BANKING IN CONTINENTAL EUROPE
Major central banks in the European Union are France’s Banque de France, Germany’s Bundesbank, and the Bank of Italy. Major commercial banks include Germany’s Deutsche Bank A. G., Dresdner Bank A. G., and Commerzbank A. G.; France’s nationalized Banque Nationale de Paris, Crédit Lyonnais, Crédit Agricole, Groupe Caisse d’Epargne, and Société Générale; the Union Bank of Switzerland and the Swiss Bank Corporation; and ABN-Amro Bank and Rabobank Nederland in the Netherlands. Significant structural differences distinguish the banking system of continental Europe from that of many other developed nations. The main differences are in ownership, scope, and concentration of activities.
One distinguishing aspect of European banking, especially in the Latin countries, is the role of the state. Virtually all banking institutions in the United States, Canada, and the United Kingdom are privately owned. In France and Italy, however, the government has traditionally owned either many of the major commercial banks or the majority of their stock. The role of the government in banking is therefore significant, and often controversial. France’s Crédit Lyonnais was the subject of considerable criticism in the early 1990s because of the government assistance extended to it to cover its heavy trading losses. European banks engage in some activities prohibited elsewhere, such as the placement and acquisition of common stock. Commercial banks in Europe tend to limit their lending to shorter-term loans. Long-term loans are handled by bank affiliates. The share of the deposits and loans handled by the major European banks tends to be particularly large. This stems from the absence of restrictions on branching, leading the large European banks to maintain extensive networks of branches in their home countries. The absence of an antitrust tradition also accounts for the greater degree of concentration.
Germany’s Bundesbank was the dominant central bank in the European Union, thanks mainly to its success in controlling inflation and Germany’s economic strength. Its constitution leaves it notably independent from government interference. It was established in 1957, taking over from the Länder (regional states) banks and the Land Central Banks.
The Land Central Banks had been independent but acted together as a central bank and were responsible for the German currency. They then came under the Bundesbank structure and now act as regional/federal offices for the central bank. The Bundesbank became part of the European System of Central Banks (ESCB) to support the Euro and was fully restructured by means of the Seventh Act Amending the Bundesbank Act, which came into effect on April 30, 2002.
There have also been changes to the Länder banks, which acted as house banks to Germany’s states and as clearing and commercial banks for the Sparkasssen, the public sector savings banks. This was because of EU competition rules.
Now known as the Deutsche Bundesbank, it has been de facto superseded by the creation of the European Central Bank (ECB) in 1999. The ECB’s creation was vital to the success of the Euro, the pan-European Union currency that replaced many of the EU-member states’ national currencies.
According to the ECB itself, there had been a need for exchange rate stability since the 1970s, in the wake of the collapse of the Bretton Woods system, and a stable exchange rate would minimize the risk of trade tensions within the European customs union. This led to the creation of the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) in 1979. As the EU moved towards the creation of the single market for goods, services, capital, and people, the argument for a single currency grew.
As a result, national authorities participating in EMS/ERM had to subordinate monetary and, to a large extent, fiscal policy to the achievement of exchange rate stability. A further development of this concept was the creation of the ECB and the introduction of the Euro. This development has not been without its critics pointing out that, as a supranational institution, the European Central bank has seized financial and fiscal sovereignty from Euro-member states. Levels of state debt or borrowing are limited by agreement, consequently affecting state expenditure. However, while the rules of Euro membership have been agreed by treaty and are required to manage effectively the currency and attendant interest rates, some of the largest members of the Euro, notably France and Germany, have consistently failed to keep national expenditure within the limits and have ignored penalties imposed by the ECB.
The benefit of the creation of the ECB and Euro, which also had a knock-on effect on national banking institutions, is that it has begun the process of creating a single pan-European capital market. Already the Euro-denominated corporate debt market has exceeded that of the United States.