EU BANKING STRUCTURES OCTOBER 2007 EU BANKING STRUCTURES OCTOBER 2007 In 2007 all ECB publications feature a motif taken from the €20 banknote. © European Central Bank 2007 Address Kaiserstrasse 29 60311 Frankfurt am Main, Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main, Germany Telephone +49 69 1344 0 Website http://www.ecb.europa.eu Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The cut-off date for data in this report is 31 July 2007. ISSN 1830-1878 (online) CONTENTS EXECUTIVE SUMMARY 7 2.3.1 Structural developments 25 Shorter time horizon for 1 OVERVIEW OF DEVELOPMENTS payment obligations: IN EU BANKING STRUCTURES 10 real-time systems and increased 1.1 Regulatory developments 10 internationalisation 26 1.2 Consolidation and mergers 11 Developments in the 1.3 Internationalisation of the funding structure of EU banking market 13 EU banks 26 1.4 Market structure 15 2.3.2 Cross-border pooling 1.5 Developments of liquidity and use of in intermediation 17 collateral recent 1.6 Conclusions 18 developments 28 Potential barriers 30 2 LIQUIDITY RISK MANAGEMENT 2.4 The liquidity risk management OF CROSS-BORDER BANKING GROUPS of banks 32 IN THE EU 19 2.4.1 Structure and governance 2.1 Liquidity risk management: of liquidity risk issues from a fi nancial stability management perspective 19 in banks - the role 2.1.1 Rationale underlying the of ALCO and ALM 32 interest of supervisors 2.4.2 Internal organisation and central banks of liquidity risk in the liquidity risk management - management of banks 19 centralisation 2.1.2 The international fl ow vs. decentralisation 33 of liquidity and 2.4.3 Quantitative models and collateral and its impact approaches 34 on the liquidity risk Internal liquidity management of banks 21 risk models 34 Stress testing and 2.2 Regulatory framework for contingency planning 35 liquidity risk in the EU 21 2.5 Main fi ndings and 2.2.1 Regulatory requirements conclusions 36 for liquidity risk at the national level 22 3 DISTRIBUTION CHANNELS IN RETAIL 2.2.2 Implementation of the BANKING 39 home-host supervisory arrangements 3.1 Distribution channels operated by the banks for liquidity risk 23 39 2.2.3 Regulatory infl uence 3.1.1 Channels with physical on intra-group presence branches 39 Automated teller cross-border liquidity fl ows 24 machines (ATMs) Industry perspective 24 41 3.1.2 Electronic distribution Supervisory perspective 25 channels 42 2.3 Recent developments regarding Internet banking 42 liquidity risk management Mobile phone and by banks 25 telephone banking 45 ECB EU banking structures October 2007 3 3.2 Cooperation with non-banks 46 3.3 Financial stability implications 48 3.4 Main fi ndings and conclusions 49 ANNEXES 51 1 Structural indicators of the EU banking sector 51 2 Methodological note on the structural indicators 65 ECB EU banking structures 4 October 2007 ABBREVIATIONS COUNTRIES LU Luxembourg AT Austria LV Latvia* BE Belgium MT Malta* BG Bulgaria NL Netherlands CY Cyprus* NO Norway CZ Czech Republic* PL Poland* DE Germany PT Portugal DK Denmark RO Romania EE Estonia* SE Sweden ES Spain SI Slovenia* FI Finland SK Slovakia* FR France UK United Kingdom GR Greece HU Hungary* IE Ireland IT Italy LT Lithuania* OTHERS EU (EU25) European Union (25 countries, after enlargement on 1 May 2004) EU15 European Union (15 countries, before enlargement on 1 May 2004) MU12 Monetary Union (12 countries participating in the euro area) NMS New Member States (10 countries, marked with *) RoW Rest of the World (non-EU25 countries) ECB EU banking structures October 2007 5 EXECUTIVE SUMMARY The EU banking structures report is an of 2007 increased and a number of signifi cant annual publication containing information deals is currently in progress. on structural developments in the EU banking sector. It is based on a wide range of The structure of the banking markets still indicators and on the exchange and assessment varies signifi cantly within the EU, but the of qualitative information by the Banking dispersion of most capacity indicators has been Supervision Committee (BSC) of the European declining over time, closing the gap between System of Central Banks (ESCB). The BSC Member States. Finally, banking intermediation comprises representatives of the central banks continues to increase, as the total assets of and banking supervisory authorities of the EU credit institutions have been growing faster Member States and of the European Central than GDP. Bank (ECB). The chapter on liquidity risk management of The report focuses on the structural cross-border banking groups in the EU focuses developments that took place in 2006 and, mainly on issues related to liquidity regulation where possible, provides information on the and to developments in the organisation of fi rst half of 2007. The overview chapter starts liquidity risk management of banks in the period with the main regulatory developments in the covered by the report (i.e. until the end of 2006), fi nancial sector, including the implementation as well as their fi nancial stability implications. of two very signifi cant Directives, the Capital The link between the static evaluation of Requirements Directive and the Markets in liquidity and the dynamic one (i.e. market Financial Instruments Directive. Moreover, liquidity in stress conditions) was outside the the assessment of the Lamfalussy framework scope of the analysis. The chapter is based on in terms of speeding up the adoption of a survey aiming to assess potential obstacles Community legislation in the fi nancial sector and as perceived by large EU cross-border banking promoting its consistent implementation at the groups to their liquidity risk management national level will be completed by the end of practices. Its main fi ndings and conclusions can the year. be summarised in the following points: Consolidation in the banking sector continued Although liquidity risk management by in 2006, although there were signs of European cross-border banks takes place in deceleration compared to previous years. a rather fragmented regulatory environment, Whereas the number of credit institutions liquidity risk regulation is not perceived declined, total assets of the EU banking sector to impose undue restrictions on the cross- increased, signalling the emergence of larger border management of intra-group liquidity. institutions. While consolidation continued, Cross-border banks do not object to the concentration, for the fi rst time during the existence of liquidity regulation per se, but period under examination, stagnated at previous would like supervisors to take a concerted year levels in terms of market share of the fi ve approach within a banking group. Other largest institutions and even slightly declined regulations identifi ed by the banks as posing when examining the entire market using the possible obstacles relate to the home/host Herfi ndahl index. The cross-border banking arrangements and the large exposures limits. landscape in the EU also remained largely unchanged compared with the previous year. Major market developments identifi ed as This could be attributed partly to the decline impacting the liquidity risk management of in both the number and value of cross-border banks include the shortening time horizon for intra-EU M&A activity observed in 2006. Still, payment obligations, the use of more market- the value of M&A transactions in the fi rst half based and potentially more volatile funding ECB EU banking structures October 2007 7 sources and the increasing need for high quality their own internal models also for regulatory collateral. From a fi nancial stability perspective, purposes and the smaller banks that use, and given the absence of stress events in the period intend to continue using, the regulatory liquidity under review, it was considered premature to ratios also for internal management purposes. ascertain whether these market developments The use of more sophisticated internal liquidity encourage improved liquidity risk management risk approaches (e.g. “Liquidity at Risk” practices or, given the increased complexity models) is still not a common practice, although and interconnectivity of fi nancial systems, they cross-border banks are increasingly developing could increase the severity of a liquidity event. such approaches for internal risk management. Stress testing procedures are associated with Despite the initiatives taken by central forward-looking scenarios which simulate banks to address problems of international abnormal market periods and are often not fl ows of liquidity and the cross-border use of refl ected in the historical data of the institution. collateral, which are acknowledged by the Further work in this area could focus on the industry, cross-border banks still identify specifi c models and parameters used by banks the existence of certain obstacles regarding with regard to their stress testing models and the pooling of liquidity and the cross-border the stress levels designed in the context of their use of collateral. These obstacles relate to contingency funding plans. transaction costs, different time and currency zones, the divergence in standards of access The chapter on distribution channels in retail to central bank money outside the euro area, banking presents the evolution of channels the non-connectivity of payment and security operated by banks (branches, ATMs and settlement systems and legal issues. From a electronic channels), explores the cooperation fi nancial stability perspective, the potential of banks with non-banks (post-offi ces, retailers improvement in the effi ciency of liquidity risk and fi nancial agents/services groups) and management of banks resulting from the lifting assesses the main risks posed by developments of technical barriers (if any) would be welcome. in the distribution strategies of banks and their With regard to other potential barriers that are respective fi nancial stability implications.