questions are constantly debated and the proposed answers undergo a continuous evolution. As the financial sector is an integral part of any economy, the integration of the European financial markets is an important part of the work programme of the European and national authorities. Here too, while the EU is undoubtedly approaching the state of a Single Market, the integration process does not follow a straight political line with a predetermined result. Instead, policy makers and stakeholders are engaged in a constant dialogue about the concrete realisation of the Single Market as well as on the path and measures to be taken to induce the desired outcome. Among the important topics in this area is the future and further integration of Europe’s retail banking sector, which has dominated the political agenda following the completion of the Financial Services Action Plan (FSAP – 1999-2005). Undoubtedly, for the time being, the ongoing financial crisis has pushed this debate in the background. Nevertheless, discussions on market integration certainly will be revived as soon as circumstances permit, and will also be influenced by the lessons learned from the current crisis – 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 the initial stages of the discussions, there has been great convergence in the positions on what the integration of the retail banking sector should and could achieve. This convergence has contributed to the fact that the diversity of Europe’s banking markets is now integrated into any credible vision for further market integration – even if this diversity had been condemned initially by some parties as an obstacle to achieving a ‘true’ internal market. Hand in hand with these developments, there has been an increased understanding of the retail banking market and a nearly unanimous recognition that retail banking as a business is local and driven by customer demand. The most recent manifestations of these trends are the reports by the European Parliament such as the Pittella Report1 and the Karas Report2 (both adopted in 2008), which clearly underline the European Parliament’s recognition of the fundamental characteristics of retail banking and the Parliament’s strong interest that plans for the future 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 in the Single Market (A6-0187/2008 / P6-TA-PORV(2008)026). Committee on Economic and Monetary Affairs of 5 June 2008, Rapporteur: Othmar Karas. 45

Due to its richness and its far reaching outlook, the debate on retail banking sector integration takes place along different dimensions. Among these the most important are the political dimension concerned with a ‘vision’ of the sector as a whole, and the policy dimension, where the regulation of the concrete aspects of the common markets takes place. The political and the policy dimensions are, of course, closely interwoven. Yet for the purpose of this report it is necessary to separate them in order to best address the issues under concern. Therefore this part of the report focuses on core parameters for the wider integration debate, while Part 3 will present ESBG’s views and recommendations regarding the concrete relevant policy areas. With a view towards the longstanding political integration debates, the present part of the report focuses on core parameters of the European retail banking market and their implications for the scope of further sector integration. ESBG does not set out to develop a ‘vision’ of an (even more) integrated EU retail banking sector. Rather, the highlighted parameters are important sector specific features which any realistic and appropriate vision of a further integrated market should incorporate. They also form the basis for a judicious and fair appreciation of the past achievements and of the degree of sector integration already reached. Chapter 1 lays out and explains the essentially local character of retail banking and its implications for the provision with retail financial services as well as the complexity of competition in the market for retail banking products. Chapter 2 highlights the diversity of retail banks as a heritage of and future for the European retail banking market. It also describes the benefits of a pluralistic banking sector for Europe’s economy. 46

1. RETAIL BANKING REALITIES AND THEIR IMPLICATIONS FOR MARKET INTEGRATION 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 possibilities and with a local access point to payments systems. The key groups of customers of retail banks 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 that at 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 exceeds cash payments, where cash itself usually can only be obtained from retail bank branches and ATMs. In most economic centres there is a great density of branches and ATMs are omnipresent. In more remote areas the presence of bank branches and ATMs mirrors the level of economic activity and prosperity, and is furthermore determined by the structure of the national banking community. One of the reasons for re-emphasising that retail banking is a local business lies in the technical developments observed in recent years. At first glance, these developments seem to indicate that retail banking is becoming ‘less local’. In fact, at least since the IT revolution, the times when there was no alternative to physical presence for any business have clearly passed. Such a gradual and partial disappearance of physical constraints implies potential for a great widening of the geographical outreach of credit institutions. It is therefore logical that, in particular at the EU level, greater potential outreach was initially found 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 prevalent business realities of retail banking as will be explained in this Chapter. Likewise it is wrong to conclude from the observation of generally declining numbers of bank branches that local retail banking has lost importance. Such an interpretation would be incorrect since the dominant reasons for the decline in branch numbers are largely found in structural changes in the banking sector and not in the loss of importance of branches as primary access, sales and communication points. Against the background of these developments and also with view towards current and future integration debates, the following sections lay out underlying reasons for the persistence of the local factor in retail banking. Equally, it is evident that the local orientation of retail banking neither indicates the presence of hidden inefficiencies nor of barriers in the market. Instead, the essentially local character of retail banking comes from the very nature of the business itself (as explained in Section 1.1). 47

Furthermore, local demand and the necessity of local presence make branch networks the 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 maintain customer satisfaction and loyalty (Section 1.3). 1.1. Local demand for retail banking products and services 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. Motivation: Why does the local dimension matter for retail banking? Policies aimed at the further integration of Europe’s retail financial services market must be based on market realities. For example, plans to advance integration must incorporate the fact that retail-banking is a business in which the proximity between provider and customer is a key-factor. Indeed, even in the age of the unprecedented communication possibilities, retail banking ‘at a distance’ is an exception. For any market integration strategy to be realistic, it needs to be developed on the basis of the local character of retail banking. At first glance the local character of retail banking may indeed not be obvious since the essence of retail banking activity is generally the same in all markets. Also for ESBG members, there is a high degree of communality in their core business. One of the key reasons why retail banking is nevertheless predominantly a local business that takes place on local markets is the strong local component of the demand for the bulk of retail banking products and services. Looking more closely at two main groups of retail banking customers, it becomes clear that, while the demand by consumers generally incorporates the need for direct contact with their bank, this is even more so the case for the demand by SMEs. The following paragraphs apply to consumers and SMEs equally; factors specific to SMEs’ demand are laid out further below. ESBG explanation: local components of demand for retail banking products and services While there is significant communality across Member States, for consumers and SMEs demand is nevertheless shaped by national economic conditions, traditions and prevalent public-private trade-offs (for more details, please refer to Part 2, Section 2.1). This means that the business of retail banks differs across countries, and that strategies which may be successful in one national market are not necessarily successful in another. 48

Partly because of such differences, the number of ‘homogeneous’ products is rather limited (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 of products and services demanded are driven by local circumstances. In addition, the importance of proximity is a result of the following: As significant players – and sometimes market leaders – in the national retail banking Relevant knowledge sectors, ESBG members have always experienced that the demand for retail banking often is local. products and services reaches beyond the need for a product and willingness to pay a certain price. Instead of a simple provider of products and services, most customers want an accessible financial partner. Here, customers are fully aware that banks’ competence and knowledge of their circumstances ultimately determine the quality of advice they receive and hence the suitability of the financial decisions they make. Customers are also aware that personal contact with bank staff is a prerequisite for advisers to become knowledgeable about customers’ circumstances to begin with. In addition, the more important a decision is in the ‘economic career’ of a customer, the more customers seek a dialogue with bank staff to identify the best offer. Customers therefore know that the proximity and accessibility of banks are conditions for a satisfactory and successful business relationship. By choosing a bank, customers also put their trust in this bank. Especially for new customers, Proximity and trust confidence depends on their expectation whether and how much a bank will justify go hand in hand. and deserve this trust. A bank’s reputation and approachability are important factors reducing the customer’s perceived gamble. Demand may focus on locally present actors because a bank’s reputation needs to be known on the local level and since proximity means approachability. To sum up, customers generally demand ‘relationship banking’, which – being based on Customers demand personal contact and knowledge – has a strong local component. In light of the current relationship banking. economic developments, and the overall observed decrease in economic confidence, it is very probable 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, Local does not always or that a local market is always confined or limited by national borders. Indeed, a significant mean national. proportion of EU citizens live in border areas and may therefore consider “local” banks on each side of the border. Such “local cross-border” phenomena are particularly likely within the European Monetary Union and in geographic areas which share a common language 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 main creators of innovation and jobs. Therefore, the supply of high quality and reliable financial services 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. 49

Furthermore, the close ties between SMEs and savings banks or regionally oriented retail banks reflect the local character of SMEs’ demand for financial services. The strong local component in SME banking is predominantly a result of the importance of financial decisions for SMEs, where a functioning, consistent and close relationship with its bank is crucial for an SME’s wellbeing. There are two main reasons why a strong local presence plays a key role for a bank’s ability to be the financial partner required by SMEs. Credit institutions need First, for banks to correctly appreciate an SME’s business risks and to adequately price and to know their SME clients structure credit and credit lines, they need a sound knowledge of the SME’s business and to make the best offers. of the sector in which it is active. Furthermore they must have a well-founded understanding of an SME’s growth potential and features such as the need for cash. It is also necessary to understand the age structure of employees in order to offer suitable ‘outside’ investment possibilities for retirement provisions. Such knowledge then gives banks the freedom to react to an SME’s financing needs flexibly and comprehensively. Relationship banking means Second, demand for retail financial services goes beyond the product or service itself. solving problems together. Among retail banking customers, this point applies most strongly to SMEs. SMEs do not merely demand products or services at a good price. They need a bank’s expertise and knowledge to decide on the best solution – and in many cases they need banks’ expertise in 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 the SME’s problems are at least as important for an SME’s success as ‘pure’ price factors alone. Therefore, in the ideal case, an SME’s success is a joint success of the SME and its bank, built on a consistent relationship with a long-term perspective. Local SME banking However, the following misconception should be avoided: while SME banking is a local is not locally constrained. activity, this does not mean that the relationship between banks and clients is ‘locally constrained’. Especially for SMEs seeking to expand into new markets or for SMEs which are active exporters, credit institutions seek to accompany and support their SME clients wherever their business takes them. Here, the challenge for banks is to support their clients outside the bank’s traditional local radius. According to ESBG Members’ experiences, while relationships between banks and SMEs are ‘locally founded’, they nevertheless reach beyond the local level. What does local retail banking imply for European integration dynamics? Local demand determines how The local nature of demand and the importance of ‘relationship banking’ have the sector integration ‘can work’. following important implications for market integration: n If ‘cross-border’ banking is defined such that branches and customers will be in different countries, market integration via ‘cross-border’ provision of retail financial services is and will remain a rare phenomenon (in some exceptional cases SMEs and consumers may bank in neighbouring countries, but this is a long established and locally confined practice). n Integration via market entry (i.e. the establishment of branches or subsidiaries of a foreign bank) is only successful if there is demand for the entrant’s products and services, if the entering bank can sufficiently adapt to the local business/cultural environment and if the entering bank can fulfil local expectations. n The local character of retail banking requires great investments for successful market entry – for mature and competitive markets the possible benefits for the entrant may not merit such investments. 50

1.2. Distribution of retail banking products: Does retail banking become ‘less local’? Key messages n Branch networks go hand in hand with comprehensive retail banking: technological progress does not change the local character of retail banking. n Financial inclusion of Europe’s regions builds on the full coverage of retail financial infrastructure in form of branch networks. n Implication for integration: ‘direct banking’ does not drive market integration. It only provides selected services to selected clients – with uncertain economic consequences. Motivation: How do distribution channels enter the debate on integration? Retail banks can make use of different channels to distribute their products and services to customers. The standard approach to distribution – also practiced by ESBG members – is via a branch network. Distribution via branch networks reflects the strong local character of retail banking and implies a dominant focus on the banks’ original markets and on those markets into which they have subsequently expanded. Typically banks operating branch networks, and in particular ESBG’s members, target and cover the entire 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 to cultivate a close business relationship. Alternatively, retail banks can function as ‘pure internet banks’, or ‘direct banks’,3 as they distribute their products and services solely via the internet and do not foresee direct personal contact between bank staff and customers. It is this kind of business model which in the recent past has attracted the hopes of some parties who took it as an indicator that physical 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 representation but also in view of the customer segments targeted and the range in products and services offered. Another question is whether, even for traditional banking models, the IT revolution has fundamentally changed the communication between retail banks and their customers. Such a clarification is also important in order to understand the potential 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 when it comes to investment decisions or larger credit applications. Retail banks’ continued large investments in their branch networks underline the persistent importance of proximity banking. In short, retail banks would not succeed without giving customers the opportunity 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. 3 An additional alternative is distribution via intermediaries, which, however, is of less relevance in the light of the present debate. 51

Branches are becoming less Though conditional on technological possibilities, the distribution of retail banking products important for the daily use is essentially driven by customer demand. As especially younger customers increasingly of retail banking facilities. demand faster and effortless access to services, means of payment and administration of accounts, 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 phone banking’. 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. Branches remain the central However, this does not imply that online banking facilities are replacing branches. platform for the relationship Instead, the current trend is to utilise the freed capacities in the branches in order to between customer and bank. satisfy the growing demand for in-depth information and advice on more sophisticated banking products. In the branch model, new communication channels complement – but do 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 their products and services solely via the internet without foreseeing direct personal contact between bank staff and customers. ‘Direct banking’ only The business approach of ‘pure internet banks’ or ‘direct banks’ is far less comprehensive serves selected customers than the traditional branch based approach. First, ‘direct banks’ do not operate a physical with selected products branch network and thereby naturally focus on a smaller segment of the population. and services. Second, they mainly offer savings accounts, which are particularly suitable for distance marketing, and less frequently credit cards; in some cases standardized consumer loans are also offered. Among the key characteristics of these products are the low associated costs 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 ‘Direct banking’ outside Regarding the nature of ‘direct banks’, they are usually subsidiaries or branches of universal the home-market is restricted banks with established branch networks in their home markets; indeed free-standing to simple products. ‘direct banks’ are a comparatively rare phenomenon. In particular, during recent years it has become a strategy of some larger European banks to establish ‘direct banks’ with a focus on ‘high interest rate’ savings accounts outside their traditional markets. Here the product 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 share and the possibility to raise funds without incurring large physical investments in the form of 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 Commission report on the impact of the Distance Marketing Directive.6 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 and the Future 2008.). 5 ‘Know your customer’ (KYC) is part of the due diligence which financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Regarding the opening of bank accounts, in many countries this entails the personal presentation of a valid ID at the bank – as an alternative, albeit sometimes cumbersome, there are possibilities of accreditation 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 distance marketing of consumer financial services on the conclusion of cross-border contracts for financial services between suppliers and consumers within the Internal Market. Final Report to the European Commission, DG Health and Consumer Affairs. 52

ESBG views: Economic consequences of distribution strategies Given the strong link between retail banking and real economic activity, the distribution of retail 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 important Distribution strategies implications for the provision of retail products and services across the population. In fact, have socio-economic the distribution of retail banking products is a key factor determining the very access to consequences: ‘direct financial services and a driving force for financial inclusion. It is evident that distribution banking’ is not a substitute via distance marketing can only address a small range of the services and products for branch presence. demanded 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 a result, 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 fixed branches or, exceptionally, mobile branches) is hence not only the dominant distribution strategy and vital from a competition point of view. It is also fundamental from a socio-economic perspective since the proximity to consumers is key to the comprehensive provision of financial services. Looking at the roots of most savings banks, these considerations form an important part of the ‘raison d’être’ of ESBG’s members. The broader economic consequences of distribution strategies cannot be disregarded. Distribution strategies affect For example, the restricted product range of foreign owned ‘direct banks’ implies that the economy: aggressive usually the funds deposited on online savings accounts are not converted into lending to ‘direct banking’ can raise the domestic economy. This may imply that a significant proportion of funds are not wider economic problems. reinvested in the domestic economy. The resulting de-facto outflow of capital can trigger a competitive race among remaining banks, which, in order to maintain domestic lending, 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 other industry, excessive competition among unequal market players may have grave repercussions by undermining the profitability and sustainability of sound and all-encompassing business models – in particular when combined with an overall outflow of funds. Furthermore, for the bank operating a ‘direct bank’ abroad the question remains how to ‘Direct banking’ – a mixed use the additional funds from the foreign market. Unless the bank encounters great blessing for the bank itself? demand for credit from the ‘real economy’ in its home market – or in other markets where 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 inherent in such strategies – notably in terms of increasing pro-cyclicality and liquidity risk – became painfully obvious in the current crisis. 53

New distribution channels do What are the implications of distribution channels for market integration? not lift the physical constraints for market integration. The differences in the roles and possibilities of banks working via branches or as ‘direct banks’ determine the possibilities of retail banking market integration: n Retail banking remains local. New technologies offer new possibilities for communication between customers and banks, which complement branch networks but do not reduce their importance. Given the limitations of their business model, any hypothesis that ‘direct banks’ could be (or become) an equivalent alternative to traditional banks overestimates the potential of ‘direct banks’ and underestimates the importance 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 of limited desirability – especially if their market share in one segment of the market becomes disproportionate to their overall contribution to the economy. At the very least, the fate and performance of European ‘direct banks’ in the context of the current crisis does not suggest that – in its current form – the business model itself is stable or conducive to financial and economic stability. n Regarding market integration, it is therefore apparent that the local nature of retail banking remains a core parameter determining which kind of integrated market will be ultimately feasible and desirable. This needs to be taken into account in any future discussions and actions directed at promoting market integration. 1.3. Competition in retail banking Key messages n Competition is multidimensional: banks compete based on prices, customer satisfaction, depth of service and regional 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 into high competition at the EU level. n Implications for integration: Given that competition levels are high already, forced market integration is not necessary from a competition point of view. Instead, real market integration is demand driven. Motivation: Competition and the debate on sector integration In the European debate and especially in the view of the ongoing discussions on further sector 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 market competition, not only given its potentially harmful direct implications, but also in order to prevent the debate on sector integration from losing its perspective on market realities. Attempts to deduce a need for further – politically precipitated – market integration by way of simplistic competition assessments need to be met with extreme caution, as they can easily yield misleading and distorted results. Also, it is important to keep in mind that already now ‘real’ market competition is very high within most national markets, and therefore – given the local character of retail banking – also on a European scale. In part at least, the intense competition among retail banks in the different national markets is a result of the well-established and functioning level-playing field for competition, which is a great achievement of the European Union. 54

On this basis and in order to yield truly meaningful contributions for the European debate on market integration, the comprehensiveness of competition assessments needs to be significantly enhanced. This being said, capturing and assessing retail banking competition on a European level is indeed a genuine challenge for policy makers and researchers. For any sector or industry it holds that market characteristics shape the concrete terms of competition and make it difficult for an observer to capture the sector’s competitiveness. Yet, as documented, for example, in the Commission’s recent sector inquiry into retail banking,7 for the retail banking sector this challenge appears particularly great. ESBG insights: competition on retail banking markets Looking back at recent efforts to assess the competitiveness of Europe’s retail banking markets (namely the European Commission’s sector enquiry of 2007 and the last European Financial Integration Report 20088) and drawing on ESBG members’ own experience, ESBG has identified the primary challenges for a comprehensive and wide overview of competition in the European retail banking markets. They are due to the very nature of retail banking as a business and should be taken into consideration for future market assessments. Competition among retail banks has a strong national component, as banks compete Competition among retail differently in the different markets. National modalities differ for pricing, interest rate banks has a strong national setting and structuring of fees. All in all national banking markets are a product of component. underlying economic conditions, of macro-economic growth and industrial development. Furthermore, depending on a country’s economic situation, markets have different degrees of maturity. As a consequence, products and services which are comparable within markets are not necessarily comparable across markets – and neither are their prices or other relevant conditions. Consequently, observed price differences across markets are not reliable indicators for national differences in intensity of competition.9 Undoubtedly, for many products, the most visible competition between retail banks is Price competition is visible but price competition, where prices are interest rates and fees/charges. Concretely, banks by far not the whole story. compete via cheaper loans and via higher interest rates on deposits and on the basis of the management fees of accounts. Prices are the most direct channel for competition in the sense that consumers can compare banks’ offers according to their prices and given that price advertisements are a central competition strategy. For these reasons, price competition is the most tangible feature of competition between banks. The price aspect also 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 differences will be the decisive factor for consumer decisions. Only if these conditions hold true is it valid to assume that intense competition eliminates price differences. However, reality is more complex. 7 European Commission, DG Competition. 2007. Report on the retail banking sector inquiry. Commission Staff Working 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 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). The ESBG Response can be downloaded from http://www.esbg.eu/uploadedFiles/Position_papers/2006-02588.pdf. 55

Competition in retail From the experience of ESBG members, ‘soft factors’ are at least as important in banking is multidimensional. determining a customer’s choice of bank, and may even take precedence over prices when 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’s knowledge of the customer and his/her circumstances, staff’s general competence, range of offers and flexibility, quality of assessment and adequacy of products, suitability of recommendations/advice, accessibility of branches and direct contact with staff, proximity to 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. Prices reflect banks’ decisions For banks, a competition strategy is a trade-off between these different factors and the to compete on ‘soft’ factors. costs involved. Indeed, most ‘soft’ factors are connected with expensive investments by the bank and may push up overall costs. Consequently banks’ costs differ not only due to differences in efficiency but also due to differences in the quality of service or in the maintenance 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 differences in the depth of the banks’ service. Furthermore, as retail-banking is a local business, competition in retail banking is also local. Competition reflects trade- Banks’ competition profiles are influenced by the type of customers they choose to offs by banks and customers. target. In general, the broader a banks’ customer base and range of offer, the less extreme are its competition strategies. For example, to compare traditional savings banks with a strong focus on proximity banking and SME clients with ‘direct banks’ offering only savings accounts, is like comparing the proverbial apple and orange. Yet, such different types of banks do compete, and each customer makes his/her preferred trade-off. Implications of competition for the scope for further market integration The recipe ‘more integration Competition in the retail banking sector is heterogeneous across markets because banks for more competition’ needs compete differently according to market practices and national conditions. In addition, to be viewed with care. competition itself is multidimensional and reflects the different facets of retail banking as a business. For the use of competition assessments as well as for the scope of further market integration, this has the following implications: n Restricting a competition assessment to a simplistic comparison of an overly narrow set of indicators can affect – or even negate – the usefulness of the investigation and lead to misleading conclusions. The complexity of competition implies that extreme care needs to be taken when competition assessments are used to investigate the need and scope for further market integration. 56

n Looking at the current situation, the European retail banking market has already achieved a high and increasing degree of competitiveness. On this basis, only very marginal benefits (if any) would arise from aggressive steps towards more market integration directed predominantly at remedying perceived competitive deficits. n Retail banking competition is multidimensional. As market integration is demand driven, integration via market entry or cross border provision ultimately depends on the ability of the entrant to fulfil domestic demand in an already very competitive and complex environment, where competitive pricing is only one element of many. 57

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2. DIVERSITY: HERITAGE AND FUTURE FOR THE EUROPEAN RETAIL BANKING MARKET Europe’s banking sector is distinguished by its great diversity – a consequence of differences between and within national markets which lead to a richness in banking practices and market players. At the EU level, Europe’s heritage of diversity in the banking sector should receive the appreciation it deserves. Appreciating diversity is synonymous with aiming for the right balance between different goals and for the adaptability of policies to the different institutions in Europe’s diverse banking 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 to diverse and heterogeneous market environments and therefore the natural consequence of 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 external constraints, the role of banks is to fulfil the needs of the economy as adequately and efficiently as possible. Diverging banking practices therefore are a consequence of differences in demand and market environments (Section 2.1). However, not only do banking practices differ throughout the EU, the banking sectors and market players themselves are also of very diverse. This is a consequence of different national developments and the adaptation of banks or their founders to national economic and legal environments. The diversity is first apparent from the substantial differences in the number and size of banking institutions in the different national markets. Second, the observed diversity in bank types implies diversity in banks’ objectives and orientation, which drives the overall performance and efficiency of the European banking 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 the European economy. In concrete terms, pluralism drives competition in the banking sector and contributes to financial stability by preventing sector-wide ‘herd behaviour’ (Section 2.3). 59

2.1. Banking practices: EU comparisons – EU diversity 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. 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 should achieve appeared narrow and even dogmatic in its reliance on a very abstract economic definition. Such adherence to the motto ‘identical prices, identical services, identical markets’ is dangerous for two reasons. First, an overly simplistic approach to assessing the Single Market 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 impetus to misguided policy interventions which, on top of being harmful, also are wasteful in chasing the wrong goal. Over time these problems became increasingly recognised, while the importance of underlying economic conditions as a driving force for retail banking product offers, fees and prices gained more and more acceptance. Against this background, policy makers have adopted a more differentiated approach and by now take distance from the dogmatic interpretation of a Single Market in their efforts to advance the integration of the European retail banking sector. Furthermore, it can be observed that there is a growing recognition at the EU level that, while the essence of retail banking is the same in all markets, a forced generalization of the actual business aspects neither contributes to 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 towards a 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 banking practices are further explained. Banking practices are To be successful retail banks have to meet the needs and preferences of the local determined by broader economy. These needs and preferences, however, are to a large extent endogenous. demand patterns. They reflect and derive from a wide range of national specificities ranging from habits and traditions to economic conditions as well as policy factors. Demand patterns therefore differ for national markets, and even within countries regional differences in demand can be reflected in regionally diverse retail banking practices. 60

In addition, savings culture as such is an important factor. Comparisons of national savings Banking practices are driven rates and time trends in savings patterns yield striking differences across counties.10 by savings culture. Partly these differences reflect underlying macroeconomic conditions; however, to a large extent they are the result of diverging national savings cultures and economic values. In retail banking, national savings patterns matter for the following reasons: First, the overall savings rate is important since domestic savings determine the availability of domestic funding for banks. In addition, the stability of the savings rate and its cyclicality influence banks’ planning horizon regarding deposit funding. Secondly, households’ preferences concerning savings deposits versus investments in capital markets determine the funding possibilities for banks (i.e. funding via deposits or wholesale funding). Of course, household savings preferences also drive banks’ offers in retail investment products and savings deposits. Deeper cultural factors, economic traditions, and labour market characteristics also have Banking practices great influence on banking practices. This is particularly the case for the demand for are driven by cultural factors, credit and mortgages. For example, overall borrowing patterns are driven by ‘national’ economic traditions and attitudes towards debt and the role of the family as a lender, for instance as consumers even the labour market. may choose to borrow within the family instead of applying for consumer loans at a bank. In addition, the relative social importance of home-ownership and the depth of rental markets for housing influence the demand for mortgages: They determine the volume of the market and influence the overall age and wealth profile of mortgage borrowers. Labour mobility and permanence in housing decisions may also influence the frequency of mortgages and consumers’ preferences regarding mortgage conditions. In the payments area, an important factor is customers’ readiness to use the newest Payments methods are technologies, which is mainly driven by existing technological literacy and the satisfaction a result of habits, preferences with existing payments methods. Therefore payments preferences have a strong and technology. demographic component. Furthermore, national traditions and habits are important factors in determining the use of cash vs. debit cards vs. credit cards, or the popularity of revolving credit cards.11 Even among countries where, for applicable types of transactions, payments by direct debit have largely replaced cash payments and cheques, the modus of payments can differ according to whether they are executed in debtor driven mandate flows or creditor driven mandate flows. This not only determines the organization of the payments operation, but also influences the banks’ obligations regarding storage of data and potential follow-ups to payments. Apart from national regulation, general government policy is influential for both supply Banking practices react to and demand for retail financial services. Public-private trade-offs can determine banks’ general government policy. business opportunities, for instance in the area of retirement provision. Examples include retail investment products tailored to support household saving and in line with government programs promoting private initiative to increase retirement income. Other prominent examples concern the financing of university education, where, as an alternative to government provided (tax financed) education facilities, public and private education draws on tuition fees, which often are financed by banks in the form of private student 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). 61

EU level legislation focuses While many aspects of the legislation applicable to credit institutions are defined at the on selected areas. EU level (see Part 3 of this report), for some aspects, legislation originates in the national environment. National legislation plays a lesser role for wholesale banking than for retail banking, where issues such as taxation and social policies of Member States are of great relevance. This influences retail banking practice via the supply of retail banking services and products To sum up, the list of factors determining national demand patterns is long, and the examples given here are in no way exhaustive. Yet they clearly illustrate the wide range of national factors which influence product offers, prices and fee structures. Implications for market integration Diversity in practices As a result of the national character of retail banking, hardly any two European retail determines the viability banking markets look the same. Directly comparing prices and offers across European of the “simple” Single counties can yield to misleading conclusions, all the more so as the different factors are Market idea. closely interlinked. Diversity in national practices has also implications for the integration debate itself: n Any assessment or comparison across national borders needs to take into account the 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 national differences between the different banking sectors also have important implications. In particular, in addition to the obvious ‘natural’ hurdles such as different languages, national differences in demand and environment can present a challenge for market entry. This is not because they constitute a barrier, but simply because the entering bank has to adapt to different national conditions and position itself in the face of different demand patterns. n For expanding banks, substantial sunk costs will thus be combined with initial or even permanent difficulties in achieving synergies between their operations in the different markets. Hence, especially for mature markets, entry may be less attractive or even outright unattractive. Similar hurdles exist for cross-border banking, which in addition is faced with the challenge to overcome customers’ preference for locally provided products and services. n Against this background, policy makers need to take a patient and circumspect approach to integration. 62

2.2. Europe – rich in market players 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. Background: diversity in the European retail banking sector Just like the European markets for retail banking products and services, the European retail banking landscape as such is distinguished by its diversity. Given the relevance of this diversity in any comprehensive discussion on market integration, it is important to illustrate its effect on market structures and its importance for a thorough understanding of the current situation on the European retail financial services market. The main provider of retail financial services in the EU are banks, and hence credit institutions according to EU law12 which therefore comply with all applicable EU banking regulation. This being said, however, there is no ultimate ‘European banking model’ as banks vary strongly according to their orientation, size, organizational structure and ownership. Rather, instead of a ‘European banking model’, there is a ‘European model of a banking sector’ which is best described as a pluralistic market culture. Banks providing retail financial products and services are either ‘pure’ retail banks or universal banks, which alongside their retail banking business also operate as investment banks. In recent decades the trend has been that most ‘pure’ retail banks either participate in the ownership of or have a partnership with an investment bank or have some 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 impressive and reflects the richness of European banking traditions. In the retail banking area the three main models are commercial banks, cooperative banks In the retail banking area and savings banks. The different main categories, however, are not mutually exclusive. three general bank types For example, savings banks can have various owners or supporting entities, including prevail. foundations 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. 12 EC Capital Requirements Directive 2006/48/EC, Article 4. “Credit institution means an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credit for its own account”. 63

National market structures Already when looking at the sheer number of credit institutions throughout the EU, differ according to the importance of the characteristics of the national banking sector becomes obvious.13 banking traditions. In general, national banking sectors with a strong presence of cooperative banks and savings banks are distinguished by a higher number of individual banks, always conditional, of course, on the overall market size. Clearly this goes back to the traditional structure of such bank types, their strong regional orientation, and their less developed tendency to pursue growth via mergers and acquisitions. Sector evolution Even within categories of banks different developments take place, depending on takes different paths national trends and banks’ own preferences and orientation. For instance from the in different market. structure of ESBG members in different Member States, different paths of evolution in the organization of savings banks are evident.14 Indeed, ESBG’s membership includes a range of possible configurations, reaching from savings banks forming one common banking group, to savings banks organized in decentralized networks, to savings banks operating completely independently. Market concentration Furthermore, differences in the composition of national banking sectors also are reflected is determined by in the degree of market concentration in terms of banks’ share in asset holdings.15 banking traditions. In particular, in countries with a large number of banks and a strong presence of savings and cooperative banks, the market share (measured in assets) of the ‘top five’ credit institutions is comparatively low. Divergences in market concentration also hint at potential differences in the way competition works in the different retail banking sectors. In addition, these divergences underline that national banking culture and banking sector composition determine the systemic importance of the largest players in a market. Performance of different Regarding the comparability of banks, the variety in banking sectors and business models bank types is not always has the additional effect of making comparisons between banks’ efficiency and directly comparable. profitability extremely difficult. The most obvious difficulty lies in the comparison of ‘pure’ retail banks and universal banks even within markets, given the differences in business focus and hence in revenue and associated costs. Banks’ business models also determine their direct and indirect objectives and planning horizon. While profitability is a key element for all banks, it is not necessarily the only objective for all credit institutions. Here, ESBG members 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 as between growth and sustainability. Banks’ choices on these trade-offs, of course, feed into their measured profitability and efficiency. Therefore, any differentiated approach to measuring bank performance needs to ask what the different types of banks ultimately seek to achieve. These caveats to cross-market sector comparisons are similar to, and connected with the observations previously made on competition between banks (See also section 1.3). They highlight the importance of understanding the banks and the business under comparison, as well as the composition of and orientations within the national banking sectors. Another crucial issue for any cross-European assessment of prices and bank performance is, of course, that markets differ in maturity and hence in the very scope for bank profitability. 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. 64

Implications for the discussions on market integration The diversity reflected within Europe’s retail banking markets underlines that there is not Europe should unite one superior market structure, but that many kinds of market structures are viable, its diverse markets in feasible and thriving. This has implications for a reality-based debate on market integration: a harmonic entity. n There is no recipe for the composition and structure of the European integrated retail banking sector apart from that it should combine the advantages of its different sectors to form a harmonic entity. n It is important to refrain from any hastened value judgments regarding the nature or performance of the different market players, as many seemingly straightforward comparisons can in fact be misleading. The over-reliance on a narrow set of indicators to draw conclusions on the merits of different banks or business models can unjustly neglect important factors and lead to false impressions among policy makers on the role of banks in different markets. 2.3. Pluralism in the EU retail banking market Key messages n Pluralism is an asset for the European economy – it benefits the real economy, drives competition and increases financial 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’. Motivation: Pluralism needs to be taken into account when regulating Europe’s markets. 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 compatible with the different business approaches. However, gaining a comprehensive overview over the richness of the European retail banking sector certainly is a demanding task. In Europe’s pluralistic environment, EU policy makers’ recognition of the necessity of Proportionality is key proportionality in market regulation is of great importance. The principle of proportionality is for regulating the pluralistic an essential guideline to ensure that regulatory requirements are not to the detriment of banking sector. (especially smaller) market players or place a disproportionate burden on market players whose activities do not entail the same risk as those who could be systemically important in a certain area. Therefore, proportionality plays a crucial part in ensuring fairness and compatibility 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 explain certain principles of pluralism, and to address and eliminate potential misperceptions. 65

Within the pluralistic It has been a great achievement of EU law-makers to ensure that all market participants banking sector, are competing on a level playing field according to the principle ‘same business, market players compete same risk, same rules’. This means that all regulation applies equally to all market players on a ‘level playing field’. engaging 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 foreign banks compete on equal terms with domestic banks. Pluralism is part of Europe’s retail banking markets are shaped by history and economic development over market evolution. centuries. Therefore the respective business models have grown with and adapted to the economies of the different Member States: they are endogenous and fully integrated in their economic system. It is therefore impossible to define a ‘starting position’ for a European retail banking market, but it would be equally wrong to consider the current situation as static or to even fear stagnation. All ownership models entail All ownership models entail compromises and trade-offs. For example, banks organized compromises and trade-offs. as joint-stock companies have the advantage of relatively easy access to external capital via 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 focus on short-term goals. Additional disadvantages are the strong exposure to developments on capital markets and a vulnerability to share price fluctuations, the potential severity of which was underappreciated until recently. Non-listed banks, on the other hand, face capital constraints in that they largely have to rely on retained earnings. On the upside, in situations of 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 of the European banking sector. Indeed pluralism is an asset in many dimensions. Pluralism reinforces From a socio-economic point of view, pluralism implies wide stakeholder representation the link between banks and reinforces the link between banks and the real economy. For example, cooperative and the real economy. ownership or ownership/sponsorship by municipalities or foundations ensures that a bank’s business activities are compatible with stakeholders’ economic interests. For ‘stakeholder- return oriented’ banks return implies profits and quality of service, depth of regional presence and regional development. Pluralism reinforces Regarding competition, pluralism implies a large and stable number of competitors, competition. whose diversity drives innovation and intensifies competition while simultaneously ensuring complementarities in offers and strategies among banks. One could even go so far as to conclude that pluralism guarantees competition and adds an additional dimension along which banks compete.16 Pluralism gives customers the option to choose not only between competing banking products and services, but also among competing business models with different approaches to banking. 16 In this context ESBG nevertheless feels the need to warn against the frequent confusion between competition on 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 banks should being for sale at any point in time to the highest bidder. 66

Around the time of the completion date of this work, the financial and economic crisis Pluralism contributes to has reached its second anniversary. The lessons we could draw so far are manifold, and financial sector stability. undoubtedly many more lessons will follow. However, one of the most important lessons is that the pluralistic nature of the European banking market has most likely protected it from far greater instability and damage. Indeed, events up to date confirm that pluralism has contributed to financial stability during the crisis, as the diversity of market players with different business orientations balances out the effects of problems at individual banks. 67

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Part 3 EU Retail Banking Policy: ESBG Contributions and Recommendations

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SETTING THE SCENE The EU Approach to Financial Sector Policy and ESBG’s Contributions on the Basis of the ‘Market Model’ The integration of Europe’s retail banking sector is one of the important topics on policy makers’ agenda. Yet the ‘vision’ of what the integrated market should look like is subject to changes in policy makers’ perception of the sector and in their views on what would be desirable developments. The question of how to achieve integration has undergone a similar evolution. Starting from a conviction by many policy makers that full integration needs to be built on full harmonization in market regulation, recent years have shown an increasing preference for targeted or minimum harmonization and mutual recognition across countries. Hand in hand with these developments, there has been an increased understanding of the retail banking market and a nearly unanimous recognition that retail 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 is the Financial Services Action Plan (FSAP – 1999-2004). The FSAP is a substantial set of legislative measures covering all aspects of financial services with the result of greater integration 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 market integration. In addition, in the context of the current financial markets crisis, regulatory and policy efforts are already being taken (or envisaged for the future) in order to address the revealed shortcomings of the existing framework. ESBG takes the present report as an opportunity to put forward its views and recommendations on the Commission’s current individual initiatives concerning the banking area, with a particular focus on retail banking relevant issues. While, naturally, these contributions are made from a retail banking angle, it is also necessary to view the issues at hand in the context of the working of the economy overall. One of the generally accepted ways to look at the link between financial authorities, the financial sector and the wider economic system is the ‘market model’. The market model provides a structure to understand the process by which monetary policy and standard setting for risk management feed through the financial system in order to generate price stability and public confidence. For this purpose, the market model 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 for retail 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. 71

The structure of this section and the way in which ESBG’s contributions are ordered reflects 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 recommendations on financial reporting, with contributions on fair value accounting (Chapter 2) and IFRS and SMEs (Chapter 3). ESBG then gives its views on retail banking relevant topics in the wholesale financial and 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 contributions as regards consumer policy (Chapter 7), the retail payments area (Chapter 8) and the fight against money laundering and terrorist financing (Chapter 9). Regarding the real economy and important issues concerning ESBG’s customers, ESBG presents its views on SME financing (Chapter 10), as well as financial inclusion (Chapter 11) and financial education (Chapter 12). 72

1. BANKING SUPERVISION Setting the scene Banking supervision broadly refers to the rules and processes that aim to ensure the individual safety and soundness of financial institutions and the broader financial stability of the markets. Within the framework of banking supervision, all banks are subject to prudential rules and to controls and interventions from supervisory authorities. In the EU, prudential regulation has been largely harmonised at the European level through extensive and detailed directives, which to a large extent are designed to implement internationally agreed standards. Prudential supervision, on the other hand, is conducted primarily by the national competent authorities, with some cooperation and coordination agreements in place to address cross-border situations. During recent years, a series of reforms have been adopted which affected various aspects of the EU prudential framework. These have concerned: n The substance of the prudential rules – e.g. the introduction of the three pillars approach of the Basel II framework in the Capital Requirements Directive (CRD); n The institutional framework for regulation – e.g. the establishment of the four-level Lamfalussy 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 of Memoranda of Understanding and the setting-up of various cooperation platforms for national authorities. The financial crisis has provided a new impetus for discussions on an appropriate supervisory architecture in the EU and led to concrete proposals for amending the regulatory framework in view of addressing various shortcomings revealed. In this chapter two equally important dimensions of banking supervision in the EU are explored: 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 Deposit Guarantee Schemes Directive. 73

1.1. The EU institutional arrangements for supervision 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 to ensure 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 a decentralized network of national supervisors with coordinating roles for the three new ‘Authorities’. Background on EU banking supervision: the European debate The question of the appropriate supervisory framework in the EU has been discussed by EU regulators, politicians and policy makers for many years. Traditionally, there have been two 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 common banking market) where the freedom of cross-border establishment of banks and the provision of cross-border services are guaranteed and can be effectively made use of. Here, especially the large, internationally-active banks have argued that a fragmented supervisory architecture is not compatible with a situation where cross-border entities increasingly manage their activities centrally (e.g. cash management, development of internal 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 financial institutions and the implicitly higher contagion channels and systemic risks. From this perspective, 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 Central Bank (ECB) with regard to the maintenance of financial stability, Over time, policy makers did not attribute the same weight to these two different perspectives for the involvement of the EU in supervisory matters. For years, the ‘internal market dimension’ dominated the discussions and constituted the focus of policy reforms concerning the EU supervisory architecture. This was driven by the political goal to achieve an EU Single Market for financial services, which led for instance to increasing the powers of the consolidating supervisor.1 This focus was to a large extent influenced by the 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 globally compete with their international counterparts. However, both the macro-prudential aspect of EU banking supervision and the discussions of crisis management and burden sharing were only marginally addressed by European policy-makers. 1 See Art. 129(2) of the Capital Requirements Directive (CRD) (Directive 2006/48/EC of the European Parliament and of the Council Directive of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast), OJ L 177, 30.06.2006). 74

The outbreak and evolution of the financial crisis led to a realignment of priorities regarding the EU supervisory architecture. Now, the stability of the EU financial system has become the priority, while efficiency concerns – especially related to large, internationally active 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 application of the European passport to banks, the principles of home country control, mutual recognition and consolidated supervision apply. According to these rules, the competent authority of the Member States that authorised the establishment of a credit institution (the home country supervisor) is broadly responsible for the supervision on a consolidated basis of the activities of the respective institution even when performed in a different country (host country) via the establishment of branches or the cross-border provision of services. Yet, host countries retain a series of responsibilities with regard to specific subjects (e.g. liquidity supervision). For banks that decide to operate in other Member States with subsidiaries, the European passport does not apply, as subsidiaries acquire a legal personality in the Member State in which they operate; as such, subsidiaries fall primarily under the responsibility of the competent authority of that Member State. Nevertheless, a number of provisions have been adopted in recent years to facilitate the prudential oversight of cross-border banking groups, including foreign subsidiaries. For instance, the Capital Requirements Directive (CRD) introduced the possibility for the consolidated supervisor to validate internal models for risk measurement under Pillar 1 at the group level,3 as well as the possibility for Member States to decide on a bilateral basis on delegating the supervision of subsidiaries to the competent authorities responsible for the parent undertaking.4 A new step was made with the review of the CRD in 2009, which rendered mandatory the establishment of colleges of supervisors for all cross-border financial groups.5 The CRD also stipulates that supervisory colleges have to strive for the adoption of joint decisions on 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 also widely regarded as an important step in the direction of a more European approach to the supervision of EU banks because of the tasks assigned to it in relation to the convergence 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 is intrinsically 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 their supervisory powers over the institutions operating in their markets. 2 Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending 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 June 2006 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 to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management P6_TA-PROV(2009)0367, 8.05.2009. 75

The crisis and immediate policy reactions As the financial crisis unfolded, EU policy makers were concerned that weaknesses in the EU supervisory framework were partially responsible. European Commission President Barroso therefore decided in November 2008 to establish a High Level Expert Group under the chairmanship of Jacques de Larosière. The Group was entrusted with the task of developing concrete proposals to strengthen European supervisory arrangements covering all financial sectors. In February 2009, the report of the High Level Group (called the 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 future supervisory architecture, separately addressing macro-prudential and micro-prudential supervision in the EU. n Regarding macro-prudential supervision, the Group believes that there is urgent need to upgrade the current framework and entrust the European Central Bank/European System 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 warnings where 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 replacing the current Banking Supervision Committee (BSC). n Regarding micro-prudential supervision, the de Larosière report recommends the gradual 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 is suggested to gradually transform the Level 3 Committees into ‘Authorities’ with key-competences, such as legally binding mediation between national supervisors or the adoption of binding supervisory standards. The Commission broadly endorsed the de Larosière approach in a Communication of 4 March 2009.7 Furthermore, the Commission published concrete proposals on a future EU financial supervisory architecture on 27 May 2009 (the Commission’s May Communication8). In that document, the Commission generally took up the proposals made by the de Larosière Group on macro and micro prudential supervision. However, the Commission proposed accelerating the reform and merging the two phases suggested in the de Larosière report in view of having the new architecture up and running by the end of 2010. The general direction of the Commission’s Communication was endorsed by the ECOFIN Council on 9 June 2009 and by the European Council on 19 June 2009.9 Concrete legislative proposals will follow in autumn 2009. 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 Conclusions meeting June 18th /19th. 76

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 the Policy makers need to take spotlight. At the same time, the reform of the EU supervisory framework should be a holistic approach beyond considered against the background of the multiplicity of factors contributing to the crisis, supervision. most of which are unrelated to the EU supervisory structure. Therefore, a holistic approach is needed and the focus on reforming the EU financial supervision architecture should not divert attention from the need to address other substantial aspects through adequate policy measures. It is crucial that any reform to the EU supervisory framework contributes to strengthening the resilience of the EU financial system as a whole. It should therefore address the supervisory concerns characterising an integrated financial market, among which interactions and 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 supervisory A two-tier supervisory framework needs to be given due consideration. Most importantly, reforms should in no system could create grave way set the groundwork for a two-tier system, where systemically relevant banks are distortions to competition. supervised at the EU level and national or local banks remain under the control of domestic supervisors. Any such division would result in supervisory asymmetries inappropriate in the EU context and would create distortions of competition in the very markets 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. ESBG generally supports Particularly, ESBG supports the idea of bringing together macro- and micro-prudential the Commission’s approach. approaches, as this would compel the parallel consideration of both the financial safety of individual institutions and of the system as a whole. At the same time, the reform of the supervisory architecture should capitalise on the merits of those features of the current framework that worked well. Thus, the new architecture should explicitly acknowledge the comparative advantage of national supervisors in day-to-day supervision stemming 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 of utmost importance. These details to a large extent still need to be determined and may impinge substantially on the concrete outcome. The current momentum and the acute awareness of policy-makers of the risks involved A realistic timeframe by inadequate supervisory structures should provide the impetus for changes. is necessary. However, ESBG believes that it is also essential to take the time to thoroughly prepare the future structures and avoid rushed measures. In this sense, the ambition to have the new architecture in place by 2010 may be unrealistic. Rather, a more flexible time schedule would be more promising. 77

Proportionality should guide Given ESBG’s consistent support for the creation of a common supervisory culture in the the application of EU, the idea that this be underpinned by a European rulebook consisting of a harmonised the common rulebook. core set of standards is in principle welcomed. However, it is important that the rulebook does not amount to a rigid framework or to overregulation. The rulebook should be devised in accordance with better regulation principles and applied under the overarching proportionality principle. It is essential to establish The integrated complex supervisory framework proposed by the Commission involves clear lines of responsibility a multiplicity of bodies and fora and a range of decision-making, coordination and between the various bodies. cooperation mechanisms. These can be effective only if competences are clearly circumscribed and if clear lines of responsibility are drawn in advance to ensure that overlaps or gaps in the European supervisory framework are avoided and that the bodies involved are accountable for their actions. An effective The establishment of a body explicitly entrusted with monitoring macro-prudential macro-prudential body developments and issuing warnings and recommendations is considered of utmost would be valuable. importance. It is equally important to ensure the effective follow-up on these warnings and recommendations. Therefore the envisaged European Systemic Risk Board (ESRB) is much welcomed. However, the proposals of the Commission so far are only indicative and substantial details are still pending – especially regarding the transposition of the results of the macro analysis into concrete prudential measures. These details should especially clarify the effects of the risk warnings and recommendations by identifying potential addressees and the roles and responsibilities of ECOFIN and of the micro-prudential authorities. Also, in view of guaranteeing the follow-up it is crucial to determine the precise workings of the ‘act or explain’ mechanism. Appropriate arrangements should warrant that the non-binding competences of the ESRB are not transformed through factual pressures into de facto binding powers. Furthermore, the public disclosure of warnings and recommendations is not necessarily the best way for increasing effectiveness. The powers of the micro- ESBG supports in principle the creation of the European System of Financial Supervisors prudential authorities need as an operational network relying on the mutually reinforcing responsibilities of the to be cautiously devised. upgraded Level 3 Committees10 and the competences of national supervisory authorities in day-to-day supervision. In principle the functions envisaged for the new European supervisory authorities (ESAs) are valid, but the Commission’s Communication is still too vague to allow for an accurate assessment of the underpinning mechanisms and concrete powers. Many details still need to be determined and several aspects should be taken into account for further specification. The new authorities’ competence to adopt binding standards and the areas subject to further binding rules should be clearly circumscribed in EU sectoral legislation. Also, the mechanism for endowing technical standards with binding legal force should be transparent and provide sufficient guarantees to ensure accountability. Furthermore, the power to settle disagreements between national supervisors through binding decisions should be seen as a last-resort solution to be employed only if mediation and conciliation have failed. Equally, ESAs’ enforcement competences and their powers in emergency situations should be precisely defined to avoid any abuse. 10 The three Level 3 Committees in the Lamfalussy framework are: the Committee of European Banking Supervisors (CEBS), the Committee of European Securities Regulators (CESR) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). 78

The ESAs should not be endowed with direct and binding powers against individual banks until several preliminary issues are clearly specified. These concern especially the determination of the applicable law on which ESAs’ concrete decisions will be based, as well as appropriate legal remedies and appeal procedures. Furthermore, credit institutions should have the possibility to be heard in cases leading to concrete decisions by the ESAs which affect them. They should also be able to ask ESAs to mediate or settle disputes among supervisory authorities and to request that ESAs investigate cases of manifest breach of EU law. The industry should have a say in the supervisory process, as it is important that experts The industry should bring their practical insights with regard to both macro- and micro-prudential contribute its views developments. ESBG suggests that the forthcoming legislation should explicitly foresee to the micro- and macro- the involvement of the industry in the new bodies. This could be realised via the prudential bodies. participation of industry representatives in the advisory technical committee envisaged to support the work of the ESRB, while existing industry consultative panels could be integrated and formalised inside the ESAs. The political commitment that the powers of the new authorities do not impinge on Crisis management solutions Member States’ fiscal responsibilities is largely supported by the ESBG. This should be are still pending. more clearly articulated in the forthcoming legislative proposals. At the same time, there is an inextricable link between supervision and crisis management. Efforts to establish a coherent and workable regulatory framework for crisis management in the EU should be pursued as a matter of priority. Substantial and reliable information (and data) will be essential for the effectiveness of Costs for additional the new structures. Their main information source should be the national central banks information should be kept and supervisory authorities which by now have a large database on individual institutions to a minimum. and 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 cost burden for information is kept as low as possible. Therefore, the ESRC should not be able to request information directly from market participants and the envisaged central European database should not introduce a second set of disclosure requirements for banks. 79

1.2. The EU regulatory framework Key messages n The financial crisis has exposed weaknesses in the current prudential regulatory framework. Yet, this does not call for a complete overhaul of the rules in place. EU policy makers should correct the identified weaknesses by 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 positive effects 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 the future. However, new rules must respond to the identified problems; they should not endanger practices that have proven their effectiveness from a market stability or risk management perspective. Background: the Capital Requirements Directive (CRD) The Capital Requirements Directive11 (CRD) is the framework legislative instrument in the EU setting prudential standards for credit institutions and investment firms. The CRD transposes 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 of prudential failures revealed by the crisis, the CRD has become a major target of regulators and policy makers. A first review of the CRD took place in 2009 and inserted already in European law regulatory responses 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 capital instruments, the prudential treatment applicable to securitisations, supervisory arrangements and references in the CRD to liquidity risk management. A set of further proposals for amendments to the CRD have been either issued already or are in the process of preparation. The topics addressed include: the prudential treatment of 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 Basel II provides a valuable ESBG has consistently expressed support for the Basel II approach as transposed into the prudential approach. CRD and our current assessment remains generally positive. Specifically, the Basel II approach is considered to have contributed to improving risk management within ESBG Member 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, once consistently applied, has the potential of preventing much of the excessive risk-taking that contributed to the current crisis. 11 European Parliament and Council Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit of 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 and Capital 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 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 adopted on 6 May 2009; forthcoming publication in the OJ. 80

However, in the light of the crisis some shortcomings in the Basel II framework became Amendments to Basel II/CRD apparent. ESBG fully supports efforts to address these shortcomings and stands ready to should address proven contribute to the process of improvement of the rules in place. shortcomings in a systematic way. Generally speaking, a more systematic and holistic approach to legislative amendments in the aftermath of the crisis would be welcome. All relevant aspects should be looked at and policy measures should be proposed only where pertinent. A straightforward distinction between short-term and long-term objectives is crucial in order to avoid regulatory mismatches. Furthermore, a clear prioritisation should be devised, taking into account the substantial impact of the aggregate regulatory changes on the banking industry and the related high administrative burden involved. Looking ahead, there is cause for concern regarding the acceleration of the regulatory Regulatory amendments activity, which implies a higher number of public consultations with ever shorter should observe the Better deadlines. Although current circumstances are admittedly exceptional, such trend does Regulation principles. generally not benefit the final outcome and may ultimately undermine the Better Regulation approach. Especially when proposals are made in areas not previously covered by legislation, sufficient time should be granted to stakeholders in order to analyse the full potential impact. It is particularly important that new regulatory measures fully respect the principle of Proportionality should be proportionality. Regulatory measures and their application in practice should duly take confirmed as an overarching into account the size, complexity, business strategy and riskiness of an institution – in principle. particular having in mind that the smaller institutions with traditional banking activities did 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 of Regulatory reforms need establishing a level playing field at international level are important. All regulatory efforts to pay due account to should accordingly be as much as possible coordinated at a global level. Of course, the global level-playing field. this should not prevent the EU from moving forward on its own, when reaching timely agreement with its international counterparts does not prove possible. Specific aspects n Prudential treatment of complex financial instruments Background: Securitisation and the emergence of innovative complex financial instruments (such as mortgage or asset backed securities, collateralised debt obligations, special purpose vehicles and structured investment vehicles) have been long praised for their merits in diversifying risks and fuelling financing possibilities. Yet, the crisis revealed that there were misunderstandings in relation to the process of securitisation and the characteristics of such products on the part of both financial institutions and regulators. The perception of improved distribution of risks proved to be inaccurate in light of several banks’ excessive use of complex instruments. Securitisation (when conducted improperly) was among the main vehicles by which risk was actually spread. To address the concerns related to securitisation, a new article (122a) was inserted into the CRD at the occasion of the review finalized in April 2009. This new provision is the first wide-reaching response of the EU to address the shortcomings identified. 81

On 13 July 2009, the Commission issued a new legislative proposal for amending the CRD14 (“CRD 3”), on which it held consultations in Spring 2009. The aim of the proposed changes is to ensure that minimum capital requirements better reflect the risks attached to complex securitizations and exposures to off-balance sheet vehicles, supplemented by adequate risk management and disclosure practices. The Commission’s proposals build on regulatory proposals by the Basel Committee. ESBG views: Legislative amendments ESBG does not dispute the well-established lesson from the crisis that the riskiness of should focus on ascertained securitisation exposures was not fully understood, which was reflected in shortcomings inadequacies, without in their regulation. There is therefore a need for regulatory amendments that address stigmatising securitisation inadequacies under the current framework. Nevertheless any such amendments altogether. should give due consideration to the fact that securitisation – when conducted properly, with due diligence and avoiding excesses – is a valuable mechanism for diversification and risk transfer, which has proven helpful and will remain useful in the future. Consequently, it is important that the envisaged new regulatory measures focus on addressing observed excesses without stigmatizing securitization altogether, as this could stifle securitisation activities completely. New capital rules on Regarding resecuritisation, the envisaged new EU regulatory proposals should consider resecuritisations should not that extensive qualitative requirements for the risk management of securitised assets prevent ‘clean-up’ operations. have already been enshrined in the new Article 122a of the CRD. Additionally, institutions have already started to improve internal processes of risk assessment in this regard. Any suggestion to fully deduct all re-securitisations from capital would go against Article 122a, and would not be supported by ESBG.15 In particular, a flat deduction of resecuritisations from own funds would not provide any incentive for appropriate due diligence and would run against the goal of ensuring proper risk management. Such a deduction requirement potentially endangers the current efforts for restoring banks’ balance sheets. In fact, many banks are currently being encouraged by their regulators to undertake 'clean up' transactions to deal with toxic or potentially toxic assets, where most of these transactions will count as resecuritisations. As these structures are currently being developed, it is impossible to determine the exact capital impact. However, these structures will most certainly not be developed if the associated capital requirements make them unfeasible. Hence any such 'clean up' operation risks being undermined. n Prudential treatment of the trading book Background: Banks’ investment activities are mainly registered in the trading book. In light of the crisis, policy makers have concluded that the regulatory capital treatment applicable to the trading book and to market risk pursuant to the CRD has been too lenient. Hence, various measures are currently contemplated by the European Commission and the Basel Committee to strengthen capital requirements in the trading book. Following a public consultation in March 2009, amendments to the CRD in view of reinforcing capital requirements for trading book activities were included in the legislative proposals issued on 13 July 2009 – “CRD 3”. 14 Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC regarding capital requirements for the trading book and for re-securitisations, and the supervisory review 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 qualitative requirements for the review and monitoring of the securitised assets for a resecuritisation should be permitted to apply the risk weights for resecuritisations. On the contrary, banks that are not in the position to properly carry out the required credit review and monitoring of the securitised assets for a resecuritisation should be subject to the sanctions prescribed in paragraph 5 of the new Article 122a. This would mean that they will have to multiply the corresponding risk weighting for resecuritisations by a substantial capital requirement. 82

ESBG views: ESBG understands the concerns motivating regulators’ proposal for increasing capital A one-size-fits-all approach requirements to cover risks in the trading book. However, when devising solutions needs to be avoided. some issues have to be looked at carefully. First, it is essential that capital requirements are in line with the risks incurred by the individual institutions. Therefore, it is particularly important to avoid a one-size-fits-all approach. Second, internal models are a useful risk management tool and banks should therefore The use of internal models have incentives to develop them on the basis of their internal risk management should not be discouraged. processes. Rigid regulatory guidelines of a mainly conservative nature would hamper the development of internal models. In addition, an overly drastic increase of capital requirements is likely to discourage a transition from a standardised market risk approach to a model-based approach, which is known to better reflect incurred risks.16 The Commission’s alternative proposal to treat specific risks in the trading book Different rules should apply exclusively according to the rules for the banking book is rejected by ESBG. The to the banking book and application of the banking book rules to trading book assets with specific risks would the trading book. be a considerable step backwards on the path to a well-established risk measurement method for specific interest and equity risks. Such an approach is also problematic due to the lack of risk sensitivity of the measuring procedure. This is because market risks such as spread movements are not adequately reflected and concentration risks are not adequately taken into account. n Remuneration Background: Inappropriate remuneration and compensation policies were held responsible for the short-termism in some banks’ business strategies and have been considered fatal for sound, long term risk management in certain cases. As a result, the Commission has included incentives for appropriate remuneration structures in the proposal for “CRD 3”. These proposals include the possibility for supervisors to impose measures, among which additional capital requirements, on the entities whose remuneration policies are considered inadequate under Pillar 2. In addition to the envisaged changes to the CRD, the Commission has also issued two recommendations on remuneration – one of which addresses specifically remuneration policies in the financial services sector.17 The CEBS has also developed high-level principles on overall remuneration policies of banks and financial institutions.18 ESBG views: It is particularly important that compensation incentives should support long-term, Remuneration policy has firm-wide profitability. In light of the current crisis, it appears that both the level and to support the long-term the structure of remuneration may be factors that could encourage short-termism and interests of the whole firm. induce high risk-taking to the disadvantage of a bank’s long-term interests and of other stakeholders. Firms need to pay close attention to the alignment of compensation incentives with the long-term interests of the whole firm. 16 Estimations of the industry indicate that the regulatory proposals discussed would result in a substantial increase of capital requirements for the trading book. Such multiplication of the capital requirements stems from 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 from the 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 services sector, OJ L 120, 15.5.2009. 18 CEBS, High Level Principles on Remuneration Policies, 20 April 2009. 83

At the same time, it should be stressed that, while inappropriate compensation policies have played a role during the current crisis, they were by far less relevant than other factors. Therefore, a policy response is necessary to reflect this relative importance of reforming compensation policies in light of the broader policy and regulatory review currently underway in response to the crisis. Regulation of compensation Furthermore, an approach focusing on an overall reform of banks’ remuneration policies should focus on policies risks diverting attention from the key issue which needs to be addressed: inappropriate incentives. 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 the decisions which define a bank’s fundamental approach to risk and its risk-taking strategies. A broad-brush approach would be unfair towards the largest part of the staff of financial institutions. Policy and regulatory reactions targeting remuneration issues should specifically focus on the inappropriate compensation incentives that induced excessive risk-taking. Remuneration policy is The responsibility for remuneration policy rests ultimately with the institutions institution-specific and themselves. In this sense, it is important to highlight the principles of contractual ultimate responsibility rests freedom and of non-interference in the determination of the amount and structure of with banks. remuneration, which must be guaranteed. The relevance and incidence of national labour legislation and regulations must also be acknowledged. Given the differences within the financial sector, overall, firm remuneration policies are very institution-specific. Consequently, a ‘one size fits all’ approach is not acceptable in this field. Public regulation of remuneration policies should be confined to high-level principles. Moreover, considering the number of non-EU firms operating in the internal market, as well as the competition among banks for good employees, it would be crucial that such high-level principles be adopted on a global level. Remuneration-related Compliance with the principles on remuneration should be addressed by supervisors concerns should be exclusively under Pillar 2. Imposing capital add-ons is not the proper way to ensure addressed under Pillar 2. compliance with remuneration principles. n Liquidity Background: Liquidity risk proved to be one of the previously neglected aspects by regulators and institutions which ultimately contributed to the acuteness and amplification of the crisis. Within a number of banks, the maturity transformation process in particular appeared not to have been managed sufficiently well in order to be resilient enough once 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 the Commission are currently working to minimally harmonise some aspects of liquidity risk management (e.g. liquidity buffers, survival periods). This work could eventually be transformed into a legislative proposal. 84

ESBG views: ESBG supports a principles-based approach to liquidity risk management and supervision, Liquidity aspects should be such as the one devised by CEBS in its 2008 recommendations.19 Only by resorting to subject to common high-level high-level principles – addressing the most important aspects of liquidity risk management principles. and supervision – can regulation possibly consider properly the multitude of business models and the specificities of risk management. Furthermore, only a principles-based approach allows for the flexibility required by changing market conditions. In addition, ESBG supports the explicit reference to proportionality as an overarching Proportionality should guide principle, as a guideline for liquidity risk management and supervision. ESBG would liquidity risk management also encourage the explicit reference to materiality as an overarching principle. and supervision. Specifically, overregulation can be avoided by making it explicit that the high-level principles on liquidity are relevant in the case of material risks and material circumstances. n Procyclicality Background: 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 render capital rules more risk-sensitive. However, the question remains open as to whether Basel II induces procyclicality. At the time of writing, the Commission is investigating the degree of procyclicality in the CRD. A report with the Commission’s findings and eventual 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 capital requirements 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 build up through-the-cycle expected loss provisions for credit risks during good times and use these provisions during downturns to cover incurred losses. A consultation covering 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 that Only undesirable procyclical undeniably some of its aspects have led to undesirable procyclical effects. Yet, it is effects should be addressed. important to recognize that not all aspects of the financial system which are cyclical are necessarily procyclical, to the extent that they should be subject to new regulatory measures. An in-depth analysis of the building blocks of the financial system and of their interaction is necessary to avoid taking incorrect approaches. 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]. 85

n Leverage Background: During the build up to the crisis, financial markets were characterised by abundant liquidity and low returns, which drove market players to seek new investment opportunities and higher yields. The innovative and complex financial instruments that emerged were intended to offer those higher yields. This was combined with increased leverage, which proved to be excessive. The problem is currently being addressed globally by regulators. In the EU a new and simple metric for addressing leverage (possibly called ‘leverage ratio’) is eventually envisaged to supplement risk-based requirements. The European Commission is expected to present concrete proposals in autumn 2009. ESBG views: A non-risk based leverage The building-up of excessive leverage in the markets should be limited, but this needs ratio does not necessarily to be done in a way which effectively contributes to the creation of a safer and help create a safer and sounder environment. The mere introduction of a supplementary ‘leverage ratio’, sounder financial in addition to existing risk-based measures provided in the Basel II framework would environment. certainly not automatically meet this objective. The details underpinning a new and simple metric for addressing leverage will be crucial for its effectiveness. ESBG looks forward to contributing to the forthcoming debates in order to identify the appropriate way to achieve the objective of avoiding excessive leverage in the financial system. n ESBG views on Pillar 2 / the supervisory review process Pillar 2 still has largely The interplay between the three Pillars under the Basel II framework is of high value. unexplored potential that The role and importance of Pillar 2, which obliges supervisors to review the adequacy may prove valuable. and appropriateness of banks’ risk management processes, deserve specific attention. Pillar 2 allows – amongst other things – the individualisation of capital requirements in accordance with the concrete risk appetite of banks and for the application of targeted supervisory measures when specific shortcomings in banks’ risk management process are identified. Pillar 2 has so far been only put to limited use, but its potential should certainly become fully exploited in the future. Proportionality should guide Given that the core of Pillar 2 consists of a direct dialogue between supervisors and supervisory action under supervised entities, it is crucial that the regulatory framework does not excessively Pillar 2. constrain its conduct. Supervisors should have sufficient discretion to adapt the intensity of controls and the substance of supervisory measures to the specificities of individual banks, taking into account their size, complexity, business strategy and riskiness. n Views on Pillar 3 / market discipline Disclosure requirements Pillar 3 can make a substantial contribution to the achievement of financial stability. are important for restoring In the context of the current crisis and in view of restoring investor confidence, investor confidence. ESBG fully supports the aim of improving disclosure. In this sense, ESBG points to the joint industry initiative21 devising good practice guidelines on CRD Pillar 3 disclosures for securitisation. The objective of these industry guidelines is to achieve sound, consistent and appropriately detailed implementation of the Pillar 3 securitisation disclosure requirements across the EU and, hence, to contribute to restoring investor confidence through improved disclosures and delivery of relevant and meaningful information to users. 21 In December 2008 the European Banking Federation, the London Investment Banking Association, the European Savings Banks Group and the European Association of Public Banks jointly presented good practice guidelines on Capital Requirements Directive (CRD) Pillar 3 disclosures for securitisation. 86

There is also a need to provide appropriate information on the trading book, as well More disclosure does not as to revisit the requirements for the banking book and the qualitative disclosures. necessarily mean more In developing those disclosures it is important to strike the right balance between transparency. more transparency, the reporting burden this places on firms, and the ability of other market participants to assimilate and interpret the information. Disclosure requirements should be suitable for improving the understanding of the risk profile of an institution. However, the abundance of requirements does not necessarily improve disclosure and may result in an overflow of details from which it will be hard to select the really relevant aspects. Much of the information is already disclosed in accordance with existing legislation or the recommendations of the Financial Stability Forum/Financial Stability Board, making the risk of overlap very high. Therefore, in many cases, the additional requirements over and above the status quo should not be enshrined in EU legislation. 1.3. Deposit Guarantee Schemes Key messages n The recent revision of the Deposit Guarantee Schemes Directive reflects the importance of Deposit Guarantee Schemes for stability on financial markets and consumer confidence. n The different national Deposit Guarantee Schemes should be maintained, as they have the important advantage 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 be manageable; the non application of such a potential provision would again be counterproductive for consumer confidence. Background Since 1994 depositors throughout Europe can rely on a scheme which guarantees, in the event of deposits becoming unavailable, that they will recover at least EUR 20,000 of their deposits (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 its territory at least one Deposit Guarantee Scheme (DGS) is introduced. In its 2006 Communication on DGS25 the Commission sets out its approach to modernise the 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 the schemes. The European Forum of Deposit Insurers (EFDI) has been assigned to play an important role in the preparation of these measures. It has started its works in various areas, e.g. topping up arrangements, exchange of information between DGS, risk-based contributions, information to consumers and payout delay. 22 This provision is called co-insurance; in Member States applying this option, up to 10% of the losses can be borne by the depositor. 23 From the date on which the competent authority makes the determination regarding the unavailability of the deposits. 24 Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes, OJ L135, 31.05.1994. 25 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. 87

Triggered by the financial crisis, the decision was taken in autumn 2008 to revise the DGS Directive. After a codecision procedure the revision of the Directive was adopted in December 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 pressing issues, 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 for legislative changes by the end of 2009. The issues subject to this analysis include (among others) the question of the full harmonisation of the amount of coverage, the possible creation 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 ESBG welcomes the recent The revised DGS Directive introduces a reduction of the payout delay to 20 working days revision of the Deposit with a possible extension of 10 working days, which is ambitious but realistic. Guarantee Schemes Consumers received confirmation that they will be timely and fully reimbursed up to the Directive. coverage level. In this context ESBG in particular welcomes that the scope of the Directive remains large and has not been limited to natural persons. Looking at the issues subject to further analysis some aspects need stressing: ESBG is opposed to n Community scheme: currently the national schemes differ considerably; this, the creation of a however, does not constitute a weakness of the current state of play. What really Community-wide scheme. matters is that each scheme is strong and safe. The national schemes are close to customers, which strengthens their confidence. This approach should be maintained, as it has the important attributes of local responsibility and social control. ESBG is therefore opposed to the creation of a Community-wide scheme. The division of responsibilities and risks would be extremely dangerous. Finally, ESBG questions whether a Community scheme could be justified according to the principles of subsidiarity and proportionality. 26 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 L68, 13.03.2009 27 European Commission. 2009. Consultation Document. Review of Directive 94/19/EC on Deposit Guarantee Schemes. 88

n Payout delay: no further reduction “on top” of the recent revision would be A shortening of the payout manageable. A whole range of steps needs to be carried out before the actual process delay would be unrealistic of paying out can be tackled – in particular the closing of the bank, stopping and counterproductive to transactions and calculating interest rates, identifying the customers and their consumer confidence. deposits. For the action of paying out, a procedure needs to the defined, where the safest solution seems to be that the customer (after getting a credit/debt balance sheet) goes to another bank and asks to move some or all of his/her accounts from the administration bank to this bank. However, this solution would take some time because the new bank must ask the administration bank to move the customer’s accounts. The payout from the DGS or the administration bank would also take some time because those administering the DGS have to control the data, and the payout must 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 by borrowing money from the Central Bank or in the markets. Although it may take some time it might be done parallel to the identification procedure. Finally, it is important to note that the non-application in practice of potentially shorter payout delays would be counterproductive to consumer confidence. n Full harmonisation of the amount of coverage: The overarching view of ESBG members 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. Notwithstanding this 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 into account that the economic circumstances vary form Member State to Member State. More importantly, these members consider that the existing systems should not be weakened, as this would be counterproductive to consumer confidence and could endanger financial stability. This being said, some ESBG members express concerns regarding 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 prevent abnormal 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 higher legal coverage – in particular for foreign branches – might provoke confusion and unjustified shifts between institutions. n Risk-based contributions: Safe and sound schemes on the national level do not necessarily require the existence of risk-based contributions. Currently, risk-based contributions are applied in a number of Member States, whereas the functioning of risk-based contributions is diverging considerably between these Member States. Harmonisation seems therefore difficult and complex. It needs to be considered that in schemes which do not rely on risk-based contributions, the introduction of such systems could lead to difficulties, especially for smaller institutions, resulting in additional administrative and financial burdens. Therefore there should be no common EU approach in this area. It should be up to Member States to decide whether they want to apply risk-based contributions or not. n Funding mechanisms: More harmonization of funding mechanisms would require sufficiently long transition periods, as in the ongoing crisis situation procyclical effects have to be avoided. While the principal characteristics of funding mechanism might be harmonized at the EU level, some details of the layout should remain at the discretion of the Member States. Short-term financing or long-term borrowing in case of need may be accepted to complement the funding when a critical situation arises. 89

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2. FINANCIAL REPORTING I – FAIR VALUE ACCOUNTING Key messages n ESBG strongly supports a more flexible application of the fair value and especially concerning the measure of financial instruments in illiquid markets. n A practical approach and more analytical studies on the relationship between fair value accounting and procyclicality are needed. n ESBG advocates for coherence between disclosure requirements and a higher degree of harmonisation between 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 calculation requirements are needed. n A thorough reconsideration of the existing accounting practices is necessary in the long term. Setting the scene As noted above, in its FSAP28, the European Commission outlined a series of policy objectives to improve the Single Market for financial services. One of them was to move towards a single set of financial statements for listed companies. Given the need to overcome the differences between the accounting frameworks within Member States, the Commission considered that the International Accounting Standards (IAS), later called International Financial reporting Standards (IFRS)29, as established by the International Accounting Standard Board (IASB) were the most appropriate benchmark for framing a single set of such requirements. One of the main changes that IFRS brought to traditional accounting is the introduction of “fair value”. Fair value is defined by the IASB as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction”.30 Fair value finds its main application with financial instruments. Since the beginning of the 1980s, financial instruments underwent significant developments in the banking industry. They were increasingly used by credit institutions as a new source of business – as opposed to traditional activities – and as a consequence, needed to be reflected conveniently in bank’s balance sheets. 28 European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: Action Plan, 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 the importance 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 standards are technically known today as IAS/IFRS. 30 International Accounting Standards Board (IASB). 2008: 2634. 91

Moreover, in a time of globalisation and increased international competition, it seemed that disclosing financial information by using equity investor related methodologies would make European listed companies more transparent and more competitive. The United States was the pioneer in the application of fair value, with the appearance of the Statements of Financial Accounting Standards 107 (SFAS 07) in 1992. With this standard, the Financial Accounting Standards Board (FASB) obliged institutions to publish the fair value of all their financial instruments in notes to the financial statements. In view of this situation, the IASB proposed in 1999 to use fair value in the case of certain financial 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 IAS Regulation32, the Commission had endorsed 33 IAS standards33 and had thus already accomplished a significant unification of accounting standards within the EU. However, the standard which aimed at valuating financial instruments at their fair value, called IAS 39 “Financial Instruments: Recognition and Measurement”, has been the subject to several revisions and ongoing discussions. The Commission, taking into account various issues and opinions, endorsed about 95% of the text of IAS 39 but carved out certain provisions because – in agreement with most Member States and the European Parliament – 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 and several American institutions started to make efforts to curb the negative effects of a too strict 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 would fetch if sold now, rather than at historic cost, could cause a cycle of falling asset prices and forced sales that endangers financial stability. The first move towards a more flexible application of the fair value approach was made in 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 issued clarifications regarding the implementation of fair value accounting, allowing a more flexible application, in particular regarding illiquid markets. In the EU – notably at the occasion of the meeting of the Council of EU Finance Ministers in October 2008 – the Commission and the IASB were mandated to make proposals to guarantee a level playing field between the EU and the U.S. In mid-October, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition and Measurement”, and IFRS 7 “Financial Instruments: Disclosures” that would permit the reclassification of some financial instruments. The amendments to IAS 39 introduce the possibility of reclassifications for companies applying IFRS which were already permitted under U.S. Generally Accepted Accounting Principles (GAAP) in rare circumstances. 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 international accounting standards, OJ L 243, 11.9.2002. 33 For further information Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament 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 international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, OJ L 111, 17/04/2004 adopted IFRS 1. 92

Responding to the urgency of the situation and without due process, the Commission adopted these amendments in its Regulation 1004/2008/EC34 and expressed at the same time the need to continue monitoring all accounting issues that could impact the stability of financial institutions and financial markets, with a view to identifying further changes where appropriate. 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 Commission stated that global solutions are preferable and that further actions should be subject to appropriate due process strictly tailored to reflect the urgency of the situation. In April 2009, the FASB unilaterally decided to implement significant revisions especially regarding when to decide whether a market is not active and a transaction is not distressed.35 In response to this development, in May 2009, the IASB issued proposals that would replace fair value guidance contained in individual IFRS with a single, unified definition of fair value.36 The proposals also provide guidance on using fair value approaches in inactive markets such as those for complex financial products that can hardly be given a value as a result of frozen financial markets. This initiative forms part of the long-term aim to achieve convergence of IFRS with U.S. GAAP as it incorporates the FASB’s recent guidance on fair value measurement.37 Regarding the classification of financial instruments, the IASB launched its proposal on the revision of IAS 39 in July 2009. In addition, the IASB decided to assess users’ and preparers’ opinions concerning the inclusion of the price of the credit risk when measuring liabilities and it challenged the different methods to report impairment in the value of financial assets. A separate IASB Exposure Draft on hedge accounting is expected in late 2009. The IASB aim is to replace IAS 39 completely in 2010 by issuing final guidances on impairment, derecognition and hedge accounting. The IASB declared that it did not expect 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 supports A more flexible application the initiatives taken by all parties concerned in order to achieve a more flexible application of fair value is needed. of the fair value approach. It is of high importance for the EU to adopt measures on fair value that take into account Exceptional importances the exceptional circumstances in the markets and are in line with the measures taken in in EU and US markets have the U.S. to be taken into account. 34 Commission Regulation (EC) No 1004/2008 of 15 October 2008 amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 39 and International 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 Market Is 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 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. For specific information, see BC7 BC99 and BC 110. 38 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/EDFinancialInstrumentsClassification andMeasurement.pdf]. Accessed July 2009. For specific information, see pages 7 and 14. 93

Fair value must improve Nevertheless, ESBG sees the need to also take into consideration other accounting topics and regarding financial to address challenges posed by the financial turmoil on an ongoing basis. An improvement instruments in of IFRS rules regarding how to measure financial instruments when markets are no longer illiquid markets. active is necessary. This is especially true as IAS 39, which concerns the valuation of financial instruments, had only been intended as a short term carve-out standards39 when introduced, and its revision should produce a lasting solution for financial instruments’ accounting. ESBG therefore welcomes the IASB initiatives of May 200940 on fair value guidance as well as the initiatives on classification and measurement of financial instruments of July 2009. Reclassification should include In this respect, the issue of reclassification should not only refer to “held for trading” all financial instruments instruments, but should include all financial instruments recorded “at fair value through recorded “at fair value profit or loss”. Like financial assets held for trading, the current increase of credit spread through profit or loss”. leads to inappropriate effects on profit and loss which does not contribute to the intended strengthening of confidence in the capital markets. Limiting transfers to financial assets “held for trading” would create undue competitive distortions between investments banks (to which the current measure can apply) and retail banks (mostly excluded from this 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 initial recognition) leads to the fact that new possibilities of reclassification cannot be applied to certain financial instruments (for example debenture bonds and mortgage bonds). A higher degree In addition, ESBG welcomes the Commission’s approach aimed at finding global solutions of harmonisation between whenever possible. A higher degree of harmonisation between European and American European and American fair fair value requirements is certainly needed for an easier comparison and to prevent value is necessary. competition distortion. In order to achieve a level playing field, it is vital for securitized financial 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 data throughout 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 integration of the different capital markets in mind, the convergence efforts made by the IASB and the FASB are highly important. EU-US convergence should However, this convergence should not be done at the expense of quality and transparency. not be done at the expense More important than short-term actions which aim at mitigating the effects of the financial of quality and transparency. crisis, a thorough reconsideration of the existing accounting practices and accounting rules is necessary. This reconsideration must also be linked with proper audit systems. 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. 94

Recent events have confirmed that over-reliance on market value not only significantly Over-reliance on market increases pro-cyclicality, but in fact also results in providing an inaccurate image of a value significantly increases company’s situation. In times of stress, the volatility in financial statements can increase pro-cyclicality. dramatically, as shown by the current crisis. This also reflects possible “market overreactions” notwithstanding the potential procyclical effects of capital requirements under Basel II and/or risk management policies such as sale triggers and margining. Possible remedies to these pro-cyclical effects of fair value measurement include reclassifications, buffers or dynamic provisioning. All these solutions entail costs in terms of transparency of information. In any case the quality of information needs to be preserved. Overall, there is a need for more analytical studies on the relationship between accounting and procyclicality. It is important to note that these analytical studies are especially needed if financial markets happen to have imperfections. Indeed, in such a case 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 be Accounting standards should strictly tailored to each specific situation. Accounting standards should not be designed follow a practical approach. in 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 value There is a need for simplicity disclosure and calculation requirements. In this respect, technical weaknesses regarding and standardisation. IAS 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 banking Disclosures need sector into account, as, for instance, sometimes information asked for is unavailable. to be simplified and take Moreover, the focus should be on the balance between the important workload that the specificities of the financial reports constitute for banks and the necessity to disclose the best information in banking sector. terms of quality rather than in terms of quantity. It is important to avoid information overload of account users and to assure that the information provided fully reflects the economic reality. ESBG advocates for more coherence in the proposed IFRS defining fair value. It expects Harmonisation between a higher degree of harmonisation between fair value requirements and supervisory fair value requirements and requirements in order to diminish the reporting burden for banks. IFRS requirements for supervisory requirements fair value can still appear too complex for preparers of financial reports as well as for is expected. users. Users might have difficulty choosing between the IFRS figures from financial reports and those disclosed for national supervisory guidances. However, despite the strong signals from politicians and policy-makers on the pressing An in-depth reflection on need for changes since the start of the turbulence in the financial markets, the necessary the application of fair value reforms in this field will be difficult to carry out. Looking ahead, an in-depth and accounting is necessary. unprejudiced reflection on the application of fair value accounting is necessary which pays particular attention to the pro-cyclical effects of excessive reliance on market prices. 95

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3. FINANCIAL REPORTING II – IFRS AND SMES Key messages n ESBG supports a practical, cash-flow and solvency oriented approach regarding International Financial Reporting Standards and SMEs. n Banks which are not capital-market oriented should be allowed to use IFRS for SMEs. 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 of the FSAP was the urgent need to move towards a single set of financial statements for publicly traded companies. The Commission considered that the International Financial Reporting Standards (IFRS) – at the time called international accounting standards (IAS) as established by the International Accounting Standard Board (IASB) – were the most appropriate benchmark for framing a single set of accounting standards. Although the IFRS were initially developed for publicly traded companies, the IASB started a 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 expressed the need to achieve the same transparency for SMEs as for public entities – namely to enhance the comparability between European SMEs and SMEs in other countries as well as 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 comparable information and limiting administrative burden for the preparers. The IASB’s proposal was, 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 do not have public accountability and do not publish financial statements for external users. From 2004 to 2007, various discussion papers and questionnaires were issued and roundtables organised. In February 2007, the Exposure Draft (ED) “IFRS for SMEs” with a synthesis of the findings was published.44 41 European Commission. 1999. Financial Services: Implementing the Framework for Financial Markets: Action Plan, 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 Reporting Standard 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/SMEProposed 26095.pdf]. Accessed July 2009. 97

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 to report any problems encountered. In February 2008, the European Financial Reporting Advisory Group (EFRAG) issued a Final Comment letter on the IASB ED.46 EFRAG appeared in general supportive of the development of a simplified set of standards. However, EFRAG stated that the proposed standards could have been further improved and a number of critical remarks were made, especially concerning administrative burden and cost of implementing some proposed IFRS accounting disclosures. On 9 July 2009, the IASB issued its Final Standard on IFRS for SMEs47 taking into account some of the criticism concerning its project. The new standard is a complete stand-alone document and contains five types of simplification from full IFRS48 especially concerning recognition and measurement principles, such as a reduction of the number of required disclosures. The necessary revisions are proposed to be limited to once every three years and not once a year as for listed companies. As opposed to accounting for listed companies, IFRS for SMEs are not compulsory for SMEs. 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 7th Company Law Directives49 since 2002 when the Regulation 1606/2002/EC on the application of international accounting standards (IAS Regulation)50 was adopted and obliged 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, the legal basis for SME accounting is still the 4th and 7th Directives and as a consequence IFRS for SMEs have to comply with the Directives to be enforceable. In parallel to the IASB initiative, the European Commission started to amend the Directives and focused on diminishing the administrative burden for SMEs. Therefore, the Commission started a review process with the aim to simplify the accounting directives for SMEs. In 2003, the Commission reiterated in its Recommendation “Concerning the definition of micro, small and medium-sized enterprises”51, that easing the administrative burden for SMEs was an important objective. Four years later, the Commission launched an “Action programme on reducing administrative burden in the European Union”52 – again stressing the need to diminish accounting reporting requirements for SMEs. 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]. Accessed July 2009. 48 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. 49 Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on annual accounts of certain types of companies, OJ L222, 14.8.1978; and Seventh Council Directive 83/349/EEC of 13 June 1983 based 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 the application 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 and medium 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 Reducing Administrative Burdens in the EU[COM(2007) 23 final], January 24. 98

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 strong statement regarding the IASB’s Exposure Draft proposals and indicated that they were not convinced that the current IASB work on SME accounting would provide sufficient elements to simplify the day-to-day work of European SMEs. Instead, the Commission identified a number of other measures that could lead to tangible simplification for SMEs which all aimed at diminishing the administrative and accounting burden for SMEs. These proposals covered various subjects, such as to exempt “micro entities” from the application of the accounting directives which are typically mandatory for SMEs and to include exemptions for SMEs from the requirement to publish their accounts. In 2008, the Commission announced major initiatives on the same policy for small businesses, based on its 2006 ambitious strategy for reducing administrative burdens for SME’s by 25% by 2012.54 In April 2008, the Commission issued a proposal amending the 4th 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 the Fourth and Seventh Company Law Directives”56 which again aimed to raise issues relating to the modernisation and simplification of the Accounting Directives. The results of the Commission Consultation were published in April 200957 and concluded that there is a need to reduce the number of categories, to standardize key indicators and to abolish additional requirements which mainly consist of quantitative information. In parallel, the Commission published a Proposal to amend the 4th Company Law Directive regarding micro-entities.58 Taking note of the evolution of the IASB’s work, the Commission’s initiatives and a decision of the EU Finance Ministers Council meeting of July 200759, the European Parliament drafted an own-initiative Report on “International Financial Reporting Standards and Governance of the International Accounting Standards Board” in September 2007.60 The draft report, prepared by MEP Radwan of the Economic and Monetary Affairs Committee (ECON), analysed among other subjects IFRS for SMEs. 53 European Commission. 2007. Communication from the Commission on a simplified business environment for the 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 in the European Union [COM (2006) 689 final], 14 November. 55 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 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 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. 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 the Governance of the IASB (2006/2248(INI)). Committee on Economic and Monetary Affairs of 24 September 2007. Rapporteur: Alexander Radwan. 99

During the discussions in the ECON Committee it was stated that the standards proposed by the IASB Exposure Draft are far too complicated for SMEs and refer in many places to the 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 of committing to an IFRS standard for SMEs or developing its own independent and comprehensive solution for SMEs. In addition, the MEPs took the view that any such EU solution should fit into the IFRS conceptual framework without obliging SMEs to use the full IFRS. A final remark was that no political mandate has been conferred on the IASB to draft IFRS for SMEs. The Plenary adopted the report of the ECON Committee on 5 February 200861. In its Resolution of 24 April 200862 the Plenary added and emphasized that the Community endorsement procedure may not be used for the recognition 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 previous remarks. The Commission is currently assessing the implications of the IASB’s final position paper and the potential use of IFRS for SMEs. While the Commission had shown scepticism concerning the compatibility between the ED and SMEs’ needs, its view currently appears less negative as the complexity of the final standard has been reduced. Interviews with stakeholders, mainly SMEs from various Member States, made it clear that 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 legal analysis, especially regarding potential conflicts with the 4th and 7th Directives. ESBG views IFRS for SMEs should not Being actively involved in the ongoing discussions, ESBG in general supports the IASB’s result in the creation of and European Commission’s initiative to promote intelligibility in SMEs accounting additional administrative standards. Savings banks are by tradition the natural business partners of SMEs, and thus burden. ESBG’s major interest is to ensure that SMEs benefit from the best possible accounting standards both in terms of simplicity and comprehensibility. However, Europe’s retail and savings banks do not have any strong preference regarding the accounting standards that their SME clients apply. More specifically, the members of ESBG can adapt to the accounting standard used by SMEs for the purpose of conducting a credit assessment – be it on a national General Accepted Accounting Principle or on an international accounting standard specifically designed for SMEs. Thus, ESBG’s main concern is that any new standards should benefit SMEs and not result in the creation of additional administrative burden. Against this background, the following points are important: IFRS for SMEs should be IFRS for SMEs should be an option. It would not be appropriate to make it mandatory for an option. all the SMEs active in the EU. If some might benefit from such a standard – especially those active in several countries – others might find it excessively burdensome and might prefer to continue applying their national standard. Therefore, for the moment, each SME should be given the option whether to use any forthcoming IFRS for SMEs standard or not. 61 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. 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)). 100

Tax reporting has to be an alternative to IFRS reporting. The effects of having different Tax reporting has to be an sets of standards must be assessed before any measures are taken towards imposing the alternative to IFRS reporting. new standards on SMEs. SMEs are generally under a legal obligation to report to their national tax authorities according to national accounting standards. Thus, most small companies already have in place information tools that would allow them to comply with publication requirements without many additional cost efforts. Unless national tax authorities accept reporting according to IFRS for SMEs, an obligation to use tax reporting would lead to double reporting. ESBG welcomes the improvement found in the IASB Final Standard. It agrees with the IFRS for SMES should be IASB’s decision to simplify IFRS for SMEs and to contain them in a stand-alone document. user-friendly and However, it is very important to make these standards even more user-friendly and standardised. standardised. Users of SME financial statements usually have limited resources to devote to an in-depth analysis of financial statements, and often value standardisation in the preparation and presentation of financial statements more. More reduction of disclosure requirements would be welcomed. In line with EFRAG’s More reduction of view, ESBG appreciates that in the IASB’s Final proposal the disclosure requirements have disclosure requirements been reduced compared to the full IFRS. However, further reductions in disclosures would be welcomed. requirements could be achieved but should not go beyond the requirements set by national accounting regulations. With regard to the IASB proposal to revise the standards every three years, the time frame The time frame for for modifications and further developments of the standards should be extended as modifications of the timeframes which are too short may create unnecessary instability and additional standards should be administrative burden for SMEs. extended. IFRS for SMEs should focus more on short term and treasury issues rather than on IFRS for SMEs should focus investment value. Users’ needs differ widely when comparing SMEs’ economic issues to more on treasury issues rather those of larger corporations. Users of SMEs’ financial statements tend to be less interested than on investment value. in value and, especially when speaking of banks, appear to be more interested in how the entity will be able to meet its obligations towards its creditor on time. This is generally a question of long-term versus short-term investment, where shareholders of large corporations look for the fair value of their investment at any given moment while the stakeholders of SMEs are typically interested in another kind of information. The focus amongst users of SMEs’ financial statements is on the entity’s ability to generate positive cash-flows in the normal course of business. In order to assess the risk of their credit portfolio, banks feed their risk calculation models with information provided by the financial statements of their clients. The publication of financial statements contributes to a positive discrimination of small companies that have good economic results, allowing them 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 not been sufficiently taken into account when creating the standards. Finally, the scope of entities obliged to report in accordance with full IFRS should not be Full IFRS should be applied expanded to include banks and insurance companies as being publicly accountable by banks only if they are entities unless they are capital-market oriented. capital-market oriented. 101

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4. WHOLESALE PAYMENTS AND SETTLEMENTS INFRASTRUCTURE Key messages n Savings banks certainly support the continued development of central bank infrastructure that effectively enables finality and certainty. n However, it must be stressed that sight cannot be lost of the public-good dimension of these initiatives – in stark contrast to commercial settlement platform initiatives. n Particular care should be paid to ensuring that the level playing field is not inadvertently jeopardized – for example by constraints that make direct access to payment and settlement systems unattractive, and/or pricing schemes that unduly – in a public-good context – reward larger transaction volumes. Background Wholesale payments are payments instructed and received by credit institutions, financial institutions (and, in the future, payment institutions), National Central Banks (NCBs), and/or other authorized institutions or entities. Such payments are either payments made between institutions for their own account, represent the bilateral settlement of retail and commercial payments, are payments made by ancillary systems such as payment and securities clearing systems, or are transactions made by NCBs in relation to monetary policy. With the introduction of the euro, integration has progressed as regards wholesale payments. On one side this is due to the fact that the infrastructure for clearing and settling wholesale payments (also often referred to as “high value payments” or “urgent payments”) has changed. The introduction of the euro saw the activation of the TARGET63 system – first as a bridge A fully integrated Real Time between national Real Time Gross Settlement (RTGS) systems, and now as an integrated Gross Settlement system will system – although the national dimension has not completely disappeared (notably with be complemented by central the capability for NCBs to manage bank accounts locally, and a certain number of other management of collateral functions of the system). and a real time delivery versus payment structure In addition, the advent of the TARGET system has meant that traditional correspondent for securities. banking has been redefined in a number of instances – although it has far from disappeared altogether from the eurozone, as some pundits were only too keen to expect and promote. 63 Trans-European Automated Real-time Gross settlement Express Transfer, introduced in 1999. 103

Certainly the TARGET (and related systems) infrastructure has successfully passed the test of the recent financial crisis. Indeed, in the face of the level of shocks experienced by high value payments and securities systems in the last months of 2008, and the dramatically increased volume of activity, one may only draw the conclusion that the infrastructure functioned as it was built and expected to (i.e. well). Indeed, no significant increase in average settlement time has been noted throughout the financial shock period (even at the time of the default of Lehmann Brothers). At the same time, experience in the midst of the financial shock has served to highlight the critical role played by central counterparties. This is an area where certainly integration is all but complete. This would tend to prove that deeper integration continues to be a valid objective for wholesale payments, yet alone it is not the response to 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 the rulemaking and scheme management functions. n A demand for the participation of other stakeholders in society to the definition and management of payment services. n A growing place for international standards (mostly ISO) as opposed to national standards. These developments meet the requirements of policy makers and regulators for continuously increasing confidence in payment systems and removing barriers to competition in order to decrease costs. But the direct consequences of these developments are also that: n Regulatory demands need to be met by continued investment in technology and seeking economies of scale. This prompts many banks to become indirect rather than direct participants in payment infrastructures. n Detaching scheme management and payment processing activities on one side requires establishing new governance structures (in which a place may be reserved for other stakeholders). On the other side this separation drives the emergence of potent payment processors who will weight on standards and product evolution. n The influence of individual players on the definition and decision making in standards is waning. 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 of the use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005. 104

These developments provide some market participants with the opportunity to leverage their market positions further and create new barriers to entry and/or to a level playing field. Barriers to competition could be raised in the following situations: n For indirect participants in payment systems, the cost of executing payments increases compared 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 execution time mandated by the Payment Services Directive (PSD) comes into force. n In addition, larger participants in payment systems tend to request steeply decreasing pricing 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-utilised have been noted. n With most standards now being developed within ISO, the influence on decision making rests 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 retail banks in particular. Coming developments In 2007 the Eurosystem launched the study of the TARGET2 Securities (T2S) project. Central Securities The concept is to create a real time settlement system in central bank money for securities Depositories to outsource transactions throughout the eurozone – and possibly open the platform to non-euro settlement services to currencies as well. In effect, this would lead Central Securities Depositories (CSDs) to the Eurosystem in outsource to the Eurosystem the settlement service they have provided up to now. the T2S project. Following a feasibility study, the Governing Council decided in July 2008 to go ahead with the project. A 2013 launch date has been set. T2S will be operated by the Eurosystem on a cost recovery, not-for profit basis. This Eurosystem initiative is viewed as the opportunity to foster harmonisation for securities T2S is pro-competition. processing and provide in the near future a settlement system for all euro-denominated securities (equities, fixed income, funds and Eurobonds). T2S is pro-competition and will allow full transparency on prices and cost recovery. It will increase competition between custodians 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 to compete on a fair basis. The T2S initiative should also generate savings both at the back offices level and in terms of collateral requirements. T2S will further enable CSDs to comply with the Clearing & Settlement Code of Conduct66 for infrastructures: transparency and fair access requirements should be met. 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 Securities Depositories Association, 7 November 2006. 105

This project is supported by the savings banks community who throughout the consultation highlighted several principles with which the initiative should comply: n In line with ECB standards, full transparency on tariffs related to T2S services (the CSDs being 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 to generate efficiencies and foster innovation in the Clearing and Settlement industry on a pan-European scale. Savings banks welcome The savings banks community also welcomes the “Collateral Central Bank Management” “Collateral Central Bank (CCBM2) project, a further initiative of the Eurosystem to facilitate the mobilisation and Management”. transfer of collateral throughout the EU. CCBM2 will be foremost a Eurosystem internal system, yet it can provide significant opportunities for users in Europe, provided several pre-conditions are met: n Participation of Eurosystem NCBs would be on a “voluntary basis”. It has been suggested that on the contrary the development of CCBM2 would be the signal of a clear 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 end users will support its cost. It is therefore important to aim at the widest possible acceptance and usage basis. n Whilst the benefits expected from the CCBM2 project will be greatly enhanced by TARGET2 Securities, the timeline of the two projects should not be tied. On the contrary, CCBM2 should be deployed in the market as soon as possible provided there is no regression in terms of service or in terms of costs. n CCBM2 should be able to accept collateral denominated in currencies other than the euro. In particular government bonds in non-euro currencies should be eligible and supported. n Users will be able to perform in genuine real time – also with intraday effect – all actions which allow them to amend their collateral position. Of course, consultation of positions must be accessible in real time as well. n External collateral management systems (such as tri-party collateral management services) as well as 2-tier collateral management organisations (e.g. correspondent bank arrangements put in place by decentralised banks) should be easily integrated into and make use of the CCBM2 architecture and service. n CCBM2 (as well as TARGET2 Securities) will deliver their desired benefits not only through the deployment of well designed technical capabilities. Further harmonisation in legal aspects as well as market, Central Bank and CSD practices are required for these projects to bring effective advances. 67 Next generation of the TARGET system, introduced in 2007. 106

The savings banks also follow and support work leading to the development of a (or Savings banks support the more) European central counterparty (CCP) for credit default swaps (CDS). Both the ECB development of a European and the European Commission share the view that there should be at least one CCP in central counterparty for the euro area. Savings banks support the principle that the location of a core market credit default swaps. infrastructure should correspond to the location of the market, which brings benefits to all stakeholders. Whilst the supervisors’ and regulators’ objective of a safe CCP is certainly shared, 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 and indirect membership to guarantee the safety of the CCP. Both the buy side and the sell side of CDS markets must be taken into consideration. CCP membership should be mostly the banking community; with buy-side access through an intermediary unless a strong capital base can be evidenced. A framework to protect and safeguard the collateral of the buy side (with segregation of collateral) should be developed. 107

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5. CAPITAL MARKETS I – SECURITIES Setting the scene The Financial Services Action Plan68, a set of measures adopted in the EU during 1999-2004, put a strong focus on wholesale financial services with the aim to create a real internal market in this area by 2004. This has led to a highly regulated environment for securities and investment funds, while a few players (such as Credit Rating Agencies and hedge funds) stayed outside the scope of direct regulation. This wave of regulation also had a huge impact on retail and savings banks which serve as intermediaries for investment services for their retail clients, and which (to a smaller or larger extent) also issue financial instruments themselves. Simultaneously capital markets have become more and more accessible to retail clients, and retail labelled/ oriented products 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 of measures aimed at removing the remaining economically significant barriers. Finally, the financial crisis has led to action in areas, which formerly had not been subject to direct regulation (e.g. hedge funds) and to an acceleration of the Commission’s work in other areas (e.g. retail investment products). This section will provide a tentative assessment of the legislative instruments of main relevance to ESBG members in the area of capital markets and will outline possible ways forward. 5.1. Markets in Financial Instruments Directive (MiFID) 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 rules established. A period of continuity is of utmost importance to enable all players to exploit the possible business opportunities offered by MiFID. n It is still early to make a final judgement on whether MiFID was successful in achieving its stated objectives or not. 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 should also be taken as an opportunity to assess whether introducing such radical changes benefits equally and adequately all market participants and fully respects the principles of subsidiarity and proportionality. 68 European Commission. 1999. Commission Communication on Implementing the Framework for Financial Markets: 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. 109

Background The 1993 Investment Services Directive (ISD)70 constituted the first attempt to create an EU framework for the provision of investment services. While recognizing that the introduction of the ISD had had a number of positive consequences for Europe’s markets in financial services, the Commission referred in its analysis of the ISD to a number of important 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 lines due to the option of imposing a concentration rule.72 n In addition, the Commission determined weaknesses in the mutual recognition concept for investment firm licences due to insufficient harmonisation. n Furthermore the Commission criticised that the ISD failed to cover the full range of investor-oriented services as well as the full range of financial dealing. n Finally the Commission stressed that cooperation between supervisors was underdeveloped 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 described above. MiFID introduced stricter and more equal rules for all financial instruments and all trading venues with the aim to create a true single market, increase competition in the provision of services and marketplace functions, and to promote an integrated financial trading infrastructure. Furthermore the MiFID influences the conduct of business for investment service providers and aims to strengthen investor protection. ESBG preliminary assessment and outlook MiFID has had a significant MiFID has been in effect since November 2007. It constitutes the continuation of the ISD, impact; a period of continuity but to some extent can be described as a ‘revolution’ due to the significant impact it has is now needed. had on the organisation of the financial markets and its players. ESBG members had to undertake huge efforts to be MiFID-compliant from November 2007 onwards, not least because the transposition was delayed in a number of EU Member States, which shortened the preparatory phase for industry. For these reasons, ESBG members have not yet been able to make the best of all possible potential business opportunities offered by MiFID to date. In this context, it is important to ensure that a period of continuity be respected, enabling all players to fully adapt to this new environment and exploit new business opportunities. 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 European Parliament 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 European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms 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 of the Council as regards recordkeeping 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. 110

After a year and a half year of experience with MiFID it is still too early to make a final judgement on whether it was successful in achieving its stated objectives or not. For the time being, only preliminary responses can be given as to whether MiFID has been beneficial for investors in financial services, investment firms and generally the EU single market in financial services. Similarly, only tentative conclusions can be drawn regarding the 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 with MiFID, it is worth highlighting two areas of vital importance, in which ESBG members have experienced the most important changes (in their daily business practice): the conduct of 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 still have a strong impact on the way Europe’s investment firms have to conduct their business. This concerns in particular the information and the advice to be given to clients.75 In this context, it can be said that the impact of MiFID on the relationship to clients has generally been strong. It should be highlighted here that ESBG members have traditionally put particular focus on the relationship with their clients (“relationship banking”). Thus, it is not the level of priority of the issue that has changed with the introduction of MiFID, but rather the practical arrangements in place. In particular, MiFID has led to important changes especially in the following areas: n MiFID has changed firms’ internal organisation. From a very practical and MiFID has changed firms’ organizational point of view, MiFID has had a considerable influence on several internal organisation. departments 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 all these departments banks have had to carry out important investments as a result of the introduction of MiFID. n Information to customers: with MiFID, banks’ clients, as potential investors, receive more written information about the financial products.76 ESBG considers that MiFID has generally led to an overload of written information. This concern is confirmed by feedback ESBG member banks receive from their clients, who feel overwhelmed by the information they now receive from their provider of financial services. n MiFID affects firms’ relationships with clients. The relationship between banks and MiFID affects firms’ their customers: MiFID has also influenced the direct relationship between the bank relationships with clients. advisor 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 “eligible counterparty”.77 - MiFID has led to considerable changes in the area of advice. MiFID has also led to MiFID has led to considerable considerable changes in the area of advice. It formalises78 the concept that the bank changes in the area of advice. needs to obtain the necessary information regarding the (potential) client's knowledge and experience in the investment field relevant to the specific type of product or service, his financial situation and his investment objectives. Against this background a piece of advice which is suitable and appropriate for the (potential) client should be given. 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. 111

ESBG would like to highlight that ESBG member banks have always put a strong focus on this aspect. Regrettably, they are now confronted with the dissatisfaction of some of their clients who judge as a useless burden/ paternalism the numerous questions asked by their banking advisor in order to be in a position to classify the client and to give him/her appropriate advice. This concern in particular applies to clients, who have already been active in the financial markets in the past. It is therefore true that the relation to their clients has become generally more formal and bureaucratic. Simultaneously ESBG considers that the formal focus on customer protection has been strengthened. In this context several ESBG members regard the success 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 rather immediate, the assessment of MiFID’s impact on market structures and market access opportunities 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 EU market for the trading of financial instruments, which would result in good prices for all market participants based on a high degree of competition between the different execution venues. With the elimination of the concentration rule, widely regarded as incompatible with the EU single market and by some as old-fashioned, a series of provisions have been introduced in MiFID to guarantee market integrity and a good degree 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 participants can execute orders: regulated markets, Multilateral Trading Facilities (MTFs) and firms (especially when they act as systematic internalisers, i.e. when systematically dealing on own account by executing clients’ orders outside regulated markets and MTFs).82 The idea is therefore to organize competition and level the playing field between different categories of venues. MiFID, has changed the Whether the provisions contained in MiFID fully achieved their aim of more competitive, EU financial markets, liquid, integrated and efficient financial markets cannot be conclusively answered at this notably through the point in time, as experience with MiFID is still limited. Undoubtedly, important changes appearance of MTFs. have already been observed in a number of Member States, which are a direct consequence of MiFID. They mainly relate to the appearance of number of MTFs, such as Chi-X and Turquoise. As a reaction, in some Member States the more traditional players (regulated markets) decreased their prices or diversified their offer in terms of services. As a consequence, some ESBG members can now operate with decreased trading costs for the benefit of their customers, which was one of the main priorities of MiFID. 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. 112

However, considerable differences between the different Member States exist. Differences between The comparison of two former markets applying the concentration rule, notably France Member States exist. and Spain, confirms these divergences; in France about 65% of the CAC trades are handled on the traditional markets, whereas in Spain still 99,8% of the IBEX 35 are handled on the Madrid stock exchange, which is due to the late entry of MTFs in this market.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 certain Rules regarding Systematic markets, since it resulted in enhanced competition, which can be beneficial for the Internalisers are too investor. On the other hand, the provisions regarding Systematic Internalisers (SIs) seem bureaucratic. less successful, as these rules are too bureaucratic. An assessment about the implications of MiFID on the functioning of the market can only be 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 the 2008 results of the transposition check conducted by the Commission84, such a review could focus on the following issues: transaction reporting, access to central counterparty and clearing and settlement facilities. In addition, the Commission concludes that (further) Level 3 guidance could be useful, in particular regarding the definition of investment advice and the cooperation between home and host competent authorities. ESBG fully supports the Commission’s conclusions regarding Level 3 guidance, suggesting that additional Level 3 guidance could be given regarding the “suitability test”, “execution only” services and “best execution”; in this context ESBG welcomes the fact that the Committee of European Securities Regulators (CESR) is currently consulting on a related issue: the treatment of complex and non-complex products for the purposes of the appropriateness requirements.85 ESBG would also welcome future work on the issue of access to central counterparty, clearing and settlement facilities and transaction reporting. Regarding this last issue, CESR could establish a list of all EU investment firms subject to transaction reporting. The revision of MiFID should also be taken as an opportunity to assess whether MiFID’s revision needs to be introducing such radical changes benefit all market participants in the same manner, in prepared carefully. full respect of the principles of subsidiarity and proportionality. Finally, all possible measures should be evaluated against the background of avoiding new administrative burdens. 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. 113

5.2. Prospectus Directive 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 million euro, should be extended. Background Measures concerning the conditions for admission of securities to official stock-exchange listing and the financial information that listed companies must make available to investors 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 consolidation process of these diverse measures was initiated: Directive 2001/34/EC89 consolidates the above mentioned Directives into a single Directive without adding substantive changes. Subsequently the rules were updated, notably by the Prospectus Directive and the Transparency 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 to the public or admitted to trading on a regulated market situated or operating within a Member State and thus creates a single passport for issuers. The Directive also reinforces investor protection as all prospectuses issued in the EU must provide clear and comprehensible key financial and non-financial information that enables the investor to make informed investment decisions. ESBG views General assessment Overall, ESBG members consider the practical application of the Prospectus Directive functional, although it involved a high administrative and financial burden. Investors now receive more complete and clear information. However, positive feedback from 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 to official 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 by companies 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 holding in 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 of securities to official stock exchange listing and on information to be published on those securities, OJ L 184, 06.07.2001. 114

From an issuer’s point of view, ESBG members have not encountered significant problems related 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 of the 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 this The focus on reducing exercise in the context of a broader exercise regarding the reduction of administrative the administrative burden burden. ESBG welcomes the approach chosen. is welcome. ESBG also supports many of the concrete proposals for changes included in the January 2009 consultation paper. In particular, it would be useful to adapt the definition of qualified investors to the provisions included in the MiFID Directive92 and to delete information requirements which duplicate those contained in the Transparency Directive.93 ESBG welcomes the Commission’s intention to harmonise the timeframe for the withdrawal of an order.94 More reflection is necessary regarding related technical issues, such as the impossibility of handling the withdrawal if the settlement has already taken place. The Commission also tackles the issue of certain thresholds of the Directive. The limitation Additional issues should be on the free determination of the home Member State for issues of non-equity securities tackled as part of the review with a denomination below EUR 1,000 is rightly seen as a burdensome restriction, process. 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 another threshold included in the Directive – the exemption from the obligation to issue a prospectus for 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 on the market. ESBG therefore proposes to raise the threshold of the total consideration of the 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 deliberations pertain 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 threshold should be increased. Furthermore it should be possible to update the registration document which forms a part of a prospectus consisting of separate documents.98 This would enable the issuer to provide all investors with a uniform, updated registration document. 90 Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, OJ L 345, 31.12.2003. 91 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 to trading and 2004/109/EC on the harmonisation of transparency requirements in relation 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). 115

In addition it is necessary to make some clarifications in the Directive, for instance regarding (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 host Member State.101 Finally, ESBG would welcome guidance by CESR in several areas, for instance regarding which information may form part of the final terms and which information must be made in the prospectus itself.102 5.3. Market Abuse Directive 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 and regarding the reassessment of the rules on insider lists. Furthermore ESBG believes that the issue of reporting of suspicious transactions needs to be analysed closely and might require revision. Background The Market Abuse Directive (2003/6/EC103) covers both insider dealing and market manipulation. It reinforces market integrity in the securities field and establishes a strong commitment to proper market transparency and equal treatment of market participants. Transparency is seen as a prerequisite for trading for all economic actors in integrated financial markets. The Market Abuse Directive applies to any financial instrument admitted 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 functioning well. In addition, they appreciate the valuable work by CESR, giving guidance on practical details 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 and inside information. 99 Art. 16 (1) 100 Art. 3 (2) 101 Art. 18 102 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. 116

With a view towards the upcoming review of the Market Abuse Directive, ESBG welcomes ESBG would welcome the general orientation of the Commission’s call for evidence105, focusing on a simplification less administrative burden, of the Directive and on reducing its administrative burden. ESBG in particular agrees that stronger alignment of the issuer may be exempted from disclosing inside information in the context of national implementations emergency measures, while stressing that the situations in which the issuer’s financial and enhanced legal clarity. stability is endangered need to be clarified. On another note ESBG highlights that it supports a reassessment of the rules on insider lists with a view towards introducing modifications to the duty to draw up and maintain insider lists; in this context, any change which would lead to less administrative burden for the issuer, a stronger alignment 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 our calculations in 2007 less than 0.13 reports have been delivered per entity), while the costs assumed by the entities are very high. Another argument for the revision of the provisions on suspicious transaction is that there are significant interpretation problems with the obligation. This is the case regarding both the meaning of “transaction” and “reasonable suspects”. Uncertainties in these respects may easily entail that the obliged firms may report more transactions than intended, thus creating excessive administrative burden. 5.4. Transparency Directive 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. Background The Transparency Directive (2004/109/EC106) amends the Directive 2001/34/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market. It upgrades the transparency requirements in relation to the content and dissemination of periodic and ongoing information for securities issuers and investors acquiring or disposing of major holdings 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 position as well as changes in major shareholdings. 105 European Commission. 2009. Call for evidence. Review of Directive 2003/6/EC on insider dealing and market manipulation. 106 Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004. 117

ESBG views Based on the experience gained by ESBG members concerning the practical application of 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 especially the following issues: ESBG recommends n The rules on publication of major holdings are too formal. a revision of the provisions n The aggregation rule in Article 10 causes a high administrative and financial burden, on publication of major in particular for small banks. In many cases a subsidiary’s holdings and holding strategy holdings and the are wholly independent from the parent company’s holding; against this background aggregation rule. the aggregation rule should be more clearly specified so that aggregation is only obligatory when it is relevant in practise. More generally, ESBG members would welcome a similar approach to the one chosen for the revision of the Prospectus Directive, thus also putting the revision of the Transparency Directive in the context of the exercise of reduction of administrative burden. 118

6. CAPITAL MARKETS II – ASSET MANAGEMENT AND INVESTMENT FUNDS 6.1. UCITS Key messages n ESBG welcomes the changes introduced by UCITS IV, in particular the introduction of the management company passport. n With view to future modifications regarding the definition of eligible assets, ESBG stresses the need to preserve the spirit of UCITS as safe products for retail investors. n The responsibilities of the depositaries are an issue which requires further attention. Background UCITS (Undertakings for Collective Investment in Transferable Securities) are specially constituted collective investment portfolios exclusively dedicated to investing funds brought by investors. The importance of UCITS is demonstrated by the volume of the sales; in 2007 the value of all UCITS was EUR 6,160 billion in total net assets – a growth by 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 first European retail financial product. UCITS I sets common rules for the authorization, supervision, structure and activities of collective investment undertakings situated in the Member States and the information they must publish. UCITS I was limited to open- ended funds investing in transferable securities, complying with the principle of risk spreading. 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 concerning the areas of eligible assets, management companies and simplified prospectuses. However, the Commission stated in its 2005 Green Paper that the initial aim of an internal market had not yet been fully reached, with a relative low number of cross-border UCITS and sub-optimal fund sizes. In addition, the introduced changes did not work in an optimal manner. In particular UCITS III introduced the concept of the management company 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 Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings 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 January 2002 amending Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), with a view to regulating management companies and simplified prospectuses, OJ L 41, 13.02.2002. 119

In June 2009 the ‘UCITS IV’ Directive110 was adopted. UCITS IV contains provisions regarding the product passport, which basically permits the distribution of a product which 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 a re-authorisation procedure had to be undertaken.111 UCITS IV also makes the management company passport work. The management company passport allows management companies to provide their services all over Europe.112 While the relevant 2001 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 simplified prospectus with a new concept, called Key Investor Information, the content of which is harmonised, short and simple.114 CESR is currently preparing its advice regarding the implementing details for Key Investor Information, as well as the other areas covered by the revision of the Directive, which it will publish in October 2009. Finally, UCITS IV allows fund mergers both on a domestic and on a cross-border basis. It also allows funds to be related via a master-feeder structure (i.e. a feeder UCITS has to invest at least 85% of its assets in one single master UCITS).115 Both measures will result in economies of scale and lower costs. ESBG views UCITS IV is expected to bring With UCITS IV a solid basis for the internal market for UCITS has finally been created. considerable improvements. The concepts of product passport and management company passport have been given a clear legal basis. Former weak points regarding the notification procedure for the products have now been eliminated. In particular this procedure will now be carried out in considerably less time. ESBG also considers it of high importance that UCITS IV makes the management company passport work while simultaneously maintaining high standards of investor protection and of supervision. In addition the relationship between the management company and the depositary has been clarified. In light of the changes introduced by UCITS IV in relation to fund mergers, it needs to be guaranteed that an accompanying framework concerning tax neutrality is created soon. ESBG fully supports the 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 crucial Looking ahead, the question importance. No changes in this field have been introduced with UCITS IV, as the new of which assets are eligible provisions were adopted in 2007 (i.e. in Directive 2007/16/EC116, which adapted the as UCITS will be crucial. eligible assets to market developments). Changes to this Directive will become necessary again in the future; the speed of the legislative process for the adoption of the Directive mentioned above can serve as a good example. All future revisions should preserve the spirit of UCITS, being known as a safe product for retail investors. 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 transferable securities (UCITS), (recast), 2008/0153 (COD), 19.06.2009, awaiting publication in the Official Journal. 111 Art. 91-96 112 Introduction of the principal in Art. 5(3), further provisions in particular in Art. 13-23 113 Directive 2001/107/EC, in particular Art. 5 (1) 114 Art. 78-82 115 Mergers Art. 37-48, master-feeder Art. 58-65 116 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) as regards the clarification of certain definitions, OJ L 79, 20.03.2007. 120

Looking further ahead, discussions will also continue regarding the question of whether Tasks and responsibilities a depositary passport should be introduced. Such a passport would enable depositaries of depositaries should be to provide their services all over Europe. However, the possible introduction of a further aligned. depositary passport would certainly raise supervisory concerns. As such, a detailed assessment would need to be conducted; CESR could play an important role in this process. Furthermore, and even prior to such an assessment, the tasks and responsibilities of depositaries would have to be aligned. The Madoff collapse has brought a new spotlight on the question of tasks, responsibilities and liability of depositaries, and confirmed the existence of divergences in this area. The Commission envisages a clarification of these aspects117, which would constitute a useful step toward enhanced harmonization and investor protection in this area. 6.2. Alternative Investment Fund Managers 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. Background Until autumn 2008 the Commission considered that hedge funds did not pose any specific risk to Europe’s financial stability and that therefore no particular regulatory action on the EU level was necessary. However, later the Commission expressed the view that the recent market convulsions had revealed that hedge funds may play a pro-cyclical role that might indeed create risks to the stability of the financial system and therefore warrant closer prudential oversight. On 30 April 2009 the Commission issued its proposal for a Directive on Alternative Investment Fund (AIF) Managers118 – capturing all non-UCITS funds. The Commission proposes that, above a certain threshold119, all managers of non-UCITS funds shall be subject 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 over Europe. Furthermore, the proposal foresees that managers will have to fulfill additional requirements when they employ certain techniques or strategies, notably management of leveraged 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 Paper on the UCITS Depositary Function. 118 European Commission. 2009. Proposal for a Directive of the European Parliament and of the Council on Alternative 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 less than 500m EUR, in case of AIFM managing only AIF which are not leveraged and which do not grant investors redemption rights during a period of five years following the date of constitution of each AIF. 121

ESBG views From the beginning of the discussions ESBG welcomed the Commission’s decision to tackle the issue of hedge funds. ESBG recommended coordination at an international level (through the International Organisation of Securities Commissions / IOSCO) while recognizing the necessity for a leading role of the EU. A number of issues still With regard to the Commission proposal for a Directive, ESBG notes that the focus has need to be discussed been expanded to cover all non-UCITS funds. At the same time, the Commission is and reconsidered. moving away from the traditional products approach and puts the focus on the fund managers. ESBG regrets this policy change, since the product approach has proved successful in many cases. ESBG is currently analyzing the impact of the proposal to significantly broaden scope by covering all “non-UCITS”. Also to be looked at are the responsibilities and liabilities of the depositary; in this regard clarification and reconsideration might be necessary. Finally, ESBG reflects upon the implications for managers selling products to retail and professional 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, while limiting their cross-border sale to professional investors. This approach conflicts to some extent with the Expert Group recommendation to create an EU framework for OEREFs and to facilitate their cross-border distribution to retail investors. ESBG is of the opinion that it would be worth giving renewed consideration to this recommendation at a later point in time. 6.3. Packaged retail investment products Key messages n ESBG is open for discussions on how a framework for all packaged retail investment products could work in 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). Background Since 2007 the European Commission has been analysing the impact of the fragmented regulatory landscape for retail investment products on the protection of retail investors and 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 a European approach for OEREF. The expert group recommended the creation of an EU regime for OEREF in order to facilitate their cross-border offer to retail consumers. Looking at the possible ways to achieve such an EU regime, the expert group recommended to either modify the UCITS Directive or to create a standalone Directive. 122

In April 2009 the Commission released its Communication on this issue121, opting for a horizontal approach to both mandatory disclosures and selling practices for all packaged retail investment products. Based on the Commission’s Communication ‘packaged retail investment products’ include (for example) investment or mutual funds, unit-linked life insurance policies, retail structured securities and structured term deposits (the list of examples is neither static nor exhaustive). The Commission’s plan is to use UCITS Key Investor Disclosure and MiFID as benchmarks for the areas of disclosure and selling practises respectively. ESBG views During the discussions taking course in 2007 ESBG stressed that its member banks could not identify any sign of market failure and that the substitutability among certain products effectively depends on the clients’ needs and objectives. Since then discussions have progressed, with the focus shifting from substitutability to a more generalized approach on retail investment products. Given that the Commission is expected to present detailed orientations on the form and Legal clarity needs to be content of future legislative measures by end of 2009, ESBG’s comments are at this point provided. only preliminary. ESBG is open for a dialogue on how to improve selling and disclosure practices for all packaged retail investment products. In this context, it is crucial that the term “packaged retail investment product” be clearly defined. Only on that basis will it be 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, without harming functioning business activities. A good implementation of a future framework could provide legal certainty, clear selling and distribution practices and promotion of a high level of investor protection. 121 European Commission. 2009. Communication from the Commission to the European Parliament and the Council. Packaged Retail Investment Products [COM(2009) 204 final], SEC(2009) 556 SEC(2009) 557, 30 April. 123

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7. CONSUMER POLICY IN THE AREA OF RETAIL FINANCIAL SERVICES Setting the scene: the European approach to consumer protection In recent years, European policy makers have shown a distinct desire to put the consumer at the centre of designated policy initiatives. Consumer protection has become a cornerstone of European retail financial services policy. The initiatives and proposals by the European Commission in this area are focused on assisting consumers in making good financial decisions, giving them the freedom to select the products that best suit their needs, and ensuring that they are offered a high level of protection. In addition, the Commission believes that although advances in technology make it much easier to buy financial services across borders, consumers are still reluctant to purchase financial products from countries other than their own.122 Recent studies 123 have shown that this reluctance is mainly due to language and cultural barriers, and to a lack of confidence in foreign financial regimes. In this respect, the Commission’s initiatives seek to raise consumer confidence through information and education and to increase competition in the Internal Market. As described in Part 2 of this report, despite the new opportunities for businesses and consumers through the technological advances like the Internet, most people still prefer face-to-face communication when it comes to financial service providers. Retail banking services are in principal locally orientated. Moreover, as decentralised financial institutions with local and regional ties and a wide-stretching network of branches, savings banks have kept a focus on proximity banking and thus often hold a long-standing relationship with their clients. Hence, the European consumer policy in retail financial services should focus on financial education and efficient information to foster consumer confidence in the short term and on 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 information are key for any commercial transaction. These issues are paramount when it comes to financial services. Nowadays, European consumers are living a moment of weak confidence due to turbulence in the global financial markets. Moreover, in times of globalization new opportunities in terms of new financial products, new instruments and new technologies became available posing new challenges for the consumers such as understanding the risks associated with complex products. This is the main lesson learnt as the current crisis in the banking sector has led people to question the stability and reliability of the banking sector. 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. 125

Beyond that, consumers’ lack of confidence in financial services is often caused by detrimental 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 of the industry can taint consumers’ views of the industry as a whole, whether or not it is justified. A permanent dialogue between the credit industry and consumer organisations is necessary in order to resolve consumer complaints, address consumer demand for information and advice in a satisfactory way and regain consumer confidence. Savings banks serve this demand as they are institutions which are close to consumers and have a solid and long-term business philosophy. Information and advice Information and advice are two of the most important topics in the relationship between consumers and banks. The financial markets depend on the ability of consumers to play their role by making customised choices between different products which are based on the information acquired beforehand. Thus, it is important for the banking industry that consumers are conscious of their own financial needs and abilities and decide based upon this. Regarding information, in retail financial services the distinction between pre-contractual and contractual information – depending on the phase of the financial transaction – has to be made. The quality and quantity of the types of information provided to consumers raise additional questions. The information which financial institutions are required to provide to consumers should be strictly limited to that which the consumer actually reads and needs in order to understand the product. So far, this limitation of information requirements to the real needs of consumers has not been achieved, and a rigorous assessment is therefore necessary. Thus, ESBG members strongly encourage focusing on increasing the quality of information rather than the quantity. To avoid information overload or possible information gaps, the approach towards consumer information must be coherent in all EU legislation and the political objectives have to be coordinated at all times. Advice can not be Advice is another important factor in the relationship between consumers and banks but standardised and always has to be clearly distinguished from information. While financial institutions should fully needs to be determined on and appropriately inform consumers, the final decision to opt for a specific financial a case-by-case basis. product should be made by that consumer, based on his or her own needs and circumstances. Providing professional advice is a separate service and should remain at the disposal of the consumer. Moreover, advice cannot be standardised and always needs to be determined on a case-by-case basis. The introduction of an obligation to advise would be detrimental for those consumers who would have to pay for a service which they do not need and/or did not request. Furthermore, the advice given must be objective and based on the consumer's profile considering the complexity of the offered products and the risks associated with them. 120 From June 2007 to March 2008 an expert group set up by the Commission assessed the opportunity of a European approach for OEREF. The expert group recommended the creation of an EU regime for OEREF in order to facilitate their cross-border offer to retail consumers. Looking at the possible ways to achieve such an EU regime, the expert group recommended to either modify the UCITS Directive or to create a standalone Directive. 126

7.1. Consumer credit Key messages n Various concerns of the financial industry regarding the provisions for over-drafting, pre-contractual information, the definition of the annual percentage rate of charge, early repayment and the right of withdrawal have not been addressed in the Consumer Credit Directive. n The current regime of the Consumer Credit Directive prolongs the handling of consumer credit, imposes additional administrative burdens on financial institutions, increases their costs and as a result causes a delay in the implementation at the Member State level. Background After more than six years of negotiations, the Council approved the changes made by the European 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 the Commission. Although at a later stage an impact assessment was carried out upon request of the European Parliament, this was not taken into account in the discussions at the 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 of different rules across the 27 EU Member States. The new Directive (2008/48/EC) on Consumer Credit,126 with the objective of full harmonisation, aims to grant consumers an appropriate degree of protection when taking out consumer credit. The regulation was designed to ensure this objective by providing consumers with standard and comparable information on advertising, adequate pre-contractual information, information on an annual percentage rate of charge (APRC) and generally high quality contractual information. The Directive also introduced two fundamental rights for consumers. First, the right of withdrawal allows consumers to withdraw within a period of 14 calendar days from the credit without giving any reason and without any charge.127 Second, the CCD confirms the right to repay early at any time.128 Standards are set on the compensation creditors are entitled to claim in case of an early repayment129 in order to make it easier for consumers to 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 of the 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). 127

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 concerns related to the interpretation of a selection of provisions of the Directive (e.g. definition of non-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 calculation of APRC launched in April 2009 should be highlighted as giving concrete examples and a calculation formula for a harmonised APRC.131 ESBG views During the discussions held in past years, ESBG presented proposals to address the problems identified in the revised Consumer Credit Directive, such as the provisions relating to overdrafts, pre-contractual information, the definition of APRC, early repayment and the right of withdrawal. Another controversial issue was the lack of an impact assessment, for which ESBG has continuously advocated. Consumer Credit Directive While recognising the progress made with the revised CCD proposal compared to the still needs clarifications. original proposal tabled by the Commission in 2002, ESBG believes that the implementation of the Directive will be expensive and enormously slow down the handling of these types of credits. Moreover, delays of implementation are expected, as certain areas still await clarification including APRC, the notion of ‘adequate explanation’ in Article 5 (6)132 and the definition of creditworthiness/ability to pay. National transposition has In addition, some provisions leave flexibility to Member States. This means that the to account for the specific industry will have had to commit to information technology changes without regulatory needs of financial certainty. Therefore, it is of paramount importance that the national authorities take the institutions. specific needs of the financial institutions into account when transposing the Directive into national law. Information requirements In more concrete terms, the treatment of pre-contractual information in Article 5 of the in the Consumer Credit CCD will certainly be a major issue. Banks will have to extensively redraft information Directive are by far sheets and brochures in order to adapt the existing credit forms to the new legal too extensive. requirements. The implementation of the Directive confirms the concerns expressed repeatedly during the adoption process that the information requirements are by far too extensive and therefore not suitable to help consumers to understand the credit offer or compare different offers. New bureaucratic burden The new CCD provisions create an enormous bureaucratic burden for both credit is created for credit institutions and consumers. Thus ESBG remains concerned about the ability of the institutions and consumers. Directive to fulfil its objectives, namely to increase consumer confidence and consumer credit activities in the EU. 130 The European Commission DG SANCO launched a study on the establishment of a benchmark on the economic impact of the CCD on the functioning of the internal market in the consumer credit sector and on the 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

7.2. Mortgage credit Key messages n The initiatives of the Commission to assess possible future developments in the area of mortgage credit are welcome 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 credit should 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 of credit registers. n Responsible lending and borrowing should achieve a fair spread of responsibilities between consumers and lending institutions. Background In recent years, discussions have been ongoing to address some aspects of mortgage credit at the European level. In March 2003, the European Commission set up a Forum Group on Mortgage Credit with a mandate to identify the barriers to the functioning of the Internal Market for mortgage credit.133 In parallel, the Commission launched a research project on the costs and benefits of further integration of the EU mortgage credit market. In early 2005, the Commission established the Government Expert Group on Mortgage Credit to provide advice on its mortgage credit policy. In the same year, the Commission published its Green Paper on Mortgage Credit134 launching a consultation process. After the Green Paper consultation, in 2006 the Commission decided to create two new ad-hoc working groups. One of these working groups focused on funding – the Mortgage Funding Expert Group (MFEG)135 – and the other focused on consumer issues – the Mortgage Industry and Consumer Expert Group (MICEG).136 Consumers and industry 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. 129

Both reports of the Expert Groups were published at the beginning of 2007 and considered by the European Commission when drafting its White Paper on Mortgage Credit137 launched in December 2007. The White Paper did not propose any concrete legislative measure but defined four objectives in the area of mortgage credit: 1) Obstacles to cross-border provision of both funding and supply of mortgage credit have 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 offers outside local markets. In order to achieve those objectives, the Commission announced several initiatives and in 2008 launched studies in the following areas (i) the revision of the current European Standardised Information Sheet (ESIS), (ii) a study on the costs and benefits of the different policy options for mortgage, (iii) credit credit intermediaries, (iv) land registration, property valuation and foreclosure procedures, (v) non-credit institutions and (vi) equity release schemes. All the studies mentioned are being carried out by external consultancies 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 the current ESIS in order to check the effectiveness of different options in conveying the intended message to consumers when providing pre-contractual information. This format provides pre-contractual information to consumers as established by the Code of Conduct on home loans agreed by the industry in 2001.138 The Commission believes that there are some inefficiencies in the current application of the ESIS. Against this background, the Commission mentioned its considerations to keep either the current non-binding form of the ESIS, via the Code of Conduct on home loans, or to convert it into binding legislation. Certain policy areas of the study on a revised ESIS have been supplementary addressed in the Commission study on costs and benefits of different policy options for mortgage credit. The latter study analyses the current legal and regulatory requirements in four policy areas, such as pre-contractual information, APRC, responsible lending and early repayment.139 Through the study on credit intermediaries, the Commission is gathering information on whether the current legislative framework is sufficient and if consumers face any particular 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 intermediaries are beneficial to consumers and lenders. Following the report, the regulatory framework for credit intermediaries varies significantly by Member State and credit product. However, the report has given credit intermediaries only a limited role to overcome potential barriers in cross-border trade of retail financial services.140 137 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 to consumers 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 Credit Intermediaries 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

With regards to the study on land registration, property valuation and foreclosure procedures, in 2008 the Commission issued a Draft Recommendation in order to reduce time for foreclosure and registration procedures, to facilitate the use of foreign valuation reports, 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 European mortgage markets, the respective study assesses whether appropriate action at the Community level is needed.142 The study on equity release schemes provides an overview of different equity release schemes currently available across the Member States. However, it does not reach any policy conclusions in its final report.143 Another Commission intention in the area of mortgage credit was to identify any obstacles to the access to and exchange of credit data for the development of cross-border mortgage credits. The Commission was seeking advice on how to address these whilst ensuring a high level of consumer protection. Therefore, it established an Expert Group on Credit Histories in 2008.144 The Expert Group’s final report was published in June 2009 and 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 responsible lending and borrowing in autumn 2009. This initiative has a broad approach and therefore, all studies conducted so far will most likely feed into the package on responsible lending and borrowing in autumn 2009. On 15 June 2009, the Commission allowed a first look at the potential content through its consultation on “Responsible lending and borrowing in the EU”. Building on previous consultations, studies and policy developments especially in the area of mortgage credit, the aim of the consultation is to gather information on outstanding issues and to deepen the Commission services’ understanding. The Commission is seeking information on business practices prior to and in the context of lending transactions, on responsible borrowing, and on credit intermediaries. In more detail, the consultation addresses issues of advertising and marketing 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 future developments via impact assessments and consultation is a clear commitment to the Better Regulation principle. Another achievement is the dialogue through the established working groups like the Mortgage Industry and Consumer Expert Group (MICEG) and Mortgage Funding Expert Group (MFEG), which could serve as a precedent to organise more direct open dialogues between consumers and industry representatives. 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 Spring European Council. Driving European recovery. Volume 2: Annexes [COM (2009) 114 final], 4.3.2009. 131

Furthermore, any action at the European level in the area of mortgages has to demonstrate the potential benefits for both consumers and the industry alike, – in particular in light of the current crisis. The Code of Conduct should At present, one of ESBG’s major concerns is the revision of the European Standardised maintain its voluntary nature Information Sheet (ESIS). The financial industry fears that with the revision of the ESIS, the as a self-regulatory measure. Commission has in mind to introduce mandatory rules such as regulation in the form of a 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 on the implementation of the Code of Conduct. In particular, the situation in the UK and Spain147 has to be highlighted where pre-contractual information is also provided – though not using the ESIS format. The industry is also in favour of revising and updating the Code of Conduct. However, it should maintain its voluntary nature as a self-regulatory measure. ESBG favours a narrow In addition to the issue of pre-contractual information, ESBG members are also concerned definition of the APRC about the method of calculating the Annual Percentage Rate of Charge (APRC). ESBG specific to favours a narrow definition specific to mortgage credit. A common Annual Percentage mortgage credit. Rate of Charge with the Consumer Credit Directive could have been envisaged, but not on the basis of the broad APRC definition recently adopted in the Consumer Credit Directive, because this would not deliver comparability for mortgage products. Early repayment should be Early repayment should be a contractual option legally in force in all Member States. If a contractual option. consumers do not exercise this option, they should not be obliged to pay for the costs involved in an anticipatory manner. Requirements for credit With regard to the study on credit intermediaries, EU Member States do not have the intermediaries should be in same rules and standards regarding the regulatory regime applicable to these entities. line with those for credit If the Commission concludes from the final report of the study that there are insufficient providers. controls in place for credit intermediation across the EU, ESBG members support the introduction of EU regulation in this field in order to bring the requirements for credit intermediaries in line with those for credit providers. A single EU standard for Regarding property valuation, the industry welcomes the focus of the Commission valuation methodologies Recommendation on facilitating the use of foreign valuation reports and promoting the neglects national, regional & development and use of reliable valuation standards. In this context, valuation local market specificities. methodologies 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 is the best-suited instrument to drive further convergence in the areas in focus. 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

On access to credit registers, a legal obligation to consult credit registers is not A legal obligation acceptable. They often do not deliver the necessary information and questions on liability to consult credit registers for wrong information remain unresolved. Also, harmonisation of negative and/or is not acceptable. positive criteria is neither desirable nor feasible at this stage. Compulsory consultation of credit registers would not improve the correct assessment of the consumers’ creditworthiness. At the same time, there should be no mandatory obligation to inform the consumer about the outcome of the register consultation in the context of mortgage credit, as this could result in abuse. The consumer should, however, be provided with the information upon request. In principle, it is promising that the Commission is approaching lenders and borrowers at The Commisision’s definition the same time as in its consultation “Responsible lending and borrowing in the EU”. of responsible lending Moreover, the Commission’s view that credit products should be appropriate to represents already good consumers’ needs and tailored to their ability to repay makes sense and represents banking practice in Europe. already good banking practice in Europe. Regarding the concept of “responsible lending” the principle of assessing creditworthiness is already an obligation with which lenders comply under supervision rules, namely the Capital Requirements Directive (CRD).148 Mixing supervision obligations with contract law and civil liability would constitute a systemic break. On top of existing CRD obligations, a legal obligation to assess creditworthiness would not remedy legal uncertainty and would exponentially increase litigation. Reference to good banking practice would enhance certainty. The Commission’s perception on responsible borrowing is highly appreciated – recognizing Responsible borrowing by that consumers have a responsibility to inform themselves about offered products, consumers is vital. provide relevant, complete and accurate information on their financial situation to lenders and take their personal as well as financial circumstances into account when making their decision. In general, responsible lending and borrowing should achieve a fair spread of responsibilities between consumers and lending institutions. 7.3. Distance marketing of consumer financial services Key messages n The consumers’ preference of “face-to-face contact” offered by local providers is essential for the purchase of financial products. n The Directive 2002/65/EC for Distance Marketing of Consumer Financial Services contains unclear definitions failing 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 and additional burdens on consumers and banks. n The Directive is not effective at encouraging consumers to buy financial services cross-border. 148 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 p.1. 133

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 marketing techniques. Aiming to enhance internet transactions of financial services across borders, the Directive 2002/65/EC for Distance Marketing of Consumer Financial Services,149 in force since 9 October 2002, is covering contracts for retail financial services which are negotiated at a distance.150 The Directive had to be transposed by 9 October 2004 at the latest and provides consumer protection provisions for financial services such as (i) right of reflection, (ii) right of withdrawal and reimbursement, and (iii) the requirement to provide contractual terms in writing beforehand. On 6 April 2006, the Commission launched a Communication151 informing the European Parliament and the Council that the implementation of the Directive had been delayed in many Member States. As a result, a review of the application and operation of the transposed provisions in the Member States, as foreseen by Art. 20 of the Directive, could not be carried out. In March 2007, DG SANCO disclosed its intention to start the revision of the Directive through the organisation of workshops and studies on its positive and/or negative impacts. Given the delay and difficulties of the Directive’s transposition, the Commission launched two studies on the functioning of the Directive, addressing the legal as well as the economic impact. Both studies will be used to produce a comprehensive Commission review of the implementation of the Directive over the course of 2009. ESBG views Consumers prefer ESBG generally supports the efforts to enhance the functioning of the internal market for “face-to-face contact” consumer activities. Nevertheless, for an enhanced purchase of financial products offered by local providers via distance communication tools the consumers’ preference of “face-to-face contact” over distance marketing. offered by local providers is a key issue. Some definitions In addition, ESBG has identified some priorities with regards to the implementation of the remain unclear and fail to Distance Marketing of Financial Services Directive. Some definitions remain unclear and take into account current fail to take into account current banking practices. Moreover, inconsistencies arise banking practices. between Directive 2002/65/EC on Distance Marketing of Consumer Financial Services and Directive 1997/7/EC on Distance Selling (e.g. as concerns the right of withdrawal and the provision of information). Another issue is the extensive nature of the information requirements in Art. 3 of the Directive. In Art. 6 of the Directive, the delay of the period for withdrawal asserts that if the information obligations of the financial service provider have not been duly fulfilled or in due time the consumer’s right of withdrawal changes to be unlimited in time. This rule could result in legal uncertainty, unnecessary costs and additional burdens on consumers and banks. 149 Directive 2002/65/EC of the European Parliament and the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/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 financial services. For more information see Directive 1997/7/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. See for specific details p. 19. 151 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], 6.4.2006. 134

Finally, the anti-money laundering legislation constitutes a barrier to all forms of distance marketing since it is very difficult to comply with the legislation without some face-to-face interaction with the customer – especially when conducting distance marketing cross-border. Overall, the very formal and overall burdensome provisions for distance marketing do not encourage consumers to buy financial services via distance communication tools. 7.4. Consumer redress Key messages n ESBG supports the Commission’s initiative to reinforce the provisions of effective and efficient dispute resolution and redress mechanisms for consumers. n There is a need for the further assessment of existing redress and alternative dispute resolution systems at Member 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. Background In mid-2007, the European Commission announced its intention to evaluate the systems of redress mechanisms in Europe and the ways in which they could be improved. It was stressed that before taking any measure, the Commission aimed to gather more information and feedback from the Member States, the European Parliament and stakeholders. This opened the door to an increasing interest in discussions on consumer redress mechanisms. The Commission decided to include this issue as a priority in the agenda 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 of the EC antitrust rules.152 The White Paper presented a set of recommendations to ensure that victims of competition law infringements have access to effective mechanisms for claiming full compensation for the harm they have suffered. These recommendations aim to offer a solution to the current compensation systems in place. The White Paper’s key recommendations cover collective redress, disclosure of evidence and the effect of final decisions of competition authorities in subsequent damages actions. In September 2008, the European Parliament (EP) began discussing the White Paper and adopted it in March 2009. The most debated issues had been the question of a sufficient legal basis, the primacy of public antitrust enforcement, and the possibility of a horizontal measure for collective redress instead of a sector-specific solution. In the following, a first draft 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. 135

Green Paper on Consumer Collective Redress In November 2008, DG SANCO published a Green Paper on Consumer Collective Redress153 which seeks to facilitate redress in situations where large numbers of consumers have been harmed by a single trader’s practice by breaching consumer protection legislation. The Green Paper contains an evaluation of the existing consumer redress mechanisms. It concludes that the current redress situation in the EU is unsatisfactory and presents several problems. To close the identified gaps, DG SANCO presented several options varying from cooperation between Member States to judicial collective redress procedures in all Member States. Due to the feedback from stakeholders, DG SANCO changed the policy options and conducted a further consultation of market participants starting in May 2009. In this follow-up consultation DG SANCO leaned towards an EU-wide judicial collective redress mechanism including collective 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 public consultation on Alternative Dispute Resolution (ADR)154 in the area of financial services in December 2008. The Commission expressed that currently consumers and financial services providers will not always have the option of resolving their domestic or cross-border disputes through an ADR scheme. The objective of the consultation was to seek views on how ADR schemes in the area of financial services could be improved in the internal market. ESBG views Existing redress & dispute Existing redress & dispute resolution schemes at national level need further assessment. resolution schemes at ESBG supports the Commission’s initiatives in this area in order to provide consumers with national level need effective and efficient redress and dispute resolutions mechanisms. However, further further assessment. assessment is necessary of the existing redress and dispute resolution schemes at the national level before introducing any EU legislation in the field. Future measures should not ESBG has expressed its concerns about some of the Commission’s actions in this field, as create an imbalance between care should be taken to ensure that the future European measures do not create a consumers’ rights and disproportionate imbalance between consumers’ rights to effective redress mechanisms banks’ business. and the ability of businesses to function without fear of unmeritorious claims being brought against them. In this regard, ESBG stated the need to learn from the American litigation experience and make sure that procedural reforms do not open the door to litigation abuse in Europe. During discussions in the process, the Commission’s explicit recognition that the aim is not to develop a lawsuit culture based on the American model was therefore very welcome. Against this background, a first Commission draft proposal of spring 2009 raised concerns by indicating a contrary approach. At the same time, ESBG acknowledged the increasing awareness of private enforcement in competition matters. ESBG believes, however, that the application of the “subsidiarity principle” should be taken into account before proposing any harmonisation of important aspects of Member States’ procedural and tort law. Furthermore, it is a matter for national law to provide the procedural safeguards for the exercise of consumers’ rights, in particular for the exercise of collective actions. 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

Regarding ESBG views on ADR in financial services, ensuring mechanisms for effective Alternative Dispute consumer dispute resolution and redress is a key issue for the savings and retail banks Resolution has a long- which have a long-standing tradition of providing consumers with “in-house“ complaints standing tradition departments. Internal complaints handling provides consumers with the opportunity to in financial services. resolve their complaints directly without imposing a fee or charge for accessing or using these processes. ESBG members’ experience is that consumers and businesses should first attempt to Existing out-of-court resolve their disputes directly before seeking recourse through third-party mechanisms. settlements should be Having said that, ESBG welcomes the Commission initiative examining the problems that promoted rather than consumers face in obtaining effective redress. ESBG is strongly in favour of out-of-court establishing new ones. settlements. In this context, it is worthy to mention the existence of FIN-NET155, a network of national out-of-court complaint schemes dealing exclusively with consumer’s disputes in the area of cross-border financial services. Most of ESBG members participate 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-court settlements rather than establishing new ones. 7.5. European contract law Key messages n ESBG in principle supports the initiative of a handbook to achieve a coherent and consistent European legislative framework. n The Draft Common Frame of Reference is not practicable because of the lack of consideration of the input of stakeholders 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. Background In its Action Plan on European contract law of 2003156, the European Commission announced that it would examine whether problems in the European contract law area may 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 European Parliament) with a "toolbox" or a handbook to be used for the revision of existing and the preparation of new legislation in the area of contract law. This toolbox could contain fundamental 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 Coherent European Contract Law. An Action Plan [COM (2003) 68 final], 12 February. 137

After several years of work, in April 2008 the Study Group on a European Civil Code and the European Research Group on Existing EC Private Law officially launched the Draft of a Common Frame of Reference (DCFR).157 The Draft contains “Principles, Definitions and Model Rules of European Private Law” in an interim outline edition. One purpose of the text 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 would not necessarily have the same coverage and content as the DCFR. The Commission has informed about its intentions regarding the DCFR stating that it will make a selection from the work of the two groups. Such a selection process should take place 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 result of this process. The consultative document is scheduled to be released in the summer of 2009. However, the Commission did not explain how such a selection would preserve the consistency of the final result and has been criticised throughout the discussions by the members of the two groups. They feared that a “cherry-picking” by just taking over certain parts and rules from the DCFR would undermine the logic and structure of the whole work done so far. The legal basis and the content had been discussed under the Czech presidency and will be continued under the Swedish presidency of the EU in the second half of 2009. ESBG views It is important to achieve As member of the CFR-Net, ESBG actively follows the debate on European Contract Law a coherent and consistent and generally supports this initiative. However, it is important to achieve a coherent and European legislative consistent European legislative framework and there are some concerns regarding the framework. following issues: The legal basis or ESBG would like to draw attention to the question regarding the creation of a legal basis its creation for such for such an optional instrument. The EC Treaty neither provides a specific competence to an optional instrument create private law instruments, nor does it provide any general competence to harmonize has to be questioned. private law. Any future optional instrument will have to be limited to rules on the subjects that are particularly relevant to the Internal Market. The overall draft structure of the CFR based on the Principles of European Contract Law is 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’s positions. The final outcome of this ESBG regrets that the members of the two groups did not consider input and comments initiative is not reflecting the provided by the CFR-Net and hence did not modify their drafts where appropriate, so that practitioner’s point of view. the 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 transparent consultations which take proper account of all stakeholder groups and carrying out appropriate impact assessment, in line with the EC’s “better regulation” policy. 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

7.6. Consumer rights Key messages n ESBG supports the initiatives of the Commission to simplify and to make European consumer protection legislation 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 and consistent regulatory framework in the areas of contract law, consumer protection and financial services in order to provide legal certainty to both consumers and industry alike. Background On 8 October 2008, the European Commission adopted the proposal for a Directive on Consumer 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 the Consumer Acquis was launched in 2004 with the objective to simplify and complete the existing regulatory framework. The overarching aim of the review was to achieve a real business-to-consumer internal market. This means striking the right balance between a high level of consumer protection and the competitiveness of enterprises, while ensuring respect of the principle of subsidiarity. The Directives under review contain minimum harmonisation clauses meaning that Member States may maintain or adopt stricter consumer protection rules. Member States have made extensive use of this possibility. The outcome is a fragmented regulatory framework across the Community which causes significant compliance costs for businesses wishing to trade cross-border. The new proposal on Consumer Rights refers to pre-contractual information, rules on delivery and passing of risk to the consumer, cooling off periods, repairs, replacement, guarantees and unfair contractual terms. The Consumer Rights Directive had been discussed at the European Parliament and the Council but further assessments have to be undertaken by the Parliament and the Commission in the course of 2009. ESBG views In its response to the consultation launched by the Commission in May 2007, ESBG Achieving the right balance welcomed the Green Paper on the Review of the Consumer Acquis. It is an expression of between consumer the Commission’s commitment to its Better Regulation principles and the objectives of protection and industry the Lisbon Agenda. At the same time, ESBG supported the Commission in its efforts to competitiveness is vital. revise the proposed directives in order to simplify and improve the consistency of the current European consumer legislation framework, to the benefit of the Single Market. Furthermore, in the response to the consultation, ESBG also pointed out that achieving the right balance between consumer protection and industry competitiveness is of paramount importance. 158 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. 159 European Commission. 2007. Green Paper on the Review of the Consumer [COM (2006) 744 final], 8 February. 139

The EU should target With regards to the current proposal for a Directive on Consumer Rights, although a coherent framework financial services are in principle outside the scope of the current proposal, some of the for contract law, provisions might be applicable in the area of financial services. ESBG is therefore consumer protection & concerned about the interaction of the proposed Directive with other legislation on financial services. consumer protection issues which is currently under the Commission’s review – such as the revision of the Directive on Distance Marketing of Financial Services. Other EU initiatives 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 consistent regulatory framework in the areas of contract law, consumer protection and financial services in order to provide legal certainty to both consumers and industry alike. In this respect, there is a need to clarify to what extent the proposal will be applicable in the area of financial services. 140

8. RETAIL PAYMENTS Key messages n The future European retail and commercial payments landscape is first and foremost shaped by political vision and 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 time will 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 for about 30% of European payment transaction volume) will be an essential driver of massification, and the logical 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 the interests of retail customers must be preserved both in the design of payment instruments, and in their market transposition. Background Retail payments are payments instructed and received by end-customers for the purchase of 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 to execute to the benefit of a payee, or initiated by a payee on the basis of a mandate given by the payer, directly or through the banking/payment institution channel. In the future – after the transposition of the Payment Services Directive161 which should theoretically take place 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 of Regulators’ theory that Regulation 2560/2001162 on cross border payments in euro, and over a year after the pricing had been the biggest launch of the SEPA (Single Euro Payments Area) Credit Transfer Scheme163 and the SEPA obstacle to integration has Cards Framework164 – the overwhelming majority of retail and commercial payments been defeated. continue 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 border payments within the euro area. 161 Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing 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), approved by the EPC Plenary on 8 March 2006. 141

Indeed most authoritative market analysts estimate that at a maximum 2% (or about 1.7 billion, according to the latest ECB Blue Book165) of all retail and commercial payment transactions in the EU are cross-border transactions. This would be in spite of the fact that well-oiled channels for cross border credit transfers and payments with cards have existed for 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 the cost 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 thus been defeated. Indeed, with a zero cost, the number of credit transfers should have become infinite – which it did not, by a wide margin. The notion of “euro This represents substantial evidence towards the reality that retail and commercial payment” will first appear payments remain payments made and received locally – in essence within 30 kilometres in “border corridors.” of where the payer and the payee live and/or are established. Incidentally, this is the current situation in the U.S., a market which definitely has enjoyed a single currency for over two centuries, and a fair extent of harmonization as far as retail payment legislation is concerned. Indeed the vast majority of non-cash payments are payments driven by the provision of work (i.e. salaries and wages) and work-related services (pensions, etc.), as well 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 loose track either of the fact that in Europe today, there are still over 300 billion cash transactions every 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 very likely 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 services across the nearest border, whilst maintaining their account where they reside, or shifting it to where they work. In addition there still are today (in mid-2009) vastly different patterns in the usage of both the volume and the types of non-cash payment instruments across the EU Member States. According to the figures of the European Central Bank (ECB) Blue Book there is a 20 to 1 difference between the number of per capita non-cash payment transactions between 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 there are completely different patterns of usage of types of non-cash instruments, with broad groupings 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 (Automated Teller Machines).166 ESBG preliminary assessment Will this situation be radically and dramatically changed with further harmonization at the legal level (in essence, the mandatory transposition by 1 November 2009 of the Payments Services Directive (PSD) into national legislation) and the further deployment of the SEPA project (in essence, the launch of the SEPA Direct Debit Schemes167)? 165 Produced by the ECB and provides a comprehensive description of the main payment and securities settlement 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 142

This is unlikely for 2 reasons: Firstly, the PSD is an attempt to harmonize consumer protection in the field of payment The Payment Services Directive services, and to introduce greater competition in the provision of these services by attempts to harmonize allowing a new category of players – payment institutions – to compete with credit consumer protection and institutions. Very wisely, the PSD acknowledges the local dimension of payment services, offers 23 provisional waivers and allows Member States to waive for no less than 23 of the provisions of the European to Member States. text in favour of choices made at national level. This is an endorsement by the European legislators of the continuing, predominant local dimension. Local customers will – to a very large extent – continue to enjoy the protection and convenience provided by local legislators and providers. Of course customers either dissatisfied with, for example, the choice available at the national level, and/or in utter need of a provider outside their place of residence, will be able to have access to services under better known and understandable conditions – which is significant progress. During the elaboration of the Directive, significant concern was expressed that the intended harmonization target would be missed due to translation, transposition, and conflict of law issues. Secondly, the SEPA Schemes (Credit Transfer and Direct Debit) mostly introduce bank- DG Competition will only to-bank (or, more exactly: payment service provider to payment service provider) take responsibility for the standardization as regards the structure and the content of the instruction and reporting cross border space, making messages to be exchanged. Regarding end customer impact, all will be dictated on one the effective amount of side by the PSD and its transposition, and on the other side by applicable competition integration limited. legislation.168 As a consequence, the SEPA Schemes by themselves will have a rather marginal impact on integration. It is interesting to note in this respect that after years of claiming the contrary, DG Competition recently admitted to the banking industry that it only holds responsibility for the cross border space. Responsibility at the Member State level continues to be held by national competition authorities. As a consequence, the effective amount of integration – beyond standardization – will be limited. Again, however, there is no indication that this would conflict with actual customer expectations and/or requirements. The lack of massification from the biggest stakeholders, i.e. reluctant public administrations Public administrations and corporates makes investing a challenge. The lack of migration to the new schemes must adopt SEPA to create forces the maintenance of parallel legacy systems – a costly exercise. The large differences a massification effect. in infrastructure and implementation between larger and smaller countries should not be overlooked 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 low per-transaction cost, whilst smaller countries need substantially less infrastructure investment to obtain a low per-transaction cost. Yet the value-added products that could be developed on top of SEPA as a means to recuperate costs could be far more limited in smaller countries than in larger ones. These legislative and regulatory signals are compounded by the debate instigated by The policy maker-driven European policy makers about the necessity for a mandatory end date for SEPA nature of SEPA is emerging migration169 and by the ever more open admission that SEPA is public-policy driven. ever more clearly. 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. 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. 143

Market participants are longing for a stable legal and regulatory environment. Only absolutely necessary legislative or regulatory initiatives should be undertaken on the basis of wide, open, and transparent market consultations and impact assessments. Is a legislatively While SEPA was originally portrayed as a self-regulated project, the reality that it is a mandated end date for SEPA political and policy-maker driven initiative is increasingly becoming apparent today. migrations avoidable? Regulators’ insistence that an end date should be implemented confirms SEPA’s transformation from a market driven assumption to a regulatory driven initiative. Indeed this regulatory insistence stands in sharp contrast to EPC’s 2005 Crowne Plaza Declaration170 which agreed that the adoption of SEPA products would be market driven. The continued intervention of policy makers and regulators in SEPA developments, and the significant legislative and regulatory content which is being transposed, have anchored the perception in the general public that SEPA is a policy maker/regulatory driven initiative. In such a context it becomes increasingly difficult to sway customers to migrate on the basis of value propositions. Thus the setting of a mandated end date could become unavoidable. At any rate, applicable competition legislation would not allow for an end date to be set by self-regulation. Yet for regulators to set and enforce a legally sanctioned end date would not only compel change but also cause a wide reaching ripple effect. Indeed, it cannot be ignored that an end date would change the nature of the market for payment services by mandating supply and enshrining commoditization, polarising attention on the migration process and on the deadline (away from possible enhancements and innovation), and creating additional costs (which because of legal/regulatory/ market constraints cannot be recouped) at the level of individual market participants by interrupting depreciation and investment planning. Pre-conditions for such a setting of an end date should include publicly announcing the end date at least five years prior to taking effect in order to allow all stakeholders concerned to depreciate existing applications where relevant, making the end date contingent on public administrations and related entities complying with a specific end date which should be set mid-course in order to ensure a massification effect, and ensuring that at national level all payment originators and collectors have become familiar with – and are using – the IBAN and BIC standards. The European Commission SEPA migration should be as short as possible to fully reap the potential benefits of the sees up to EUR 123 billion in SEPA project. The study171 undertaken on behalf of the Commission published last year potential benefits in a swift estimates potential benefits for SEPA of up to EUR 123 billion over a six year period migration to SEPA. (2007–2012). On the other hand, if migration is slow, losses could amount to EUR 43 billion. The effects on stakeholders are also expected to vary sharply depending on the success of the uptake of SEPA. For consumers, benefits may vary from EUR 12 to EUR 129 per person over the course of six years. The other stakeholders may incur benefits if SEPA is 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 mass adoption of innovative services (i.e. e-payments, m-payments and e-invoicing), which are based on these basic SEPA instruments. 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. 144

In line with this rationale and assuming that a binding end date can be publicly announced in 2010, the deadline could be set no earlier than 2015. Because of the changes required for corporate accounting and processing parameters, it must be acknowledged that a SEPA migration is infinitely more complex than the migration to the euro. An additional variable is injected by the current economic crisis. Many market players and The economic crisis has observers have noted that the crisis spells a return to the notion of “national” at the created a nationalistic expense of other objectives. For example corporates who could have been convinced by preference for country the SEPA logic to consolidate country accounts into European ones are now keen to accounts and credit as well as retain them – as well as the credit lines attached to them. Furthermore the crisis has cast more doubt over the obviously brought business case considerations to the fore. Many have long held that SEPA microbusiness case. whilst 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 will do little to help with the micro-economic business case. The stances of European institutions need be reconciled as a matter of urgency. The pro- The question of who integration stance of DG Markt and the ECB at times conflicts with the positions taken ultimately pays for SEPA by DG Competition. In particular as regards payments, the question of who actually will has not been answered. pay 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 DG Competition. This and the very long response times from authorities (over 3 years in some instances) 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 establishes a “commodity payment account”, mandates transparency of terms and conditions at pre-contracting levels, eases the termination of contracts, and invites broader competition by 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 between those 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 by forcing cross-subsidisation. With customer protection in place, it comes as somewhat of a surprise that regulators While banks see interchange now drastically challenge the business models for the provision of payment services – at as the most efficient way to least in the field of direct debits and payments with cards. Two and a half years after recoup cost, competition informing the European competition authority of its plans for the SEPA Direct Debit authorities do not, and will Scheme the banking payment industry was informed that the intended default ban it after 2011. interchange mechanism would not be acceptable beyond 2011 – although no significant transaction volume is expected to be registered any earlier. Although many banks see interchange as the most efficient way to recoup costs, competition authorities view them as stymieing what should be a constant search for actively lowering their cost basis. 172 European Commission and European Central Bank. 2009. Joint statement by the European Commission and the European Central Bank clarifying certain principles underlying a future SEPA direct debit (SDD) business model .SEC(2009)397, 24 March 2009. 145

It strikes the casual observer that in both instances justifications provided by the competition authority are rooted in lessons drawn from the past, or from current situations in a limited number of countries, and/or for a limited number of payment instruments. Admittedly, there is no economic theory available that would model the transformation over a number of years of multiple payment landscapes (each with their differing sets of habits, practices and laws) into an “internal market for payments”. In the absence of such model, to rein in (or outlaw) interchange on top of customer protection provided by other legislation could be read as good policy. Regulators feel that self Regulators’ preference for direct pricing models (i.e. models where end-customers are regulation has not succeeded directly charged for the services they buy or use) is a long term goal (not limited to direct so direct debits risk debits, or payments) which will be difficult to reverse. Whilst direct pricing has merits, its becoming a commodity. implementation at the time of a major market transformation (i.e. the PSD, pan-European scheme) is questionable. Authorities have not prepared public opinions for such a radical change, and regulators have condoned cross-subsidization for decades (e.g. for cash). Although some national competition authorities have recently inquired about interchange for legacy direct debits, the ECB’s and DG Competition’s emphasis that any position is their’s only leads to question the breadth of support for their policy. This would confirm SEPA as a top-down vision, in effect limited to cross-border. A presentation173 by the ECB Director General for Payment Systems and Market Infrastructures on 16 March and a speech174 on 17 March by the Director General of DG Markt, indicate that regulators perceive self-regulation as having failed (certainly the fact that there is a new Regulation 2560 fortifies this view). This means that direct debits will be viewed as a regulator mandated product – in effect a commodity. The banking industry has A banning of interchange for direct debits (and in effect a banning of return been left to explain to arrangements when the debtor is directly accountable, e.g. lack of funds – or 80% of the debtors why they will now cases) affects up to 88% of direct debits paid in euros. In many countries it will be be charged for direct debits. impossible to charge the debtor for legal or practical reasons. In the absence of interchange, debtor banks will cross-subsidize the SEPA Direct Debit – to the benefit of creditors and creditor banks. The 10 February ECOFIN meeting175, whilst confirming Finance Ministers’ support to the SEPA project, also re-confirmed the principle of “non-degradation” of services. This means that SEPA products may not be more expensive, yet not less performing, than existing national payment products – thus creating a “perfect squeeze” for debtor banks. In addition, the ECB Issues Note176 of 8 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 the transaction volume. In addition, the baseline (types and number of payment instruments used) differs vastly across Member States. All of this compounds a distortion of the level playing field – rather than enhancing competition. 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 2009 175 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. 146

The conditions for payment service providers to determine the nature and level of remuneration 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 any other 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 of legal constraints), then the competition authorities’ current approach equates to levying a 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 pushed Unlike card payments the aside, or misleadingly used by competition authorities for tactics such as the “tourist cost of cash is often ignored test”177 that justify disputable decisions on interchange fees. Policy makers tend to ignore or misused. that cash costs are infrastructure costs (with a significant fixed basis), which often cannot be externalised to customers. However little progress has been made regarding the repositioning of cash in society. Whilst acknowledging that the “war on cash” campaign promoted by some does little towards creating the necessary conditions for a useful dialogue about repositioning, policy makers and regulators should also soon accept that there is more to the cash equation than operational aspects only. This must lead to acceptance that cost perceptions and the anonymity feature of cash – for both customers accepting and disbursing cash – play a determinant role, which have to be changed for Europe to move decisively towards a digital economy. However without convenient alternatives and cost transparency in particular for face- Legislation to harmonize to-face transactions, cash in circulation still expands sharply – averaging 7% of GDP in professional cross border the EU 27 compared to 5% in the U.S., and yet little has been done to harmonize the cash transport is necessary to 27 national processes and conditions for distributing and recycling euro cash. Almost 8 years reap the benefits of a true after the introduction of the physical euro, it is still in most instances impossible for internal market. professional 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 situation through legislation which would create the conditions for cross border cash transport by professionals is welcomed. What the legislator should pursue is the creation of a true internal market for professional cash transport. Any lesser objective would lead to questioning the policymaker’s stance on the need for SEPA and an internal market for payments. 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 is formally allowed – as soon as possible – within “cross border corridors” spanning up to 100 kms on each side of a border. In a 2nd Phase, at the latest by the end date that the European Commission is currently contemplating setting for the migration of legacy payment instruments to the SEPA Credit Transfer and Direct Debit Schemes, any limitation to cross border cash transport should be lifted and a genuine internal market should become possible. 177 See i.a. Rochet, J.-C. and J. Wright. 2009. “Credit Card Interchange Fees” (23 January 2009), as presented at the joint ECB/ De Nederlandsche Bank Conference Retail payments: integration and innovation on 25 May 2009. 178 European Commission. 2009. White Paper final by the European Commission on Professional Cross-Border Transportation of Euro Cash by Road between Member States in the Euro Area, COM(2009) 214, 18 May 2009. 147

The topics of e-SEPA The concept of “e-SEPA179”, as promoted by European authorities, is as yet ill-defined are too broad to be handled and ill-understood. It seems to cover domains such as e-invoicing in which banks can play under the sole responsibility a very limited role, and where there still are considerable legal hurdles to be removed for of the banking industry. any progress to be seen. It is unwise for the banking industry to be seen as co-responsible for what will be – even more than SEPA – a very long and uncertain process. As to other dimensions of “e-SEPA”, we are in effect talking about either using existing schemes over different access channels, or enhancing end-to-end convenience, again for existing schemes/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/or receive classic payment instructions such as credit transfers and direct debits, and e-invoicing on the other, which represents a completely different value chain in which banks play a very limited role. It must furthermore be highlighted that for the foreseeable short term future there will be limited deployment of actual m-payment solutions in Europe – simply because the massive enabling Near Field Communication (NFC) deployment – essential as in Europe m-payments will mostly be a niche application for substituting very, very low value cash transactions is still at least 2 years away. Attributes like convenience, There can be no dispute that the mobile phone is developing into the key interaction user friendliness and medium for citizens. Any residual doubt should be dispelled by the European perceived low costs have Commission’s Digital Competitiveness Report180 that finds the mobile penetration rate to lead to a penetration rate have reached 119% in the EU in 2008. The stellar growth in mobile phone deployment of 119% for mobile phones leads mobile phones to be increasingly used either for receipt of bank statement or in the EU. transaction information, or for payment initiation, or payment execution. From the onset the possibilities created by mobile phones for payments and banking have been much promoted – as not unusual the speed of market acceptance is slower than most predictions. Such rapid adoption of new technology and related services certainly demonstrates that customers have been swayed by key product attributes such as great convenience, user friendliness and perceived low costs. As far as developed countries are concerned, there is consensus amongst market experts that the target for mobile payments will be the displacement of cash for very low value transactions (e.g. transactions under EUR 20). Business cases are heavily savings and transaction price-dependent. Furthermore massive NFC deployment – expected to be a key enabler – is still two years away. The EPC decided in December 2007 to develop an “E-Payments Framework”181, a piece of 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 with the principles of building on international standards and defining conditions for interoperability between existing market solutions, thus giving market participants options for participation (either interlinking or migrating) which are pro-competition. 179 See i.a. Amundsen, E. and D. Kalsone. 2009. “E-Payment products and value-added services – moving towards an 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’s Digital 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 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). 148

Indeed the interoperability and possibly convergence that will be triggered by the E-Payments Framework will open the market for competition between payment service providers in their efforts to recruit both merchants and buyers, both choosing between a range of solutions on the basis of their features and pricing. This healthy competition should 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. a set of technical standards complemented by a rulebook), but a framework organising the logical layers that will support the provision of mobile payment services by participants in the payment industry, and formulating the core requirements that will ensure there is interoperability between the multiple solutions that will develop in a competitive market. The business case for switching from paper to e-invoicing is supported through multiple The Commission has study results: France Case Study182 – B2B savings of EUR 40 billion (2001), Capgemini acknowledged that Study183 – EUR 238 billion over 6 years, Danish Government184 – G2B savings EUR 100- e-invoices must be treated 134 million/year, EACT-CAST Project185 – 80% cost saving. The Expert Group convened on a par with paper invoices. in 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 interoperable e-invoice services”. Work structured in three streams namely business requirements, the legal and regulatory framework, and network and standards solutions, is well underway. The extremely low overall penetration rate of e-invoicing in the EU is notably due to uncertainty regarding the treatment of invoices with respect to VAT and different perceptions as to how to guarantee authenticity and integrity of data. In order to overcome these hurdles, the Expert Group proposed, and the Commission acknowledged, 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 solutions must remain technology neutral. Furthermore the Expert Group believes that the overall process control framework within and between trading entities is the crucial element in order to ensure the secure transmission and storage of e-invoices. The constant application of such business controls should represent the most important reassurance to tax authorities that VAT processes are correct. The Expert Group also formulated an EEI Model Agreement187 which would help create a binding framework for sellers and buyers to use and accept electronic invoices (whether they deal directly with each other or through a service provider). 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. 149

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9. ANTI-MONEY LAUNDERING, COUNTER TERRORIST FINANCING AND FINANCIAL INSTITUTIONS Setting the scene In order to protect the global financial system from illicit financial activities and to enhance the integrity of financial markets, the prevention of money laundering and of financing 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 21st century by terrorist attacks raise international awareness towards the problems of money laundering and terrorist financing. While the nature of money laundering and terrorist financing is different, both issues are intimately linked. Money laundering is an extremely complex process involving ever-changing financial set-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 any connections between the money and its criminal origin. n The laundering or layering in the second stage consists of multiplying the number of transactions 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 of new technologies and disparities between national laws. To address these developments, already in 1989 the G-7 established an inter-governmental body on international level. The Financial Action Task Force (FATF) – bringing together 33 states – developed and promoted policies both at national and international levels to combat money laundering and terrorist financing.188 In Europe, the creation of the Single Market provides advantages for businesses and consumers but also increases opportunities for money laundering and financial criminal activities. The EU – being aware of these associated risks – has therefore adopted legislation to protect the financial system and prevent money laundering and the financing of terrorism. The first Anti-Money Laundering Directive on the prevention of the use of the financial system for the purpose of money laundering adopted in 1991189 concentrated on drug trafficking. It obliged credit and financial institutions to identify customers and transactions exceeding EUR15,000, to examine any suspicious transaction possibly related to money laundering, and to inform the authorities of any fact which might be an indication of money laundering. Such reporting in good faith shall not constitute a violation of banking secrecy and must be made to specialized bodies known as Financial Intelligence Units (FIUs). 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 the purpose of money laundering, OJ L 166, 28.6.1991. 151

These central national agencies are charged with analysing the information collected from credit and financial institutions and, in case of serious evidence of money laundering, forwarding the case to prosecuting authorities. In 2001, Directive 2001/97/EC extended the scope to a series of non-financial activities and professions 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 the financial system for the purpose of money laundering and included terrorist financing. Moreover, in 2006 the European Commission launched an informal dialogue with the financial industry to exchange views on the issues in practice regarding Anti-Money Laundering and counter terrorist financing. As one of the keys to prevent money laundering transactions and to reveal suspicious transactions, knowing the person behind the relevant transaction seems to be essential. This approach is represented in the legislative measures of the Commission, which is to identify the parties behind the transaction. In particular, non-face-to-face activities challenge the capacity of the existing measures to ensure appropriate identification of the customer, thus bearing a risk of anonymity or false identity. Especially in retail banking with its focus on providing locally financial services to its customers, savings banks practice in their daily work a face-to-face relationship with their customers and maintain this approach through a wide-spread regional network of representations. Therefore, ESBG stresses the importance of a sound and stable business-consumer relationship to counter the risk of money laundering and terrorist financing. ESBG welcomes all the Commissions initiatives and is actively involved. However, in order to provide realistic expectations as to what financial institutions are able to achieve in practice, ESBG emphasises the importance of consulting and considering financial industries’ experiences for more effective regulatory initiatives in future. 9.1. The Third Anti-Money Laundering Directive Key messages n ESBG highlights the risk of human error when revealing the transmission if a data subject pursues his/her right to 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. 190 Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 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 of the use of the financial system for the purpose of money laundering and terrorist financing, OJ L 309, 25.11.2005. 152

Background The Third AML Directive 2005/60/EC came into force on 15 December 2007 and aims to include the funding of terrorism in the definition of money laundering. It extends the application of the system to trusts and insurance intermediaries and introduces a simplified due diligence system as well as banning anonymous accounts. Moreover, it incorporates the 40 Recommendations of the FATF192 on anti-money laundering and counter terrorist financing. The Third AML Directive introduces a risk-based approach which means that banks are obliged to implement customer due diligence requirements proportionally to the concrete risks 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 an increased risk. As consequence, supplementary measures have to be taken in order to verify the identification documents and to assess third-party institution's anti-money laundering and anti-terrorist financing controls. Moreover, the Third AML Directive introduces more specific and detailed provisions for the 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 or controls 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 is a legal entity. In addition, the Third AML Directive imposes requirements, such as the applicable level of the due diligence, concerning the risks associated with customers who, by virtue of their position in public life, are vulnerable to corruption, and sets out ways for firms to deal with such Politically Exposed Persons (PEPs). The Directive defines PEPs as “natural persons who are or have been entrusted with prominent public functions and immediate family members or persons known to be close associates of such persons”. Examinations of PEPs were already considered best practice but through the Third Directive this procedure has become law. National PEPs are excluded from the banks’ obligations to apply enhanced due diligence. Moreover, any disclosure to the customers that information related to their transactions has 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 implementing measures193 to the Third Directive, such as a definition of what should be understood by the term PEP, technical criteria allowing simplified due diligence, and technical criteria to exclude persons or entities with limited activities from the scope of the Directive. 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 Directive 2005/60/EC regarding the definition of ‘politically exposed person’ and the technical criteria for simplified customer due diligence procedures and for exemption on grounds of a financial activity conducted on an occasional or very limited basis, OJ L 214, 4.8.2006. 153

ESBG views The “no tipping-off” rule ESBG welcomes the risk-based approach, as it allows targeting efforts where they are creates practical problems. needed most. Regarding ESBG members’ experiences in relation to the rule on “no tipping-off”, members generally seem not to experience any problems. Nevertheless, some find that safeguarding the non-disclosure of the transmission to the Financial Intelligence Unit (FIU) requires special attention and special procedures to be taken into account by staff members manually. This carries the risk of human error which would reveal the transmission if a data subject utilises his/her right to access his personal data on the basis of the Privacy Directive 95/46/EC.194 Furthermore, practical problems with the rule on “no tipping-off” do occur – particularly when it comes to opening a basic bank account. Feedback from national FIUs Furthermore, as relates to the provision of feedback from their national FIUs after filing a should be improved. suspicious transaction report, ESBG members as well as the industry see substantial room for improvement. It seems that understaffing is a problem for some FIUs and in general it appears that there is substantial lack of feedback to the reporting bank. Moreover, the structure and designated powers of the FIUs vary widely in the 27 Member States. How far do banks need to go Regarding beneficial owners, ESBG is concerned about the obligation to identify and in investigating the identity verify their identity. Identifying a beneficial owner is not always easy, in particular in cases of the beneficial owner? where the account holder is a legal entity. In this regard, the key issue for financial institutions in terms of risk assessment is to understand the ownership and control structure of the customer. Many times, due to the lack of an official register or when the company is very small, financial institutions do not have access to sufficient and reliable information for carrying out such identification. Considering the complicated ownership structures of companies nowadays, the financial industry is concerned that the implementation of the directive at the national level does not sufficiently stipulate how far a bank must go in taking measures to decide on the beneficial owner. The treatment of ESBG doubts that there is a coherent application of the treatment of PEPs throughout the Politically Exposed Persons in EU, as there is no official PEPs list and the definition of PEPs is very broad. In the current the EU seems incoherent. situation, the European Commission should release an official “EU PEPs list” to facilitate a coherent application of the rules. Prior to the Third AML Directive, financial institutions checked on a voluntary basis existing commercial lists to identify “Publicly Exposed Persons”. Now, on a daily basis ESBG members encounter the problem that, because of the broad definition of a PEP in the Third AML Directive, the financial institution’s staff needs to make the distinction between “Politically Exposed Persons” and “Publicly Exposed Persons”. The latter is based on a commercial list, which leads to interpretation problems. Commercial lists therefore, can only be provided per Member State and can not be harmonised with an EU PEPs list. There is a need for As a more general comment, the Commission should develop clearer guidelines clarification on how far regarding the extent of measures which a bank needs to take in order to be considered investigations have to be compliant with the rules on beneficial ownership. It should be clarified how far undertaken. investigations have to be undertaken, also depending on the size of the client and the level of risk considered to be involved in the type of business the client carries out. 194 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, 23.11.119. 154

9.2. Compliance at Group Level Key messages n Banks have an interest in having good knowledge about operations and transactions of customers throughout the group. n Not all problems regarding compliance at group level have been defined due to the lack of transposition of the Third AML Directive in all Member States. n There is great value in establishing harmonised Data Protection rules for the handling of cross group information 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 customer when it is needed for “Know Your Customer” or when it comes to suspicion of Money Laundering. Background The so-called “compliance at group level” is currently being intensively discussed at the European level – dealing with AML requirements for groups active in different countries. In order to identify difficulties for compliance by financial institutions with the Third AML Directive at group level in an EU cross-border context, the Commission is therefore carrying out a survey among banks. One of the assumptions of the survey is that financial institutions tend to have a global risk management policy. The difficulties that may arise can be the result of more stringent or additional AML requirements in national legislation (gold-plating), but also as a result of of bank secrecy rules, data protection rules or different national supervisory practices. The Commission considers that discrepancies or inconsistencies between national AML regimes could give rise to legal uncertainty, operational problems (or operational advantages), and/or increased costs for financial institutions. The Commission survey is related to data protection rules and their relation with the transfer of customer data across borders. This is especially complicated when the group involves banks outside of Europe. The final Commission report issued in July 2009 concludes that, despite the minimum harmonisation nature of the AML Directive, the degree of convergence across Member States’ AML rules applicable to banks is relatively high. However, national regulatory differences remain in certain areas – in particular regarding the interaction of AML rules with national data protection rules and with bank secrecy rules and their impact on banks’ AML policies at group level (especially regarding the information flows within the group). Based on these findings, the Commission will prepare 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 of 2008. Although ESBG members are currently focusing on the recently implemented national legislation following the Third AML Directive, some Member States have not transposed the Directive into national law yet. For that reason, it is not certain that all problems 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. 155

Given the legal responsibilities to handle issues at group level, and given the reputation risk involved, it is in a bank’s own interest to have good knowledge about what is happening throughout the group. This is especially valid as some customers might conduct business in another part of the group as well. Excessive information On the division of the sanctions list, a large amount of information in the official list leads in the official sanction list to complications for financial institutions when screening for sanctions. Whenever the leads to complications. Commission wishes to offer “additional information”, it should be very clear that all the additional information on goods or personal data is only for reference and not for blocking transactions. Great value to have Data In order to handle this cross group information, it would be of great value to have Data Protection rules harmonised. Protection rules harmonised in order to know what is acceptable when processing personal data for AML purposes. It should be clear that it is allowed to share data about customers for consolidated “Know Your Customer” (KYC) and suspicious Money Laundering activities (ML) and probably also allowed to share data for a group-common Money Laundering-register. The question of which personal data is allowed to be used in customer approval processes, cross-border payments and checks against customer databases should be answered in a consistent manner across the EU. Furthermore, bank secrecy laws should not hinder transmission of information within a banking group about a customer when it is needed for KYC or when it comes to suspicion of ML. 9.3. Financial Action Task Force – FATF Key messages n There are mutual benefits for policymakers and the industry from further exchanging views and the Consultative Forum is a successful and workable format. n There is a need for adequately timed consultation periods which allows the financial industry to provide reasonable and substantive responses. Background The Financial Action Task Force on Money Laundering (FATF) – also known by its French name ”Le Groupe d'action financière sur le blanchiment de capitaux (GAFI)” – is an intergovernmental body founded in 1989 by the G-7. Its scope of action has widened from being 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 of proliferation of weapons of mass destruction (so-called Proliferation Financing). 156

As the standard setter to generate the necessary political will to bring about legislative and regulatory reforms in these areas, the FATF has published 40 recommendations on money 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 its regulation, and international co-operation. To guarantee a swift implementation of the nine special recommendations on terrorist financing, the FATF issued an action plan.197 In taking its action plan forward, the FATF will intensify its cooperation with the FATF-style regional bodies and international organisations, such as the United Nations, the Egmont Group of Financial Intelligence Units198, the G-20, and International Financial Institutions that support and contribute to the international effort against money laundering and terrorist financing. In early 2008, the FATF created the Consultative Forum aimed at establishing a successful and 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 great There is a mutual benefit importance and there are vast opportunities as well as benefits from working in for the industry and collaboration with the FATF. It is certainly of mutual benefit for the industry and the FATF as policymakers policymakers to exchange views on the legal, technical and practical aspects of any to exchange views. measure to reach the underlying aims. The Consultative Forum is one example of how the FATF has managed to establish a successful and workable format for such exchanges of views. ESBG very much welcomes those efforts. Looking forward, ESBG and its members would like to see an even more enhanced and Consultation periods need intensified cooperation between the industry and the FATF. As a starting point, the to allow for a reasonable consultation periods need to be long enough to allow for a reasonable and substantive and substantive response. response to be provided. At present the consultation timelines are very limited and therefore do not allow any in-depth assessment. Thus, the industries’ contributions to the debate are rather general and in some cases explicitly provisional. The situation is regrettable and recent consultations cannot be considered as proper consultations as such. This is important not only in order to create practicable and targeted measures but also to ensure efficient, timely and effective implementation of the policy measures. 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 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. 198 For More information see Egmont Group. 2009. “The Egmont Group”.www.egmontgroup.org]. Accessed June 2009. 157

9.4. Proliferation financing Key messages n Financial institutions do not usually have the insight in the underlying business transaction and details required to pass judgment on the possibility of Proliferation Financing as being the underlying aim of the financial 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. 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 and export of nuclear, chemical or biological weapons; their means of delivery and related materials.”199 The FATF report on Proliferation Financing, published in 2008, makes a general assessment of the threat of proliferation financing including a number of risk factors which makes a jurisdiction vulnerable. The section on “witting and unwitting” actors addresses issues particularly relevant for financial institutions such as risk management and customer due diligence, correspondent banks, reviewing and monitoring transactions, as well as identifying suspicious activity. In the annex, the report provides typologies which are elements indicating proliferation financing. These so-called red-flag indicators provide general scenarios where there may be reasons to suspect proliferation financing. Several countries have undertaken different strategies and measures to disrupt the financing of terrorism – including (among others) by identifying and blocking the sources of funding for terrorism, freezing the assets of terrorists and denying terrorists access to the international financial system. The multilateral financial prohibitions contained in the United Nations Security Council Resolution 1540 of 2004200 introduce an additional tool that complements existing counter proliferation regimes. Regarding the EU’s action in this field, the European Commission considers it a priority to intensify efforts to prevent and sanction the financing of proliferation. In this regard, the Commission asked Member States to raise the awareness of financial institutions and to strengthen their machinery for combating the financing of proliferation. Moreover, the Commission called for improving the cooperation between administrative authorities and financial 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. 158

ESBG views ESBG members are already active in the fight against proliferation of weapons and related Banks generally cannot pass goods by applying the existing financial sanctions against specific entities or persons judgement on the possibility involved in these activities. However, the fact that the vast majority of business of proliferation financing. transactions with a proliferation background will involve goods which by themselves are inconspicuous limits the possibility for banks to detect them. In all but the most exceptional cases, a proliferation connection can therefore only be derived from the overall context – and even then only by intelligence and proliferation experts, and usually only in hindsight. Financial institutions are only involved in the financial transaction and thus do not have insight into the actual business transaction. Therefore, financial institutions regularly do not have the details required to pass judgement on the possibility of Proliferation Financing as the underlying aim of the transaction. Even if details about the contract goods are provided in the respective documents, financial institutions do not possess the technical expertise to assess if the goods could be used to produce weapons of mass destruction. Only specialised experts from the export control authorities are skilled and have the necessary, technical knowledge. Moreover, many goods are so-called “dual-use” goods, meaning that they can be used for several purposes. Among these could be goods necessary for the creation of weapons of mass destruction whereas another purpose is perhaps construction in general. In any event, financial institutions lack the expertise to pass judgement on whether a particular good is consistent with the business activity of the supposed recipient or with the technological level of a country. The same applies correspondingly to inconsistencies with respect to the pricing of goods and transport. Any future measures to hinder the financing of proliferation of weapons of mass Customs authorities destruction must put realistic expectations on financial institutions. In areas where are more likely to detect customs authorities are more likely to detect such activity, the responsibility should suspicious activity. certainly target those actors, not least for efficiency reasons. As with terrorism, the proliferation of weapons of mass destruction poses a serious and Industry concerns on fundamental threat. ESBG members therefore attach great importance to contributing to proliferation have not been the fight against this proliferation. Nevertheless, it is regretful that despite severe industry appropriately considered feedback on the FATF proliferation financing report, the industry’s concerns have not by the FATF. been appropriately considered. There are large problems in the way that the FATF places responsibility on financial Clear indicators not requiring institutions in an area where they have little, if any, possibility of control. Along with the further individual assessment financial industry, ESBG is in particular concerned that the report intends to provide a list and/or judgment are needed. of red-flag indicators. It is not feasible to impose additional control obligations on financial institutions as long as certain restricted products and materials are concerned. Financial institutions do not have the necessary knowledge to be able to judge the technical background. In this regard, the indicators, in order to be useful, should describe only such characteristics which are present and noticeable in the information available. Furthermore, the indicators need to describe these characteristics in clear and unambiguous terms and should not contain elements requiring further individual assessment and/or judgment. 159

The characteristics in question must have actual distinguishing properties, describing characteristics for which empirical evidence has been demonstrated to appear with a significantly higher probability in connection with cases where the risk has materialised than in cases where the risk has not materialised. All of the mentioned “inconsistencies” are relatively common occurrences in legitimate international trade transactions. Thus, they are not suitable for identifying transactions with a potential proliferation background. Instead of imposing any inefficient new control obligations on financial institutions, the approach to provide reliable and adequate information about suspicious persons and entities should be strengthened. This approach enables financial institutions to verify if any of these persons or entities is a recipient of a financial transaction and to halt the transaction. 9.5. Financial Sanctions 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. 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 through the publication of a consolidated list of financial sanction targets. By using these lists banks and other financial institutions can scan their customer databases and discover financial assets controlled by those who are a listed target. The EU and its Member States have often imposed financial sanctions, which can be designed to target specific persons, groups, and entities responsible for the objectionable policies or behavior. Financial institutions and other entities are required to check whether they maintain any accounts or hold any funds or economic resources for, or provide financial services to, the individuals and/or entities subject to related EU financial sanctions. The implementation difficulties (legal status, incomplete information, etc.) of the electronic consolidated list of financial sanctions of the European Commission201 have been discussed for some time already. As a result, the improvement of the electronic consolidated 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. 160

In order to facilitate the application of financial sanctions, the financial industry and the Commission recognised the need for an EU consolidated list of persons, groups and entities subject to related financial sanctions. It was therefore agreed that the financial industry 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 was developed first and foremost to assist the financial industry in their compliance with financial sanctions. At the international level, the United Nations started a first exchange of views with representatives of the financial industry in order to improve the implementation of the UN financial sanctions. ESBG views There is a general issue that banks and credit institutions are obliged to implement financial sanctions which are drafted by authorities, such as the United Nations and the European Commission, without taking into account the work of credit institutions in practice. For that reason, ESBG welcomes the established discussions with the Commission and Banks and the EU institutions Council representatives on how to improve the applicability of financial sanctions for should discuss the applicability banks. Moreover, the requests and recommendations for best practices of the financial of financial sanctions industry have been largely taken into account by legislators in the guidelines to for banks. implement and evaluate sanctions.202 To better implement the UN financial sanctions, ESBG along with the financial industry Banks need legal security recommended that (i) the identification of persons or organisations targeted by financial when applying the sanctions should be improved; (ii) the definition and handling of the “freezing of funds” resolutions in good faith. should be improved and made more practicable without favouring targeted account/safe deposit holder, (iii) competent authorities should ensure rapid clarification, unfreezing and authorisation procedures and (iv) the legal security of banks and their staff should be improved by an exemption from liability when applying the resolutions in good faith. 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. 161

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10. SME FINANCING 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 Market for SMEs and the ability to go cross-border by providing information on Member State registration procedure and taxation. n There is a need to bring coherence, to communicate and to clearly define the aim and target group of different European financial support programmes for SMEs. n There is a need to take a comprehensive and coordinated approach in the provision of microcredit taking into account the principle of subsidiarity. n There is a need to facilitate the provision of microcredit at the national, regional and local level via targeted business 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 financing activities. Setting the scene Small and medium-sized enterprises (SMEs) are considered the backbone of the European economy and serve as principal creators of innovation, jobs and wealth. At the European level, an SME is defined as an enterprise with fewer than 250 employees, a turnover of up to EUR 50 million or a balance sheet of no more than EUR 43 million. SMEs represent a major part of the European economy. It is estimated that some 23 million SMEs in the EU provide approximately 75 million jobs. Ninety-nine percent of all enterprises in Europe are SMEs, under the Commission’s definition, and in some industrial sectors SMEs represent almost 80% of the total employment. They play a central role in achieving the Lisbon goals of the European Union to become the most competitive and dynamic knowledge based economy in the world. Against this background, SME policy has become a natural priority for the European Commission seeking to improve the business environment for SMEs in general, to simplify the regulatory environment for European companies and to tackle the financing problems that small and medium-sized enterprises face. This has resulted in a number of initiatives like the Small Business Act for Europe (SBA) and several financial support systems at the European level, such as the Competitiveness and Innovation Framework Programme (CIP), European Fund for Regional Development (EFRD), European Social Fund (ESF), the Joint European Resources for Micro to Medium Enterprises initiative (JEREMIE), the Joint Action to Support Micro Finance Institutions in Europe (JASMINE) and the proposed Progress microfinance facility. 163

JASMINE In November 2007, the European Commission adopted a Communication203 to improve access to finance for micro-entrepreneurs and financially excluded people. The proposed initiative 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 microcredit with the view towards developing mentoring services which are essential to support micro-borrowers setting up a business, to develop good market practices by creating a specific microcredit label and a guide of good conduct. The Communication also put forward a proposal to create, together with the European Investment Fund (EIF) and the European Investment Bank (EIB), a facility for financial support to microcredit. A microcredit initiative – the so called Microfund – was proposed for this means. The initiative was planned to be embedded in the JASMINE project, an instrument developed by DG Regional Policy of the European Commission, the European Investment Bank (EIB) and the European Investment Fund (EIF) to increase the range of microcredit available in Europe through supporting the non-bank institutions providing such credits. The JASMINE initiative was launched in September 2008. It covers the provision of funding in a co-finance facility which started to be operational in spring 2009, technical assistance 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 on Microcredit was drafted in the European Parliament’s Committee on Economic and Monetary 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 in June 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% by 2012. The 10 principles of the SBA are the guidelines to the conception and implementation of SME policies at the EU and Member States’ level. The essential principles aim to create a level playing field for SMEs, applying the ‘Think Small First Principle’ and to improve the legal and administrative environment for SMEs. Moreover, other principles address the issues of granting a second chance for business failures, facilitating access to finance, and enabling SMEs to turn environmental challenges into opportunities. 203 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-credit in support of growth and employment [COM(2007) 708 final/2], 20 December. 204 European Parliament. 2009. Report on European initiative for the development of micro-credit in support of growth 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. 164

In addition, the SBA outlines the time needed to start a new company, the maximum time to obtain business licenses and the ‘One-Stop-Shops’ to facilitate start-up and recruitment procedures. The SBA seeks new ways to stimulate interest in SMEs and family businesses and new ways to cultivate a more entrepreneurial mindset for innovation and upgrade 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 December 2008, supplemented by an action plan committing the Commission and the Member States 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 administrative burden and enabling them to fully benefit from the opportunities offered by European and 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 "SME Test" when assessing the impact of forthcoming regulation on SMEs. The Plenary of the European 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 European Microfinance Facility for Employment and Social Inclusion. The so-called Progress Mircofinance Facility was one of the actions announced by the Commiission Communication ‘A shared commitment for Employment’.208 In order to fund the new facility, the Commission will reallocate EUR 100 million from the existing EU budget and aims to leverage up to EUR 500 million in cooperation with international financial institutions and in particular the European Investment Bank (EIB) Group. The facility is open to public and private bodies established in Member States which provide microfinance to persons and micro enterprises in the EU. It will facilitate access to microcredit by providing equity and debt financing. In addition, it will also support measures such as training and mentoring. The Progress Microfinance Facility is expected to 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 towards improving the business environment for SMEs. Nevertheless, there is still work to be done in the area of administrative rules and regulations, the access to finance in the form of financial support programmes, microcredit and lending, cross-border activities and CSR for SMEs. 206 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/impression PDFe93d.pdf?url=%2FPFUE%2Flang%2Fen%2Faccueil%2FPFUE-12_2008%2FPFUE- 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 European Parliament, the European Economic and Social Committee and the Committee of the Regions. A Shared Commitment for Employment [COM(2009) 257 final], 3 June. 165

Savings Banks are important ESBG members are traditionally natural business partners of SMEs, following their partners of SMEs throughout business development throughout the SME’s lifecycle, tackling problems that may arise their lifecycle. and 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 the root 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 are furthermore important partners to micro enterprises. They provide the whole range of financial products to SMEs at local level, giving access to loans, guarantees, microcredits as well as to the equity and capital markets. In addition, savings banks often try to support SMEs from the very onset of their existence, or at later stages by providing alternative services, such as private equity. Given the close and long-standing business relationships between SMEs and savings banks, ESBG is committed to taking an active part in the work in this field, and to assist the Commission in its work towards a better business and financial environment for European SMEs. The Small Business Act For all SBA measures the ESBG considers it very important to improve the business environment and financing ‘Think Small First” principle for SMEs. The measures proposed in the SBA are undeniably in line with the general goal has to be strictly applied. to cut administrative burden for SMEs. ESBG would however have preferred the Commission to include far reaching measures in the SBA which would have strengthened the value of the statements made in the Act. Such an action could have included an official recognition at the national level to the “think small first” principle and be incorporated into all policy making targeted towards SMEs. Nevertheless, ESBG welcomes the commitment made by Member States during the Competitiveness Council meeting to apply the “Think Small First” principle. EU policies to alleviate In this context, it is important to avoid any overlapping measures. There is a need to administrative burdens need coordinate different EU policies in order to avoid excessive administrative burden for better coordination. European SMEs. This is not least of great importance when it comes to providing EU financial support for SMEs and micro enterprises. EU policies should be Regarding the administrative burden on SMEs which is caused by EU legislation, it is adapted to small important to acknowledge that the imposed administration, as such, tends to have a business entitities. more significant impact on smaller entities than on larger corporations. SMEs are small entities, and by their nature, these entities face different problems than those of larger corporations. 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 focus their 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 of the services provided by ESBG members to their SME clients has proven a successful tool. 166

Another issue for attention is the administration for the creation of an enterprise which The setting up of SMEs, varies greatly across the EU. In order to facilitate business creation, the time and cost for their registration and registration needs to be addressed. In this regard, the Commission should play a role in transfers should be facilitating the registration procedures. Measures already undertaken by the Commission facilitated. like the initiative “Business start-ups in one week” of 2007, should be carried on and fostered 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 increasingly important. Work to facilitate such transfers is important as too complicated procedures could result in a loss of already built up, functioning enterprises. Thus, the question of subsidiarity arises and overlapping measures with already existing initiatives in the Member States must be avoided. The idea of the Commission presented in its SBA, to turn the environmental challenge CSR should be promoted into opportunities for SMEs is very welcome and in line with ESBG’s general approach for SMEs. towards assisting SMEs in becoming more aware about the environment in which they operate. Considering the importance given to social responsibility within their own organisations, savings banks take every opportunity to assist their SME clients to improve and promote their respective work carried out in the field of social responsibility. ESBG members have a longstanding contribution to CSR and a number of schemes within ESBG member institutions target SMEs specifically. Supporting SMEs going across borders Looking ahead, support functions for SMEs are needed not only for creating a favourable business environment in their home markets, but also for SMEs deciding to go international. An increasing number of SMEs are entering into cross-border activity and even small-scale entrepreneurs begin to see the possibilities in expanding their businesses across national borders. As SME partners, banks need to think ahead and be flexible in terms of offering simple solutions that enable SMEs to get in contact with local service providers in prospective new markets. It is important to facilitate access to the Single Market, not only for larger companies, but SMEs should be able also for SMEs and micro-enterprises. An initial measure, in order to assist SMEs going to operate easily within across borders, could be to encourage Member States to provide clear, user-friendly the Single Market. information on the Internet regarding their national registration procedures and taxation. In order to be accessible for foreign SMEs, such information should preferably be available 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, also electronically, by the end of 2009 is an important step. ESBG has over the years put great effort into assisting SMEs that are expanding ESBG’s International Business internationally. It has in particular set up a joint subsidiary, Tevea International, which network assists SMEs in offers para-banking services for SMEs involved in import/export activities. Moreover, a operating within the EU. new service was recently launched, also as part of European savings banks’ effort to develop business cooperation: the International Business Network (IBN). This network is designed to support SME customers in their business abroad with a trans-national service offer. The network also focuses on the provision of quick and easy access to reliable and useful information on account opening requirements and banking conditions in general for SMEs in the destination country. 167

Access to finance EU financial support With regards to access to finance and the issue of existing financial EU support systems programmes need greater for SMEs, these tend to focus to a large extent on the supply side and neglect an analysis coherence & coordination, of the needs and demand of SMEs. There are a number of support programmes in place as well as clear definitions. and thus a wide offer, which are not always easily understandable or accessible to the intended beneficiaries. An increase in the already rather vast offer can thus in some cases be a part of the problem rather than the solution. In order to clarify and enhance the outreach 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 target groups should be clearly defined and communicated. Microcredit Target groups The savings banks’ activity in providing credits to small and micro enterprises comes of EU microcredit naturally due to their mandate to contribute to their regions and be socially responsible programmes should be institutions. In this regard, microcredit has in recent times been recognised as an better differentiated and important tool for growth, jobs and for fighting financial exclusion among European clearly defined. policymakers. However, there is a potential lack of coherence between the different initiatives at the EU level regarding the target groups for the support envisaged. There is no formal definition of the term “microcredit” although the European Commission has suggested all loans not exceeding EUR 25,000 be considered microcredits. A more general provision of the term is that offering microcredit means extending smaller loans to the poor or to those who cannot access finance through ordinary banking structures. This can be due to a lack of experience, collateral, or knowledge about the national legal and business environment – for example in the case of migrant entrepreneurs. Therefore, ESBG advocates for a clear definition of target groups of microcredit. Their specific hurdles for finance and requirements for qualification differ widely, depending on whether sustainable and commercially viable projects, start-ups or projects with a socio-political component are addressed. Simple “labels”, such as migrants, the unemployed or women, are not useful as they are not indicative for any decision on credit or business viability. Microcredit should first be Tradition and longstanding experience of the local market is crucial for evaluating the facilitated at national, viability of a business concept whatever its scope and size, and including small-scale regional and local level. projects. Given the local dimension 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 – 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 and available support organisations (such as economic chambers, promotion agencies, microfinance institutions or start-up initiatives). In such a case, a solution in some European markets could be for the latter to focus on providing support services, leaving banks with the task of credit provision. Risk, costs and consequences In addition, the increased risks and costs involved in microcredit activity need to be of microcredit should be counteracted – for example through additional business support and accompaniment of better addressed. the entrepreneur or through targeted support schemes where the maximisation of profit is not the sole aim of the activity. Specific challenges for micro or start-up credits are in some 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 banking system and not to transfer them to a second credit market, labelling them "non- bankable" and thus stigmatising them. 168

ESBG has participated with great interest in the debate at the EU level on financial Financial institutions education. Knowledge about financial matters is an important tool for creating a – especially savings banks – successful enterprise. Many small business entities lack an understanding of basic are key providers in financial financial services products, and most small enterprises cannot afford expensive education and advice to SMEs. consultancy services. Although financial education is primarily the responsibility of Member States, financial institutions can contribute as “educators”, both in various schemes at the international, national or local level, and in the everyday meeting with their SME clients. As the local partners of SMEs, the employees of savings banks often take on the role of explaining and guiding SMEs in the financial services field and beyond throughout their life cycle. Due to the higher risk that smaller entities face resulting from a larger exposure to external risk factors, financial institutions can also play a role in explaining the use of the risk management products on offer to SMEs. Savings banks across Europe have operated in this spirit at the local level for more than a century and used microcredit as a means to help entrepreneurs to integrate, or re-integrate into social and economic life. Specific targeted schemes have developed within savings banks focussing 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 qualification EU microdrecit measures as an entrepreneur or lack of a viable business idea are too big to be overcome by need proper eligibility adequate support measures, should not be driven into debt through subsidized criteria for borrowers. microcredit offers. Any EU support measures which allow national or regional managing authorities to enter into uncalculated financing risks at lowest interest rates should therefore be avoided since such unfair competition makes any existing attempts by private suppliers to provide micro credits and corresponding support in commercial terms fruitless. Throughout the discussions on microcredit at the EU level, ESBG has been actively involved JASMINE should target all and continuously called for a more comprehensive approach towards microcredit. It is intermediaries providing important to acknowledge that there is a wide-ranging variety of institutions offering microcredit. microcredit in Europe. All have diverse aims and targets, but all actively contribute to reaching 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 full benefits of microcredit in the form of growth and job creation, the support measures in favour of microcredit, such as the recently launched JASMINE initiative should be targeted at all intermediaries providing micro-credit. It would also particularly be required to ensure that all microcredit services initiatives Follow-up actions & throughout the EU, whatever the status or the legal structure of the provider involved, recommendations of EU are able to develop optimally, and with a view to optimize the advantages brought to the microcredit programmes beneficiaries. In this regard, specific attention will need to be given to the scope and focus need full attention. of follow-up actions or recommendations eventually launched by the Commission and/or the Member States. This will be all the more important for promoting the exchange of best practices, especially between banks and non banks, as suggested by the Commission. 169

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11. FINANCIAL INCLUSION Key messages n ESBG strongly advocates for a strict application of the principle of subsidiarity and for dealing with financial inclusion 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 the problem 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 of information 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. Setting the scene During the past few years, the topic of financial inclusion has increasingly been in the focus 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 "Financial services provision and prevention of financial exclusion"209 was commissioned. The report provided data on the levels, causes and consequences of financial exclusion in the Member States, described the diversity of policy responses developed in different Member States in the field of transaction banking services, credit and savings, and proposed a series of potential policy responses to prevent financial exclusion of people facing poverty or social exclusion. Following a conference publishing this report and a commitment in the Single Market for 21st Century Europe210 to ensure that by a certain date nobody is denied access to a basic bank account, DG Internal Market and Services together with DG Employment, Social Affairs and Equal Opportunities of the European Commission launched a public consultation in February 2009. The Consultation “Financial Inclusion: Ensuring Access to a Basic Bank Account”211 described the levels, causes and consequences of financial exclusion in the EU. 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, the Council, the European Economic 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. 211 European Commission. 2009. Financial Inclusion. Ensuring Access to a Basic Bank Account Consultation Document [MARKT/H3/MI D(2009), 6 February. 171

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 sharing best 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 Promoting financial Savings banks are by tradition important promoters of financial inclusion of all citizens. inclusion of all is a central The promotion of financial inclusion for all citizens is part of savings banks’ mission. ESBG mission. Caring for the general interest of society is the savings banks’ initial purpose and is an integral part of their identity, as a long term commitment towards meeting the critical needs of society through their daily business. Therefore, ESBG considers that the “bankarization” of citizens is not only desirable in terms of social stability avoiding financial exclusion but is also of economic and financial importance as it enlarges the market and the scope of potential customers. In addition, many ESBG members have introduced specific, targeted schemes to ensure that also the most vulnerable parts of the population have access to necessary basic financial services.212 ESBG welcomes the Commission’s aim to encourage the further development of financial inclusion of all EU citizens. The debate at the European level shows the growing awareness of parties involved. The principle of Considering the important commitment of its members in the field of financial inclusion, subsidiarity has to apply ESBG and its members strongly advocate for a strict application of the principle of – financial exclusion subsidiarity. ESBG agrees with the aim of European policy makers to raise the level of needs to be tackled at financial inclusion among all citizens. However, there is a need to deal with the fight the national level. against financial exclusion first and foremost at the level of Member States. The specific reasons for financial exclusion are manifold and differ widely from country to country due to 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 main reasons. Another important aspect is the issue of trust. A lack of trust in the stability and accountability of the financial sector can have significant influence on consumers’ choice to store money in cash. A clear distinction must also always be made between those consumers who are financially excluded and those who, for some reason, choose not to buy a certain product or who do not make appropriate use of the products available. These diverse situations call for different approaches and subsequently different possible solutions taken at the national level. Avoid a one size-fits all The most suitable way of handling the problem of financial exclusion is therefore to have approach: apply specific measures at national level in the countries where the problem of financial exclusion arises tailored national, regional – tailored to each context and the traditions of each country. ESBG is convinced that and local approaches. governments of Member States are the most suited to find remedies for possible problems in accessing financial services depending on the situation in their national markets. In this context, it is also important to recognize that circumstances may not only be national but in many cases regional or even local in order to avoid taking an – ultimately futile – one-size-fits-all approach. 212 Also see Annex 2, CSR Case Studies 172

In addition, it has to be stressed that financial exclusion is one element of the broader Financial exclusion should be problem of social exclusion and therefore often closely linked to low income, age, addressed in the wider education and status of ethnic minorities or migrants. It is thus not an isolated issue and context of social exclusion. the effects of the exclusion will therefore also differ. In those markets where the problem is clearly and almost exclusively related to socially excluded individuals, financial exclusion might 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 lies with problems related to general social exclusion, a more holistic approach to the problem should be taken. This would mean starting by addressing issues such as employment, physical and mental health and housing. This does not exclude the possibility of linking such efforts with the introduction or reintegration into the formal financial system. Access to Basic Banking Services ESBG welcomes the Commission’s aim to encourage further developments of access to A clear definition of the financial services to all EU citizens and residents. The access to a bank account is certainly coverage of a ‘basic bank the most crucial part of financial inclusion. A clear definition of the coverage of such a account’ is necessary. service is of utmost importance. For the purpose of responding to the Commission consultation on “Financial Inclusion: Ensuring Access to a Basic Bank Account”, ESBG defined the basic bank account as an account which enables the account holder to receive 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 enable the 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 credit card 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 against Financial inclusion needs regulation. Applying the better regulation principle, there is no justification for an to be advocated, but not intervention at the EU level in countries where financial exclusion is not an issue, and regulated. neither 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, only 2% of consumers do not have access at all. This does not evidence a distortion of the internal market and therefore, no regulatory action at the European level is required. However, ESBG sees the Commission playing a role in maintaining awareness on the subject and facilitating the sharing of information and best practices but does neither see room nor necessity for any regulatory measure for the access to a basic bank account at the European level. Moreover, in order to objectively assess the current situation, ESBG requests that the Commission balance the Eurobarometer findings used in the consultation with national, regional and local market studies. In addition, the existing national regulation in some Member States prove that still no Inititatives to to foster complete coverage can be reached by legislative means. Therefore, initiatives in this field financial inclusion should should always be taken on a voluntary level, and cannot be imposed on banks. always be voluntary. Financial providers should by no means, be obliged to provide financial products or services as this would interfere with the principle of contractual freedom, private autonomy and the obligation of each provider to perform risk management. It would also hamper the innovation of products and services, in particular in the markets where citizens already have easy access to bank accounts. Besides, compulsory measures would increase costs to the financial institution and result in an increase of fees or other costs which would have most likely to be borne by customers. 173

Proximity banking National governments, the financial industry and consumer oriented organisations have already been very active in offering specific, targeted programmes and products to ensure that also the most vulnerable parts of the population have access to necessary basic financial services. ESBG and its member are convinced that access to financial services can and should be increased in various ways, by offering specific products and services. Financial institutions need to adapt their products and services, making them available and accessible for all, through adequate information and through financial education and by improving the level of financial literacy. ESBG members are committed to functioning responsibly and to serving all strata of society. Through various schemes they target particularly vulnerable groups, enabling them to obtain additional support in the form of tailor-made products, services, information and financial education. This shows that ESBG and its member have a longstanding experience to ensure that also the most vulnerable parts of the population have access to necessary basic financial services. Proximity banking is The concept of ensuring financial inclusion includes a wide range of activities next to a success factor to enhance access to a basic banking services and financial education. Proximity banking is also an financial inclusion. important means for increasing the level of financial inclusion. For many consumers, not least the weaker groups in society, proximity is of crucial importance when choosing their financial service provider. Support, accompaniment and explanations are necessary in order 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 fast speed and consumers are asked to take more and more responsibility for their personal finances, 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 areas than in larger cities. ESBG firmly believes that one of the most important success factors when aiming for financial inclusion of all citizens is for the provider to remain close to the client. In order to live up to this aim, ESBG members work through wide-reaching networks, whether via branches or independent entities. This enables them to serve consumers in cities as well as in more remote geographic areas and to provide all the necessary support for their clients, tailored to each customer’s specific situation. Thus, proximity banking is not always and exclusively related to less wealthy groups, but also 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 for access to finance would increase. 174

12. FINANCIAL EDUCATION 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. Setting the scene Consumer empowerment has been the focus of the European Commission in recent initiatives targeting the retail financial services sector, such as the Green Paper on Retail Financial Services213 and the Single Market Review214. Financial education is recognised as one of the means for achieving a higher level of consumer confidence. It is not only approached 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 a consequence, the Commission adopted a Communication on Financial Education in December 2007215, providing a number of recommendations to the EU Member States on how to address the issue at the national level. In reaction to the Commission Communication, the EU Finance Ministers concluded in May 2008 that raising public awareness about financial issues is seen as being of particular importance as products become more and more complex and consumers need to make an increasing number of choices for their personal finance. In addition, the European Commission established the Expert Group on Financial Education (EGFE)216 in 2008 which aims at promoting the exchange 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 November 2008, advocating for a stronger focus on the role of Member States instead of action at the EU level, and on exchanges of best practices rather than legislation. In addition, the European Commission launched the European Database for Financial Education (EDFE)218 in January 2009. It has been designed as a reference to numerous financial education programmes offered by public or private institutions in the EU. 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, the Council, the European Economic 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. 2008. Commission Staff Working Document. 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 Strategies for Financial Education. Report, 7 October. 217 European Parliament. 2008. European Parliament resolution of 18 November 2008 on protecting the consumer: 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. 175

Financial education has been Ensuring a high level of financial literacy is a matter which has throughout history been important throughout seen as an issue of great importance among savings banks across Europe. Savings banks play savings banks’ history. a key role in educating people on finance and budget matters, far beyond their actual clientele. Consumers’ lack of insight into and understanding of financial matters can be detrimental for customers’ confidence and even to customers’ satisfaction. It is consequently in the interest of all stakeholders to work together towards improving the situation. Financial education is ESBG therefore considers that financial education is an important way to enable citizens important to empower to make their own independent judgement as well as conscious choices on the products citizens and prevent offered to them. Consumers need to have the skills to manage and use their money over-indebtedness. wisely and adequately, and to understand the complex products and variety of services that are offered. In developing these skills and enabling consumers to choose the products and services that are best tailored to their specific needs, financial education also plays an important role to prevent over-indebtedness and to integrate people who are at risk of financial exclusion. ESBG views Provision of financial As financial institutions with a strong commitment to CSR, ESBG members welcome all educations should be efforts to ensure that European consumers are knowledgeable and well-informed on dealt with at national, financial matters. ESBG supports the European institutions’ initiative of placing financial regional and local level. education high on the agenda and welcomes the current discussion on European level, reflecting the importance of the topic. Nevertheless, ESBG is convinced that the provision of financial education is mainly a matter for Member States and should be dealt with at national level, regional and local level. This way, financial literacy schemes are able to take into account the local specificities, such as culture, tradition and languages. All stakeholders have In order to make financial education an efficient and sustainable tool to empower a responsibility to foster the consumer, all interested stakeholders have to be involved. Member States, national financial education. governments, education bodies and authorities, financial regulators and institutions, as well as other stakeholders such as parents, share the responsibility to foster financial education amongst Europe’s citizens, helping them to have a better knowledge of financial issues and to make informed choices. Governments and public institutions have the responsibility to give the policy orientations, to provide the overall support to financial education strategies, to raise awareness on potential financial needs and risks, and to encourage people to anticipate and prevent personal financial difficulties. Financial institutions, including savings banks, are involved in delivering financial education programmes and schemes to increase the level of financial literacy. Savings banks should be Savings banks are close to their clients and well aware of the areas where the lack of involved in drafting financial knowledge is most present. They can widely contribute to financial education throughout education programmes. citizens’ lives, and savings banks play a key role all over Europe in educating people on specific money matters. ESBG members have traditionally been involved to a large extent in creating and participating in various financial literacy schemes at the local level, tailoring the needs of the target groups and covering literacy programmes in primary, secondary and higher education.219 They therefore have a significant amount of experience to share as best practises with other actors. Based on the knowledge of their clients’ needs, savings banks can efficiently bring their expertise to financial education campaigns and provide technical input for the development of targeted projects focusing on consumer’s life planning aspects – and they can do this successfully on a voluntary basis. 219 Please also see Annex 2 CSR Case Studies 176

Against this background, the ESBG welcomes the two practical initiatives on European level to encourage the sharing of experiences and best practices which were outlined in the Commission’s 2007 Communication on Financial Education: the Expert Group on Financial Education (EGFE) to which two ESBG members220 participate and the European Database for Financial Education (EDFE) in which a number of schemes initiated and carried out by ESBG members are presented in the database including the European Stock Market Learning221 initiative – a multinational financial education programme for students which is a joint project of savings banks across Europe,. The latter has received great 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 for Financial 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. 177

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CONCLUDING REMARKS While this report was being developed, the financial world was changing dramatically. This report can therefore not be a summary of conclusions reached in important debates or an attempt to capture the status quo in all different discussions. Rather, we hope that it will contribute to the ongoing debates and shape them as they move forward. We also hope that the parameters developed here will set future standards for those discussions which currently appear suspended. Regarding our concrete recommendations on retail banking policy, we believe that now is the best time to give them their due consideration and to integrate them into the ongoing regulatory efforts and into current and upcoming assessments on the need and scope for future regulation 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 is difficult to make projections for the future, since, even at the time of writing, many ‘fashionable wisdoms’ and political priorities on retail banking and retail banking sector integration are being overthrown. Yet there are three central themes to our recommendations 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, and third, 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 to the risks associated with misguided priorities. Now, globally and at the EU level, efforts are being made to take necessary actions to address the lessons learned and to increase the stability of financial systems. This is an urgent task, which still requires a judicious 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 banks should be built based upon their role in the real economy; they should not trigger ambitious and unrealistic politically motivated goals. Looking at the efforts already underway, the current revisions to EU regulation and supervision are timely and entail many important 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 subject to 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 reflect on the best possible outcome - keeping in mind that the existing business models have proven their validity and adaptability to the circumstances in the markets they serve. Traditionally, banking is an economic activity which takes a long time to build, and which, by its very nature, combines dynamic reactions to changes in demand and economic circumstances with a long-term outlook 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 changes in political trends. 179

3) Europe needs a targeted approach to regulation according to the principles of proportionality and compatibility with national circumstances Regulation which imposes undue burden or hampers banks’ competitiveness without any clear general benefits is not good regulation. EU-level regulation is of course often needed for market functioning and for market integration. Yet, it needs to be consistent, compatible with the different market environments, and concentrated on those areas where it is necessary and generates added value. These are general principles, but they particularly apply to retail banking. Not only is retail banking a central economic activity, it is also thoroughly imbedded in the economy, covers various important activities, and concerns a wide range of stakeholders. In addition, the diversity within the retail banking sector, as well as the diversity of national practices and environments, is greater than in many other industries. As a result – at least theoretically – the scope for EU level intervention is wide, 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 banking sector. Looking ahead, it is our hope that they will be part of the future debates on European retail banking and help set a trend for the way forward. 180

ANNEX 1 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

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 Czech Republic 65.8 65.5 65.7 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 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 198

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 Source: ECB Blue Book, Addendum incorporating 2008 figures (consolidated). 199

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 0% 20% 40% 60% 80% 100% Penetration rate n Inter-bank funds transfer systems penetration rate, 2007 (%) 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 Czech Republic 1.1 1.1 1.2 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 Source: ECB Blue Book, Addendum incorporating 2008 figures (consolidated). 201

Figure 3: Country market share in SEPA-27 (%) 2005-2007 United Kingdom 20.6% Belgium 2.8% Bulgaria 0.2% Czech Republic 1.2% Denmark 1.6% Sweden 2.9% Finland 2.2% Germany 18.9% Slovakia 0.6% Estonia 0.3% Ireland 1.0% Slovenia 0.4% Greece 0.4% Romania 0.6% Spain 7.1% Portugal 2.0% Poland 2.5% Austria 2.6% France 19.7% Netherlands 5.7% Hungary 1.0% Italy 4.9% Cyprus 0.1% Latvia 0.3% Lithuania 0.3% Luxembourg 0.1% 202

ANNEX 2 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 Charter for Responsible Business in practice. They are grouped under the six principles of the Charter. The text of the Charter and further implementation 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 to differentiate themselves in the market. CAN decided to create an emotional link by giving its customers the right to decide where the 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 social trends 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 and sustainability. Plan Cantera gives clients some important rights such as the right to know how much money the bank is making from 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 by CAN 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-six percent 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 customers chose a civic account; 1,272 projects were selected for funding and 4,193 customers carried out voluntary work on the projects with 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 sustainable development 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 Marketing 2. Fighting climate change 3. Fostering socially responsible investment 4. Solidarity Further information about “Bénéfices Futur” is available at its dedicated interactive website www.beneficesfutur.fr. 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 financing of community investment programmes (social, cultural, environmental, health, research, etc). 203

One of the most innovative initiatives taken under the Responsible Marketing pillar of this programme was the labelling of their products. 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 risk n Corporate social responsibility (CSR) and socially responsible investment (SRI) criteria in the product design n Carbon footprint of the product In order to implement this ethical labeling initiative, a methodology was developed by the Caisses d’Epargne and a consultancy company in cooperation with four external partners: ADEME (the French environmental management agency) Friends of the Earth, WWF and a consumer organisation “Testé pour vous”. This initiative came to fruition in 2008 when the savings products of 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 communicated its 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 global warming of the earth as a result of greenhouse gases due to human activities. In order to know whether its investment strategy was contributing to global warming, ASN Bank addressed Trucost, an environmental data provider specialized in reporting the environmental 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 of the three ASN investment funds were considerably reduced in 2008. In effect, the total combined carbon intensity of its funds is 49% lower than the benchmark, the MCSI All World Developed Index. This shows that the customers of ASN Bank invest in much more climate-friendly funds than the average investor. Furthermore they are able to assess the carbon intensity of their investments 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 whose first language is not English. The management has hired multilingual staff to ensure that their workforce reflects the composition of the local community. Moreover, the senior business banking managers are being trained to be aware of cultural differences and to encourage diversity. Thus Lloyds TSB acknowledges that people from ethnic minority communities make a significant contribution 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 “Bancaja Commitment” and aims to make banking transactions clear and transparent for customers. Under the slogan “If it's not good for you, it's not good for us”, Bancaja has pledged to fulfil 17 separate commitments. These have been added progressively since 2005 with the objective of fulfilling all the needs that private customers can have in their banking operations. Although it is focused 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 is stipulated 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 banking products and services. This programme also allows for the possibility of providing the beneficiary with microloans backed by 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 social authorities. In order to offer this service, the Caisses d’Epargne have developed partnerships with a wide range of stakeholders such as business creation specialists as well as social assistance and integration organizations. A total of 4,495 micro loans were granted from when the system was launched in 2006 up to the end of 2008. Of these, 3,275 were personal microloans and 1,220 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 in 2006 initiated by Erste Foundation in close cooperation with Caritas and a debt counselling service. Its objective is to provide bank accounts 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 offer overdraft facilities. It is offered for three years with the perspective that, after this period, beneficiaries can be reintegrated into the “conventional” banking system. The distinguishing feature of the Zweite Sparkasse is that it is entirely run by volunteers. Over 400 volunteers of the Erste Bank and the Sparkassen (savings banks) in Austria are involved with the Zweite Sparkasse, which enhances its visibility. Since 2008, it has been operational in almost all federal states of Austria and 4,000 accounts have been opened. More information is available at: 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 been improving the financial management skills of people in Germany. Geld und Haushalt (Money and the Private Household) is the advisory 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 budget management. The key objectives are to enhance basic financial know-how, improve the understanding of efficient spending in private 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 for Sustainable Development (2005-2014). 205

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 in consumer friendliness and on keeping the bank accessible to a broad section of the population. As part of this strategy, SNS Bank decided to enlarge and improve their self-service offer – including internet product and services – and to make it more accessible to 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 with University of Twente, an entrepreneurial research university, in 2003. The objective was to improve accessibility by adapting the website, simplifying navigation, improving the search engine, adjusting the online banking token and adapting ATMs. By 2005 the website was highly accessible for Braille use and, in 2006, they received a ‘Fakkelprijs’, an award from the Dutch Counsel of chronic patients and the handicapped. Also in 2006, SNS Bank introduced an advice service via webcam and implemented fifteen of the sixteen World Wide Web consortium2 (W3C) accessibility guidelines. In 2008 they introduced a speaking online banking token. 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 all its 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 without physical, technological or structural limitations. Specifically, in order to make its website accessible to everyone, irrespective of the type of hardware, software, network infrastructure, language, culture, location or capacity of users, La Caixa followed the recommendations outlined by the Web Accessibility Initiative (WAI) and in 2006, it obtained the AA rated certification of accessibility 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 telephone platform. In addition, since 2006, La Caixa has been collaborating with a Spanish foundation for the blind in order to find solutions that provide accessibility in some sections of their online banking website. Among other actions, La Caixa is making online banking compatible with the computer screen reading programme used by blind people (JAWS). Between 2006 and 2010 La 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 the consumption of energy among residents’ associations in the region of Madrid. The main objective of this initiative is to encourage energy-saving measures in homes and common areas owned by communities by raising the awareness of local residents and encouraging the implementation of measures to reduce energy consumption. Since its launch, the programme has had the participation 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 their energy consumption. Upon registering, they receive a brochure with information on different ways to reduce energy consumption such as reducing electricity and gas usage as well as reducing energy used for the heating and cooling of buildings. The total energy consumption of the building is measured before and one year after owners have received the brochure. The three best performances achieved receive a prize. This prize consists of the installation of 2.5 kilowatts of solar photovoltaic power panels free of charge. This facility has a minimum operating guarantee of 25 years and an approximate value of €25,000. 2 The World Wide Web Consortium (W3C) is an international consortium that produces standards for the World Wide Web. The organisation was formed in the 1990s to encourage the evolution and interoperability of the web. In 1997 the W3C created the Web Accessibility Initiative to provide the guidelines and resources that help make the web accessible. 206

The second phase starts once the panels have been installed and the community becomes small producers of green energy, which can then be used for sale or own consumption. During the first two years of this programme, the six community winners jointly reduced their emissions by 60 tonnes of CO2 and saved 12,000 kilowatt-hours in electricity. consumption. This means approximate savings 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, using 2002 as the baseline. Lloyds TSB committed itself to attaining this target and has progressively diminished its CO2 footprint by more 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 technology that puts to use waste heat produced as a by-product of generating electricity. Cutting out unnecessary travel and promoting alternatives 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 inspire employees to rise to the challenge. The commitment starts at the top with the Chairman, Group Chief Executive and managing directors of Group Property Management, Group Procurement, Group IT and Group Operational Services who have all given a personal commitment to achieve the target. Furthermore, the Group has created a sustainability network for employees across the business that are committed to helping the company achieve its environmental objectives. Lloyds TSB considers that raising awareness of the climate programme helps attract and hold on to the best people. Research shows that employees want to work for 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 for renewable 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 this market segment, the environmental and social risks involved have to be taken into account. In line with the bank’s credit risk strategy, 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) and the 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 social considerations in project financing. Bayern LB was invited to join a German exporter and finance technical equipment for a water power project called Ilisu. The Ilisu hydro-electric power project was to be located on the Tigris River, 65 km upstream from the borders with Syria and Iraq. From the bank’s point of view, the Ilisu dam project – located in Turkey – did not comply with the World 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 regarding Hasankeyf – 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 to participate in this project due to the adverse environmental and social effects. 207

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 financial institutions, but also at contributing to the objectives of the Kyoto Protocol. They have created three green credit lines for financing cars, 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 of 0.5% for cars with CO2 emissions below or equal to 120 grams/km. The green loans designated to improve homes were brought to the market on 1 August 2008 and include three product categories: i) renewable energy equipment, ii) home improvements to enhance comfort and energy efficiency and iii) the purchase of energy efficient domestic appliances. All loans provided for any of the aforementioned categories benefit from a 0.5% interest rate reduction. Renewable energy measures include solar thermal energy (STE), wind energy, biomass and solar photovoltaic products connected to the national grid for energy production purposes 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 May 2008. They do not provide an interest rate reduction, but rather a financial bonus of up to EUR 1,000 per purchase of new houses and apartments dating from 2007 that have received an energy efficiency label. Given that there was no Spanish regulation in this field, Kuxta had to develop its own energy efficiency label application. They did this with the help of architects, civil engineers and plumbers to define an appropriate set of indicators. Under this scheme, Kuxta gives a cheque to its customer for an amount of EUR 1,000 if the certification obtained is energy class A, EUR 750 for an energy class B certification and EUR 500 for an energy class 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 banks group – 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 to offer to new companies but can also share a network of contacts to help new enterprises on their way. More information is available 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 in point is the Business Angels Investment Company of Sparkasse Hannover which was the first company in the Sparkassen-Finanzgruppe to focus exclusively on Business Angels. This approach complies with the declared objective of the Sparkassen-Finanzgruppe to offer 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 information on the economic, legal and social aspects of the internal market. Furthermore, it focuses on EU funding and financing programmes, 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 companies with competent advice and information on European matters. 208

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 grants reaching over €1.5 billion per year. They operate according to subsidiarity principles, and intervene on behalf of the needs of people 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 the individual work of single foundations, working autonomously in their local areas, the foundations as a whole have acquired varied experience in all facets of social housing. Social housing comprises various types of intervention ultimately aimed at achieving the very same objectives, such as: n the activation of real estate funds dedicated to encouraging access to affordable housing for disadvantaged people, involving private 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 in Bologna, 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 di Padova 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 on the most vulnerable parts of Portuguese society and persons suffering severe socio-economic difficulties. The general objective was to improve the living conditions of these people. Montepio Foundation specifically supported institutions that host or work with children from disadvantaged households or who have been deprived of a normal family environment. With this funding from Montepio, these institutions were able to improve their hosting 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 of information 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 realisation of health information campaigns for citizens. In this context, the foundation published a “Small guide of topics and advice” which aims 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. 209

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 in 20th 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, and conviction for freedom of speech, Sparkasse Leipzig has awarded a “Prize for freedom and future of media” since 2001. Leipzig is also a symbolic location for awarding the prize as the peaceful revolution of 1989, which overthrew the communist system of Eastern Germany, started in Leipzig’s Nikolaikirche. Sparkasse Leipzig wants to promote the democratic tradition and has therefore decided 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 competence model and designed a concept for staff aged 55 years and above. The aim of the programme is to create efficiency, to preserve all competence 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 age of 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 the occupational pension maintained at 100%. As an alternative to this offer “PlusTime” gives employees who continue working full time after the age of 58 or part-time employees who work 80% or more, the opportunity to take three additional days of leave per year. This offer was initiated to promote a balance in life and to create additional time for employees to enable them to be more effective and more creative at work. A survey conducted among Swedbank employees aged over 58 years of age shows that the “Ease Down” programme in particular has had a positive impact on the way that these employees find their working life 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 fight all forms of social isolation and promote equal rights and opportunities. This accord is the first step of a continuous and sustainable effort for the employment and integration of disabled people. Over this period 200 disabled employees were recruited for 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 of Banking Business” programmes and the creation of a multimedia tool to facilitate the integration of a disabled person into a team. In addition, the Caisses d’Epargne have experimented and developed new recruitment methods to reinforce their commitment 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, workshops and activities were organised to develop this main topic and to get workers involved in the anniversary celebrations. The efforts of the BCEE were recognized in 2006 by the European Club for Health in Brussels with the award for Luxembourg of the “Prix Sante et Enterprise”. 210

The activities organised by the BCEE in the context of this initiative included the installation of fitness centres, the visits of ergonomic 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 develop a 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 careers system in joint collaboration with the Federal Savings Banks Committee of the Austrian Trade Union Federation. The new system created an ideal balance between job security and possibilities of change for individual and career development. Moreover, this system addressed the encouragement of obtaining qualifications and having a motivated and experienced workforce and it was accompanied and strengthened by a series of measures for staff promotion. Furthermore, this system complied with the requirements 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 terms of family and health policy. For example, Erste Bank initiated the LIFETIME project as a means of preparing for the progressive aging of society to be reflected in its workforce. Steiermärkische Sparkasse Bank AG won the European Work & Family Audit in 2007. In 2008, Sparkasse Neuhofen won the title of “Austria's Best Employer” by the European Great Place to Work Institute and ranked Sixth Best Employer in Europe (in the category 50 to 500 employees). In addition, sBausparkasse was ranked 13th in the “Best employer in Austria” contest and achieved a special prize for the promotion of older employees from the Great Place to Work Institute in 2009. COMMUNICATION Transparency and consistent communication with customers and other stakeholders is a key component of the savings and retail banking sector. ESBG and its members are also becoming increasingly aware of the importance of non-financial reporting and are committed to communicating on their activities as socially responsible companies and on the implementation of the principles of the ESBG Charter for Responsible Business. As part of this commitment ESBG and a number of its members have also joined European 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 was launched 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 CSR Europe’s Toolbox. At an international level, this commitment to communication on its CSR activities is evidenced by the subscription of ESBG, its sister organisation WSBI, as well as a number of its members to the United Nations Global Compact, the world's largest voluntary corporate responsibility initiative. As a business organization ESBG/WSBI provides input to improve the uptake, implementation and strategic orientation of UN Global Compact principles into its members’ business activities. Its participation also reinforces the 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 reporting projects such as the Carbon Disclosure Project (CDP) and the Global Reporting Initiative (GRI). 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 Caisse d’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 American members: Banco Estado Chile and Caixa Economica Federal, Brazil. 211

ESBG members communicate in different ways on their CSR activities and achievements. The majority of ESBG member banks publish information regarding their CSR activities within their annual reports. In addition, some of them dedicate specific sections on 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 on their websites. All of the Spanish savings banks dedicate a special section on their websites to inform about their CSR activities and, 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 which publish annual reports on their CSR activities, which are also available on their websites. The majority of the Spanish savings banks also produce individual CSR reports and, in addition, CECA publishes an annual report with aggregated data on the CSR activities of its members. It should be noted that SNS Reaal, Swedbank and some 29 Spanish savings banks publish their CSR reports according to the Global Reporting Initiative (GRI). The latter have reached the highest possible level in terms of international recognition 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 company in the world to have written its CSR report in XBRL (eXtensible Business Reporting Language), which facilitates the comparison of financial information. XBRL had not, however, been used for CSR reports until CAN published its 2008 CSR report. 212

BIBLIOGRAPHY 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 payments in 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 international accounting 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 in the 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 of companies, 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 stock exchange 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 shares of 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 provisions relating 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 listed company 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 administrative provisions relating to the taking up and pursuit of the business of credit institutions and amending Directive 77/780/EEC, OJ L 386, 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 money laundering, 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. 213

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Commission Regulations and Directives - Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance 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 certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, OJ L 111, 17.04.2004. - Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and 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 certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 39 and International Financial Reporting Standard (IFRS) 7, OJ L 275, 16.10.2008. 214

- Commission Directive 2006/70/EC of 1 August 2006 laying down implementing measures for Directive 2005/60/EC as regards the definition of ‘politically exposed person’ and the technical criteria for simplified customer due diligence procedures and for exemption 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 of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes 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) as regards 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 by lenders 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 Single Market (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: improving consumer 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 support of 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 central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management P6_TA-PROV(2009)- 0367, 8.05.2009 [CRD 2]. 215

3. Non-legislative texts published by EU institutions and bodies - Basel Committee on Banking Supervision. 2005. Basel II: International Convergence of Capital Measurement and Capital Standards: 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 liquidity risk 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 Economic and 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 companies in 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 European Economic 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-credit in 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 draw up 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 Investment Fund 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. Packaged Retail 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 July 2009. - 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, Brussels 9 March. - European Commission. 2009. Speech by Jörgen Holmquist at Friends of Europe Roundtable on Electronic Payments and Competition 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 the financial 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 of Euro 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) 257 final], 3 June. - 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. - European Commission. 2009. Working Document of the Commission Services (DG Markt). Consultation Paper on the UCITS Depositary Function. - European Commission, DG Competition. 2009. DG Competition’s review on guarantee and recapitalization schemes in the financial 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. Final Report 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 to trading and 2004/109/EC on the harmonisation of transparency requirements in relation to information about issuers whose securities 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 adopted on 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 Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review 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 European Central 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 and Economic Committee and the Committee of the Regions on Europe’s Digital Competitiveness Report – Main achievements of the 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 July 2007. 11464/07 (Presse 160). - European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2008. Conclusions of the 2894th meeting of 7 October 2008. 13784/08 (Presse 279). - European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009.Conclusions of the 2922nd meeting of 10 February 2009. 6069/09 (Presse 32). - European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. Conclusions of the 2948th meeting on 9 June 2009. 10737/09 (Presse 168). - European Union’s Council of Ministers for Economy and Finance (ECOFIN). 2009. June 9th ECOFIN report to the European Council 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, 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. 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 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. - 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 June 18. 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 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. - 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 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. - 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 European internal 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 and its stakeholders. - Civic Consulting. 2009. Analysis of the Economic Impact of Directive 2002/65/EC concerning the distance marketing of consumer financial services on the conclusion of cross-border contracts for financial services between suppliers and consumers within the Internal 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 High Level 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. 220

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ESBG – The European Voice of Savings and Retail Banking ESBG (European Savings Banks Group) is an international banking association that represents one of the largest European retail banking networks, comprising about one third of the 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 are often organised in decentralised networks and offer their services throughout their region. ESBG member banks have reinvested responsibly in their region for many decades and are one distinct benchmark for corporate social responsibility activities throughout Europe and the world. The European Voice of Savings and Retail Banking Rue Marie-Thérèse, 11 n B-1000 Brussels n Tel: +32 2 211 11 11 n Fax: +32 2 211 11 99 info@savings-banks.com n www.savings-banks.com Published by ESBG. Copyright September 2009 ISSN 1782-396x

Retail Banking in Europe

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