Regulation and Technology as Determinants of International Trade in Banking Services

Regulation and deregulation of financial markets, including the banking industry, was traditionally a topic of national rather than international concern because these markets were submitted to numerous regulatory measures and their linkage with other markets abroad was weak. However, after the liberalization of capital account transactions and the deregulation of national financial markets in the beginning of the eighties, regulation and deregulation became a topic of international concern. As the links between national markets became closer, shocks in one country were transmitted faster to other countries. Also, the competitiveness of a country’s financial service industry was at least indirectly affected by such deregulations. Two items on the agenda in international economic policy, namely the Basle accord on capital adequacy requirements of July 1988 and the second banking directive of the Commission of the European Community (EC), have or will have even a direct influence on the competitiveness of national financial markets and industries2. The present paper discusses three elements of special interest from the second banking directive:a) the permission to supply financial services across intra-EC borders,b) the authorization to set up branches and subsidiaries in all the EC countries, andc) the principle of home country control rather than host country control for intra-European operations of EC financial intermediaries.