Cross-Border Entry in European Retail Financial Services

Frontmatter

Introduction

Abstract

Most retail financial services in the European Community (EC) have for a long time been characterised by a low degree of cross-border penetration and competition. This market fragmentation stemmed partly from government regulations obstructing free movement of capital, freedom of establishment and provision of services in the EC. Not surprisingly, therefore, the 1988 ‘Cecchini report’, the large-scale economic study on the costs of market barriers between the EC countries, concluded that in the European financial services sector “… market openness, competition and low cost-efficiency is often deliberately not assured”.

Tobias C. Hoschka

Chapter One. Cross-Border Penetration of Financial Services in the EC: Definitions and Evolution

Abstract

This first chapter introduces the fundamental definitions for the study and presents an overview of the evolution and current state of cross-border penetration of retail financial services markets in the European Community. Section 1 discusses possible industry and market definitions of European financial services and introduces our definitions of the different vehicles of cross-border entry. Section 2 then analyses the evolution of cross-border penetration in European financial services.

Tobias C. Hoschka

Chapter Two. The Regulatory Environment of Cross-Border Entry in EC Retail Financial Services

Abstract

Financial markets in the EC were for a long time separated by restrictions on cross-border capital movements as well as rigid regulations which frequently had the effect of protecting the domestic industry from foreign competition. Regulatory entry barriers were erected with the legitimation of protecting depositors or policyholders and preserving monetary and financial stability. This linkage between entry barriers and regulatory objectives was recognised in the Cecchini report which states that:¹

A common feature of the financial … service branches is that the regulatory functions of government, while aiming primarily at prudential or safety objectives, also often tend to limit entry into the market as a side effect … the general objective of European market integration … is, therefore, to separate out far more clearly the setting and supervision of prudential and safety standards from the issue of market entry

Tobias C. Hoschka

Chapter Three. An Eclectic Theory of Cross-Border Entry in Retail Financial Services

Abstract

The post-war multinationalisation process in manufacturing industries has been the subject of frequent theoretical and empirical scrutiny. Cross-border entry activities in financial services, however, which have undergone a similarly significant expansion process have attracted much less attention in the academic literature. Existing studies on financial services focus almost exclusively on cross-border entry in wholesale and investment banking and not on retail financial services. This chapter therefore develops an eclectic theory of cross-border entry in retail financial services and the focus of the analysis is thereby placed on three crucial questions:

• Why does a financial services firm enter a foreign market, i.e. what competitive advantage may compensate a firm, for operating at a distance and in a foreign environment?
• Where does a financial services firm enter a foreign market, i.e. what particular host and home country characteristics induce cross-border entry?
• How does the financial services firm enter, i.e. which environmental and strategic factors determine the choice of cross-border entry vehicles?

Tobias C. Hoschka

Chapter Four. Barriers to Cross-Border Entry in European Retail Financial Services

Abstract

In a single European financial services market with no entry barriers we would expect price and efficiency differences to be eliminated by foreign entry. In practice, however, there are a range of entry barriers in the retail financial services sector. Generally, one can distinguish between regulatory barriers to cross-border entry and market- or industry inherent entry barriers.¹ While the former are attacked by the internal market programme, the latter are likely to persist and remain largely unaffected by regulatory efforts towards market integration.

Tobias C. Hoschka

Chapter Five. The Potential Impact of Foreign Entry on Domestic Competition

Abstract

The 1988 Price Waterhouse study employs the assumption that as barriers to foreign entry are reduced, domestic markets will become more competitive due to the threat of potential or actual foreign entry. I first develop some theoretical notions about the potential impact of cross-border entry on domestic market structure, conduct and performance in retail financial services in the first section. The second section then presents empirical data on the possible and actual effect of cross-border entry and discusses the extent and possible reasons for price differences of financial products across EC markets.

Tobias C. Hoschka

Chapter Six. The Scale of Cross-Border Entry in EC Financial Services: an Aggregate Analysis

Abstract

This chapter provides an aggregate overview of cross-border trade activities, majority and minority acquisitions, joint ventures, strategic alliances and de novo entry for the EC as a whole, as well as analysing trends for different EC countries. In order to evaluate the relative importance of cross-border entry activities in European financial services, these have to be assessed in a time-series and comparative perspective. In this chapter I therefore present and analyse existing and newly collected statistical data and thereby deal with the following questions:

• has there been an increase in cross-border entry activity in the most recent past and which form of entry has increased most significantly?
• can we distinguish significantly different trends in cross-border transactions for different EC countries?
• which countries are the main targets of foreign entry activity and which are the main acquirers?
• what is the preferred mode of cross-border entry?
• are there significantly diverging trends in entry activity by EC and non-EC institutions?

Tobias C. Hoschka

Chapter Seven. Cross-Border Entry in European Retail Banking: Interview Evidence and Case Studies

Abstract

There are several conceivable approaches to collecting empirical evidence on the determinants and effects of cross-border entry in financial services in order to test the hypotheses developed in the preceding chapters. For the case of acquisitions, for example, one such approach would be to collect data of a random sample of cross-border transactions and pursue a statistical analysis of characteristics of acquirer and acquired firm over time. Considering the relatively low number of cross-border acquisitions in particular in retail financial services, however, the population size would most likely not be sufficient to draw statistically valid inferences. In addition, a purely statistical approach would miss out on many of the details which can only be insufficiently captured by an exclusively quantitative approach.

Tobias C. Hoschka

Chapter Eight. Cross-Border Entry in European Insurance: Survey Evidence and Case Studies

Abstract

Analogous to the preceding chapter, this chapter presents empirical evidence on the cross-border penetration process in European insurance. The first section reports on a questionnaire which was sent to the largest European banks and insurers, while the second section presents individual case study analyses of cross-border entry activities in the insurance sector.

Tobias C. Hoschka

Chapter Nine. The Liberalisation of Inter-State Entry in US Banking: a comparative analysis

Abstract

The process of opening up national financial services markets to foreign competition in the EC may be comparable to the movements in the United States to relax the restrictions on out-of-state entry by banks. I focus in this chapter on banking services rather than retail financial services in general, as this provides the most interesting parallel to the opening up of European financial services market. In particular, regulatory restrictions in the US prevent a similar cross-industry penetration between the insurance and banking sectors as in Europe.

Tobias C. Hoschka

Chapter Ten. Cross-Border Entry in Retail Financial Services: Policy Implications

Abstract

This chapter presents some public policy conclusions which can be derived from the theoretical reasoning and the empirical evidence presented in the preceding chapters. In particular, it looks at the implications for European competition policy and develops some policy proposals for preserving financial stability in a European retail financial services market increasingly characterised by cross-border activities. For the latter question, it focuses on the question of home country versus host country provision of deposit insurance and lender of last resort facilities which are the two main regulatory tools to attempt to make financial systems ‘run-proof’.

Tobias C. Hoschka

Conclusions

Abstract

In this last section, I briefly review the questions tackled in this study, the methodology adopted to address the issues and the conclusions which emerge from the preceding theoretical and empirical analysis.

Tobias C. Hoschka

Backmatter