EUROPEAN & AMERICAN

BANKING SYSTEM
2021

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Contents
Introduction...........................................................................................................................................2
EU Economic Outlook...........................................................................................................................2
EU Banking History..............................................................................................................................3
Building a New EU Financial Architecture...........................................................................................3
The Crisis..............................................................................................................................................4
European System of Financial Supervision...........................................................................................4
The Consolidation Trend.......................................................................................................................5
The Financial Crisis in The US..............................................................................................................5
Structure of The US Banking and Financial Systems............................................................................6
US Payments Systems...........................................................................................................................6
Wholesale Payments..........................................................................................................................7
Performance of US Commercial Banks.................................................................................................7
Conclusion.............................................................................................................................................7

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Introduction
Financial integration is seen as one of the most important aspects in making Europe
more efficient and competitive, and hence contributing to long-term economic growth.
During this time, the European banking markets have undergone significant
transformations: the number of banks has decreased significantly as a result of
mergers and acquisitions, while industry concentration has increased.

Since the sub-prime mortgage crisis, the US banking sector has gone from being one
of the most profitable in the world to being on the verge of collapse.

EU Economic Outlook
With 28 member states and a population of more than half a billion people, the
European Union encompasses a substantial portion of the European continent. It is the
world's third largest behind China and India. Despite major improvements in living
standards over the last decade, significant inequalities across member states still exist.
Luxembourg has the highest GDP per capita, while Bulgaria has the lowest. The EU is
attempting to close the gap between its wealthy and poor members, and GDP growth
is now higher in the EU's newest members than in its older members.

In 1999, income per capita climbed from 40% of the old member states' average to
52% in 2008. According to research, the accession process enhanced economic
growth in the new member states by around 1.25 percentage points per year between
2000 and 2008, when growth averaged 3.5 percent in 1999–2003 and 5.5 percent in
2004–2008.

The sovereign debt crisis, which followed the global financial crisis in 2010, offered
huge new obstacles for all member nations, including decreased trade, lower finance
availability, dwindling consumer wealth, and weakening market confidence. Even
though EU membership, particularly in the euro region, gives some security and
stability, all member nations have developed similar vulnerabilities. There are
concerns that the convergence process will be slowed as a result of both crises.
However, the current economic situation presents chances for reform that might help

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to alleviate the negative social and economic effects and build a solid foundation for a
speedy and healthy recovery.

EU Banking History
In 1988 The European Monetary System (EMS) deregulated capital movements,
allowing for unfettered cross-border money flows within the EU.

In 1993 Investment Services Directive (Council Directive 93/22/EEC) - established

the legal framework for investment businesses and securities markets in the European
Union, allowing for the creation of a single passport for investment services.

In 2004 The Directive on Markets in Financial Instruments (Directive 2004/39/EC) –

also known as MiFID – envisaged standardized regulation for investment services
across the European Economic Area (EEA). It established a 'passport' that allows
trading venues and investment businesses to operate across the European Economic
Area (EEA) based on authorization in their home member state. It also enacted a
number of investor-protection measures.

In 2007 PSD (Payment Services Directive) (Directive 2007/64/EC) - PSD establishes

a harmonized legal framework for the development of integrated payment markets. It
was viewed as a step closer to the single market, with the goal of improving consumer
protection and market transparency, as well as strengthening competition in payment
markets by reducing market entrance barriers. It's also an important step toward the
Single Euro Payments Area's completion (SEPA).

Building a New EU Financial Architecture

Financial services providers and financial markets have been liberalized by the EU.
Stronger competition in EU markets has been the driving force behind this policy,
with the goal of lowering financing costs and improving resource allocation,
strengthening the EU's financial industry's global competitiveness. As previously
stated, one of the primary goals of EU law has been to lower obstacles to cross-border
banking and financial services trade, with the eventual goal of creating a single market
for financial services. Over the last two decades, a considerable body of EU regulation

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has been put in place to strengthen financial regulation and supervision co-operation,
convergence, harmonization, and standardization.

The weakness of the existing system became obvious during the financial upheaval
and government interventions of the late 2000s. Many countries enacted national
measures first, then progressively coordinated actions across the EU. This sparked
significant criticism and a heated debate regarding the EU's institutional arrangements.
To comprehend these regulatory reforms, we must first study the important events of
the European financial crisis.

The Crisis
The evolution of the US financial crisis into a European sovereign debt crisis and an
economic crisis is frequently described in terms of phases or waves, as follows:

 Phase One: US sub-prime crisis (August 2007 to September 2008).

 Phase Two: systemic or global crisis (September 2008 to March 2009).
 Phase Three: economic crisis (March 2009 to 2010).
 Phase Four: sovereign debt crisis (2010 to 2011).
 Phase Five: ‘crisis of confidence’ in Europe (since 2011).

European System of Financial Supervision

The European Structure of Financial Supervision (ESFS) was established as a
decentralized, multi-layered system of micro- and macro-prudential agencies based on
the lessons learned from the financial crisis and the recommendations of the de
Larosière Report. This regulatory system was established in January 2011 and is now
(2014) experiencing significant adjustments as a result of the implementation of the
Banking Union. The ESFS is divided into two sections: macroprudential oversight and
micro prudential supervision.

The European Supervisory Authorities (ESAs): the European Banking Authority

(EBA), the European Securities and Markets Authority (ESMA), and the European
Insurance and Occupational Pensions Authority (EIOPA), which work together in the
Joint Committee of the European Supervisory Authorities, form the micro-prudential
pillar at the European level (ESAs). The former Committee of European Banking

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Supervisors (CEBS), Committee of European Insurance and Occupational Pensions
Supervisors (CEIOPS), and Committee of European Securities Regulators have been
replaced by these new authorities (CESR).

In their respective sectors, the three authorities have similar powers and competencies.
The European Banking Authority (EBA) is based in London and regulates credit
institutions, financial conglomerates, investment organizations, and payment
institutions (including e-money).

The Consolidation Trend

The consolidation tendency that has resulted in a limited number of banks holding
dominating positions in various banking systems has been a fundamental aspect of
European banking systems in recent years. During the 1990s, national consolidation
was preferred because it looked to offer clearer potential for cost reduction and fewer
obstacles in executing the merger due to a more unified corporate culture.
Furthermore, corporations seek to create a larger national footprint first, so that they
may participate in cross-country consolidation. As domestic markets grew
increasingly concentrated in the 2000s and up until the financial crises, cross-border
mergers were prioritized. Large and complicated banking groupings have emerged as
the EU's top banks have grown even larger over time (LCBGs). The European Central
Bank coined this phrase in 2006. (see Special Feature A, Financial Stability Report).
Because their size and business strategy can have major repercussions for financial
stability in the event of failure, the European Central Bank (2006) acknowledged the
necessity of recognizing and monitoring the operations of large and cross-border
banking companies.

The Financial Crisis in The US

Deregulation, financial innovation, and a wave of mergers and acquisitions fueled a
dramatic transition in the US banking system over the last two decades, resulting in
increased consolidation and competitiveness in the sector. These reforms resulted in
enhanced profitability and efficiency, expanded banking and financial services, and
foreign expansion of US financial firms. On the negative side, these rapid changes
boosted risk taking and instability, culminating in the financial crisis of 2007–2009.

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The crisis began in the United States banking system with the collapse of the subprime
mortgage lending industry, resulting in financial losses, government bailouts, and a
prolonged economic recession in many countries.

The housing market bubble and the development of the securitization sector are linked
to the beginnings of the 2007 crisis. House prices in the United States rose steadily
from the mid-1990s to 2006, owing to growing demand fueled by low interest rates,
rising household income, and increased mortgage availability. Mortgage loan
originations increased in tandem with a lowering of lending requirements.

Structure of The US Banking and Financial Systems

In the United States, there are numerous financial intermediaries that provide a variety
of banking and other financial services. The major sort of liabilities held by these
institutions is a popular means of distinguishing such intermediaries. The following
are the most common sorts of financial institutions.

 Depository institutions – commercial banks, savings institutions and credit

unions. The main types of liabilities these institutions hold are deposits.
 Contractual savings institutions – insurance companies and pension funds
whose main liabilities are the long-term future benefits to be paid to
policyholders and fund holders. These typically take the form of reserves that
are listed on the company’s balance sheet as part of liabilities.
 Investment intermediaries – mutual funds, investment banks and securities
firms and finance houses whose liabilities are usually short-term money market
or capital market securities.

US Payments Systems
A well-functioning payments system is essential for an economy's smooth operation.
The growth of the payments system is influenced by the problems given by the ever-
changing demands of individuals, businesses, and governments, as well as technical
advancements. The US payments system, like that of most modern countries, is
divided into two parts: one for wholesale large-value payments and another for retail
and relatively small-value payments.

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Wholesale Payments
Payment and securities settlement systems in the United States are made up of a wide
number of financial intermediaries, financial services corporations, and non-bank
enterprises who produce, distribute, and process big-value payments. The majority of
the dollar value of these payments is processed electronically, and it is typically used
to buy, sell, or finance securities; make or repay loans; settle real estate transactions;
and make large-value, time-critical payments, such as interbank purchases, foreign
exchange transactions, or other financial market transactions.

Retail payments

Many payments previously done using paper instruments—cheques and cash—are

now made electronically with debit or credit cards or through the Automated Clearing
House in the United States (ACH).

Performance of US Commercial Banks

Between 1993 and 2006, US commercial banks were among the most profitable in the
industrialized world, with return on equity (ROE) ranging between 11% and 15% for
all except the smallest banks. Since then, the US banking sector's returns have steadily
declined, reaching 8% in 2007 before plummeting to -1.1 percent in 2008 and -1.35
percent in 2009. Since then, there have been minor gains, rising from 5.7% in 2010 to
slightly over 9% by the end of 2013. Return-on-assets plummeted to 0.1 percent in
2008 and subsequently to 0.08 percent in 2009, the lowest levels since 1991,
following a similar pattern. In 2008, around 20% of US banks experienced losses, and
these institutions accounted for about 35% of industry assets, the biggest share since
1987.

Conclusion
There has been a lot of talk about imposing new capital and liquidity restrictions (both
easier and more difficult). New restrictions have been enacted to limit the securities
operations of US banks. Regulators are also attempting to put in place frameworks in
order to establish stronger early warning systems for detecting and limiting excessive
credit growth and bank expansion in general. Whatever changes occur, there is no

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denying that bank and financial industry regulation in the United States has altered
dramatically.

As for the European banking system, the creation of the European System of Financial
Supervisors (ESFS), which consists of three functional authorities: the European
Banking Authority (EBA), the European Insurance and Occupational Pensions
Authority (EIOPA), and the European Securities and Markets Authority, was a
significant step toward increased integration and improved financial stability (ESMA)

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