Banking Integration in the European Community
Single Banking License
Banking Integration in the European Community
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Banking lIntegration in the
The key element for financial integration in the European
Community ("EC" or "Community") is the liberalization of capital movements,
which is closely linked with the freedom to provide financial services. In
1962, the Community adopted legislation requiring Member States to
allow free movement of capital for direct investment. The Council of
Ministers took a major step in 1986 when it adopted a directive requiring the
Member States to liberalize long term commercial transactions, bond
issues and unquoted securities. In June 1988, the Council of the EC
Finance Ministers decided to liberalize, by the end of 1990, the remaining
capital transactions, including those involving short term monetary
instruments, personal bank accounts, and purely financial loans.1 This
directive also provided a liberalization of capital flows towards the outside
world. The Commission recently adopted a proposal aimed at
establishing a minimum tax for savings.2 Finally, as part the Community's
strategy to complete the Internal Market by 1992,1 it has proposed the
creation of a unified banking market founded on the principle of mutual
* Member of the Directorate for Financial Institutions, D.G. XV Commission of the European
Communities, Brussels. The author has been involved in the drafting and presentation of a proposal
for a Second Banking Coordination Directive. He is currently involved in the negotiations for its
I Council Directive of June, 24 1988 for the Implementation of Article 67 of the Treaty, 31 O.J.
EUR. COMM. (No. L 178) 5 (1988).
2 Tax Measuresto be Adopted by the Community in Connection with the Liberalizationof
Capital Movements, COM (89)60 final (Feb. 8, 1989).
3 Completing the InternalMarket: White Paperfrom the Commission to the European Council,
COM(85)310 final (June 14, 1985)[hereinafter White Paper].
recognition and a single banking license valid throughout the
The aim of this Article is to outline and assess the Community's
strategy for the banking sector by highlighting the philosophy and the
context shaping its actions. In addition, this Article will attempt to show
that the Commission's various proposals, particularly the Second
Banking Coordination Directive ("Second Directive"), take account of the
continuing tension of, on the one hand, achieving more efficient banking
systems through increased competition and, on the other hand, the
absolute need for prudential supervision, enhancing the financial stability of
the banks and public confidence in the banking systems. Finally, this
article looks at the Community's policy towards the rest of the world.
THE STRATEGIC CONCEPTS OF BANKING INTEGRATION
The Community's policy in the banking field consists of three
fundamental features: the harmonization of banking regulation, the mutual
recognition of financial standards, and the home country control
principle. This section will examine each of these features in turn.
The Harmonization of the Essential Aspects
of Banking Regulation
One of the long-term efforts of the Community has been the
harmonization of the banking regulations in the Member States. However, the
meticulous harmonization efforts in the banking field have proven to be,
in many respects, impractical and cumbersome. This experience coupled
with the urgency of completing the common banking market by 1992 has
prompted the Commission to shift its policy emphasis. The Commission
has adopted as its main tool for integration in the financial field the
harmonization of banking legislation and the mutual recognition of
supervisory standards. The harmonization of the essential elements of the
regulations of the Member States includes the aspects regarding the
soundness and stability of banks and other financial institutions.4
The Mutual Recognition of Financial Standards
The concept of "mutual recognition" endorsed in the White Paper
in 1985 constitutes a major integration technique in the financial field.5
4 It is worth emphasising that even though the White Paper refers to "minimum
harmonization" of prudential standards, it is not to be construed as an endorsement of the lowest common
denominator and alignment to the most relaxed supervisory standards of any Member State.
Zavvos, The BankingPerspective of 1992, EUR. AFF., Jan. 1988, at 100.
5 Zavvos, Towards a European BankingAct, 25 COMMON MKT. L.REv. 263 (1988).
Since it is enshrined in the EC Treaty provisions concerning professional
qualifications, this concept was already known in Community law. In
addition, prior to the adoption of the White Paper, the Commission had
proposed a mortgage credit directive based entirely on this approach.
The concept of mutual recognition linked with harmonization and home
country control has reversed the traditional trends and has accelerated
considerably the decisionmaking process particularly in the banking
Mutual recognition is consistent with the Community's open market
philosophy which advances that its power should be activated only where
it should deliver a "public good" (e.g., protection of depositor or
investor, safety and stability of the financial system) which cannot be
effectively ensured at a national level. At the same time, the free play of the
market forces will determine the value of more costly regulatory
C. The Home Country Control Principle
The third major component of the Community's strategy is the
principle of "home country control." All the activities of banks and other
financial institutions carried out through branching or on a cross-frontier
provision of services throughout the Community's territory, in principle,
will be supervised by the competent authorities of the Member State of
the institution's head office. To this very important rule are attached
three exceptions justified by the current degree of coordination of
national economic and monetary policies in the Community. The host
authority will be responsible for the supervision of liquidity and the
monitoring of the monetary policy and provisions regarding the' market
risk related to securities. In addition, the relevant Community directives
have created the necessary framework ensuring, among other things, the
cooperation of the competent authorities of the Member States in the
field of banking supervision.
III. THE SECOND BANKING DIRECTIVE A.
The Single Banking License and the List of Banking Activities
The most "revolutionary" feature of the proposal for a Second
Directive are the endorsement of the concept of the single banking license
and an agreed list of "banking activities." This system provides the
passport for European banks through which they may receive the benefit of
mutual recognition. However, the banks must comply with the two
cumulative requirements. Initially, they must be authorized and supervised
by the competent authorities of their home states, according to the
provisions of Community banking directives. Additionally, they must
undertake activities which appear on an agreed list which is annexed to the
proposed Second Directive. This mechanism implicates three major
The first consideration is a geographical deregulation of the banking
business. A single banking license will ensure full interstate branching
and provision of banking services because of the very notion of the single
banking license. By the end of 1992, Member States should abolish the
authorization requirement on branches of Community banks (Art. 5).
Another important consequence is the gradual abolition of the
endowment capital for branches, currently required by every member state
except Great Britain (Art. 5, § 2). Thus, EC banks, freed from
administrative and financial impediments, will be able to expand their
business in the Internal Market.
The next consideration is product deregulation. The Second
Directive will contribute to the widespread acceptance of a "universal type" of
banking throughout Europe. In fact, the most interesting aspect of the
list annexed to the Second Directive is that it includes not only all the
traditional commercial banking activities (deposit taking and mortgage
credit) but also all forms of transactions in securities. More specifically it
includes: (1) trading for own account or account of customers in all
forms of security (short and long term); (2) participation in share issues
and the provision of services related to them; and (3) portfolio
management and advice.
The Commission's proposal takes into account market realities and
the growing blurring of demarcation lines between traditional
commercial banking and investment banking. The list will be subject to periodic
review according to flexible procedures cognizant of new techniques
brought about by financial innovation. Thus, within such a regulatory
framework market forces will determine the choice between "universal"
or "specialized" banks. If the latter promptly find their "market niche"
they will likely profit from the benefits offered by the vast unified market
The final consideration involves efficient, but indirect deregulation
methods. There is a justified expectation that the new Community
strategy enshrined in the Second Directive will have a major deregulatory
impact on the most restricted banking systems in the Community; that is,
systems which maintain the model of fragmented financial systems and
allow banks to provide only limited services. This conclusion stems from
the range of activities included in the list. According to the new
latory concept of the Commission, Member States will be obliged to
allow any credit institution from another Member State to provide the full
list of its activities if it has been authorized and is supervised in this
respect by the competent authorities of its home country. This result is
true even if domestic banks are not allowed, by virtue of their national
legislation, to undertake the same range of activities.
The provisions of the Second Directive do not impose upon Member
States the obligation to let their domestic banks perform all these
activities. In other words, a Member State may, hypothetically, want to allow
its own banks to engage in only some of the activities. However, if a
Member State chooses to do so, this could give rise to reverse
discrimination against domestic banks. Given the realities of the banking sector, it
would be difficult to envision any national authority opting for this
discrimination. The forces of competition and the realities of the banking
industry itself will drive Member States to adopt this deregulatory trend.
IV. REINFORCING BANKING SUPERVISION
IN THE EUROPEAN COMMUNITY
The benefits of competition notwithstanding, the Commission has
taken the position that a higher degree of regulation is justified for the
smooth functioning of financial markets as compared with the regulation
necessary for manufacturing or commercial markets. Financial markets
rely heavily on the confidence of the public. The value of financial
services is highly dependent on the public's perception of the stability of the
specific financial institution and the entire financial system. It is not
always true that stability is best served by the free play of market forces.
Unlimited competition can sometimes produce instability. The stability
of the financial system should be considered as a public good,
safeguarded by regulatory action. In addition to the above economic
considerations, the Commission's actions are justified, to a great extent, by the
Treaty of Rome, which provides for the protection of savings (Art. 57,
One of the major goals of the Second Directive is to complete the
essential harmonization of banking supervisory systems and, more
particularly, the harmonization of licensing conditions which are necessary
to secure the mutual recognition of the supervisory systems, paving the
way for a single banking license recognized throughout the Community.
The current proposal intoroduces the provision that, in order for credit
institutions to obtain authorization, they must have initial capital of at
least five million ECUs. This provision ensures that Community banks
which undertake cross-border business should have sufficient initial
capital (Art. 3).
Effective supervision of a credit institution by the competent
authorities implies inter alia that they should be able to exercise some
supervision over the important controlling interests in the institution. This
supervision should extend to both banking and non-banking entities.
This is the reason why the Second Directive enables the competent
authorities to obtain the necessary information regarding the identity and
the interests of major shareholders applying for a banking license or
envisioning the acquisition of a credit institution already in operation (Art. 4
The efficient supervision of credit institutions' participations in
noncredit and non-financial activities requires special attention in the interest
of the financial stability. It is widely acknowledged that participations in
a non-banking subsidiary may affect the soundness of a credit institution
if the former runs into financial difficulties. This is commonly known as
contagion risk. In addition, equity participations constitute a long-term
freezing of the assets of credit institutions. In this respect, the Second
Directive incorporates rules requiring banks, as a principle, to fulfill
certain objective criteria if they wish to acquire or maintain participations in
non-credit or non-financial institutions. This directive endorses two
prudential limits: (1) that a credit institution should not hold an interest in
an undertaking exceeding 10% of the amount of funds available to the
institution for meeting capital adequacy requirements ("own funds")
which is neither a credit nor a financial institution, and (2) that the total
value of such participations should not exceed 50% of its own funds.
Some Member States whose banks are allowed wide-spread participation
in the non-banking sector (e.g., Germany, Spain, Greece) encounter
particular difficulties in endorsing these rules.
The smooth functioning of the Internal Market in banking will
require close and regular cooperation between the competent authorities of
the Member States. One of the major features of the Second Directive is
the strengthening of cooperation between the banking supervisory
authorities of the Member States. This includes the right of home
authorities to conduct on spot verifications for their banks' branches in other
Member States. Specific rules reinforce the professional secrecy
obligation branches of these authorities.
B. Solvency Ratio and Capital Adequacy The enforcement of the rules of prudential supervision includes
more than the harmonization of bank licensing conditions and the
cooperation between European banking supervisors. It is also closely
interlinked with a series of other measures which should come into force by
the end of 1992. The measures include the harmonization and
reinforcement of the capital adequacy of banks and the introduction of deposit
guarantee schemes and rules on large exposure.
The Commission has tackled capital adequacy in two stages. The
Council adopted at the end of 1988 its common position regarding the
directive establishing a supervisory definition of the own funds of credit
institutions; and the own funds so defined form the numerator of the
solvency ratio proposal which was presented to the Council in April
1988, and is currently under negotiation.6 The latter proposal defines the
items of the denominator, establishes methods of calculation and
procedure, and proposes a minimum level for the ratio.
Another general observation is that the risk-asset based approach
which the Commission has developed is very similar to that developed in
the Cooke Committee, the Committee made up of representatives of the
central banks of ten major industrial countries ("Group of Ten") and
meet regularly in Basle, Switzerland.7 This is not a coincidence. Both
approaches have their origin in the early 1980s and have borrowed from
each other both before and after 1987 when the pace of work accelerated
in both Brussels and Basle. In the latter stages, the borrowing and
convergence was actively promoted by both the Cooke Committee and the
Commission, and supported by the European banking industry. From
the Commission's viewpoint, if it can achieve both the pre-conditions for
the completion of the Internal Market and the adoption of common
standards on an international plane, it will have met two extremely important
goals at the same time. Both these achievements would promote greater
competitive equality and systemic stability.
The EC proposal contains a minimum figure of 8%, the same as
Basle's figure, on a provisional basis. It was arrived at on the basis of a
series of trial, observation ratios carried out over a number of years and
6 Amended Proposal for a Council Directive on the Own Funds of Credit Institutions, 31 O.J.
EUR. COMM. (No. C 32) 2 (1988); and Directive on the Solvency Ratio for Credit Institutions 31
O.J. EuR. COMM. (No. C 135) 61 (1988).
7 The Cooke Committee is the common name for the Committee on Banking Regulations and
Supervisory Practices. The name was taken from the Committee's chairman, Peter Cooke, a Bank of
England official. The Cooke Committee is made up of representatives of some of the central banks
belonging to the Bank of Interntional Settlements ("BIS"). These countries are the United States,
the United Kingdom, France, West Germany, Italy, the Netherlands, Belgium, Sweden, Canada,
and Japan (the "Group of Ten"). The Cooke Committee meets regularly in Basle, Switzerland, to
discuss international financial matters. See Fay, CentralBankers Have a Hotline Too, FORTUNE,
Oct. 1, 1984, at 138-42.
will be re-examined later in the year in the light of a full statistical study
of existing ratios.
The solvency ratio will apply to all EC credit institutions, subject
perhaps to some exemptions for specialized institutions, and in this
respect potentially differs from the Basle recommendation. Basle's focus
has traditionally been on large internationally active banks, but there
seems to be a trend for non-EC Members of the Group of Ten to think in
terms of applying the Basle framework to a wider range of banks and
financial institutions. The federal authorities in the United States have
certainly proposed such scope, and other authorities will do the same.
There is one other noteworthy feature which does not constitute a
divergency in the two appraches, but which makes progress and
refinement in the Community rather easier than in a wider international
context. This is the harmonization of bank accounting defintions and
techniques in the Community agreed in a Directive at the end of 1986.
This presents common ground, not only on items such as valuation
techniques, but also in relation to the particularly troublesome boundary line
between reserves and provisions and the distinction between specific and
SECURITIES: DEREGULATING THE INVESTMENT
As was pointed out previously, the Second Directive has an
important bearing on investment services in the securities markets field.
However, this proposal has an institutional rather than functional approach in
so far as it relates to credit institutions, but not to other types of business
organizations. At the end of 1988 the Commission adopted a proposal
for a Directive regarding the liberalization of services of investment
intermediaries.' The aim of this instrument was to lay down an
authorization procedure for any person wishing to provide one or more of the
services falling within the directive's scope, such as brokering, dealing, or
portfolio management. In other words, the Directive proposed a single
banking license. Based on this authorization, an investment firm will be
allowed to provide services on a cross-border basis within the
Community without needing to be authorized in any of the other Member States.
Thus, the Directive will apply the fundamental principle of home
country control to the field of securities, in addition to the principle of a single
license and an agreed list of banking activities covered by the license.
In other words, this new Directive will extend to non-banking
tutions the same freedoms which are provided by the Second Directive to
banks. It should be made clear, however, that for investment firms
which are banks and already authorized under the Second Directive to
carry out securities related activities, no further authorization will be
needed under the Investment Services Directive. The Commission has
started working on a proposal to ensure that both banks and non-banks
provide adequate capital in relation to their securities-related business.
The Community approach to the integration of financial markets,
based on mutual recognition and home country control, requires an
essential degree of coordination of prudential standards prior to
establishing a single license. This is true in integrating both the banking and
securities markets. Thus banking or securities services will be provided
on a cross-frontier basis only by duly licensed and adequately supervised
institutions. Having in mind the experience of the banking sector, most
would agree that the standards which will be applicable to the securities
field will be high enough to safeguard the interests of investors. The
Commission believes that, since financial markets rely primarily on the
confidence of the public, a higher degree of regulation is indispensable for
the smooth functioning of the markets. As experience shows, businesses
are attracted, not deterred, by high quality and high standards in
Finally, it has become apparent that the supervision of securities
markets requires international cooperation. Such cooperation has
already been established in the framework of the Banking Advisory
Committee in Brussels and in the Cooke Committee in Basle. It is important
that this cooperation is reinforced between Community securities
supervisors especially when negotiating with third countries. This would be a
particularly important contribution to the international trends for the
cooperation of securities supervisors for which the EC thinks is absolutely
VI. THE EUROPEAN COMMUNITY'S POLICY IN AN
A. The Issue
The Second Directive provides in article 7 for a reciprocity clause
which is designed to apply to subsidiaries of third country undertakings
seeking banking licenses in the Community or intending to acquire part
of a credit institution already operating in the Community. The same
type of reciprocity clause has been endorsed recently in the proposals for
Directives regarding investment services in the field of securities and the
free provision of services in the life insurance sector.
While the inclusion of a reciprocity clause in a Directive on the
financial sector is not new, the Second Directive is the first time that the
Commission uses it with regard to thefirst establishmentof foreign
undertakings. In fact, previous Directives specified reciprocity as a
criterion which should be considered when the Community or the Member
States concluded an agreement with a third country in a particular field.9
It may be worth distinguishing between the term "establishment"
used in article 52 of the Treaty of Rome and the term "first
establishment" used here. The latter is relevant only for third country
undertakings (Le., incorporated in a non-Community country) wishing to operate
in the Community by establishing a subsidiary or opening a branch or an
agency in a Member State.
Though reciprocity constitutes an approach extended to the whole
spectrum of Community financial law, in the present context we will deal
with certain policy and legal aspects of the reciprocity clause regarding
the Second Directive which have attracted international attention.
Rationale for the Endorsement of the Reciprocity Clause
Single Banking License and the Community's Legal Framework
As has been observed previously, the granting of the single banking
license will have an immediate impact not only for the Member State of
the first establishment of the third country bank but also for all the other
Member States. Owing to the far reaching effects of this license, the
admission of a third country bank's subsidiary in one Member State carries
with it an admission to the whole Community's banking market. As
things stand in Community law, third country banks which establish
their subsidiaries in any Community country are considered as
Community undertakings as of the moment of their incorporation and therefore
may benefit from the right of establishment (Art. 52) and the right to
provide services (Art. 59). This approach has its legal basis in article 58
of the Treaty."1
In this respect, it is very important to draw a distinction between
9 First Council Directive of 12 December 1977 on the Coordintion of Laws, Regulations, and
Administrative Provisions Relating to the Taking.up and Pursuit of the Business of Credit
Institutions. 20 OJ. EUR. COMM. (No. L 322) 35 (1977)[hereinafter First Banking Directive].
10 "Companies constituted in accordance with the law of a Member State and having their
registered office, central management or main establishment with the Community shall, for the purposes
ofapplying this chapter, be treated in the same way as natural persons who are nationals of Member
States." Treaty Establishing the European Economic Community, 298 U.N.T.S. 3, 40, (1958), art.
58 [hereinafter Treaty of Rome].
Northwestern Journal of
International Law & Business
subsidiaries and branches, because branches 1 of third country banks
cannot benefit from the above mentioned Treaty provisions. Branches do
not repesent an autonomous legal entity, but rather they constitute an
extension of the principal business. Therefore, the branch may operate
only within that Member State. Although Member States have total
freedom to allow the cross-border provision of services from a third
country on their own territory, the right of free provision of services
across national boundaries embodied in the Treaty of Rome does not
extend to these services.12
In conclusion, the subsidiary of a third country bank established in a
Member State is legally considered to be to a Community bank and may
enjoy the same benefits accruing from the single banking license. Other
Member States are bound to allow this institution to operate in their
territory through branching or direct provision of services, without
requiring a license or endowment capital, and without limiting the range of
services provided in the home State. In the Commission's view, this is
why this common stance of the Member States regarding the first
establishment was necessary.
The Ongoing Negotiations of the Uruguay Round
The ongoing negotiations of the Uruguay Round were the second
major reason for the Community's policy regarding reciprocity. Indeed,
the Community sees an important underlying link between its efforts to
establish the Internal Market for financial services and the GATT
negotiations, which, among their other goals, also strive to liberalize the trade
in financial services. In other terms, the Community intends to use its
internal financial market as a stimulus and a negotiating tool on the most
restrictive countries which need to further liberalize their financial
markets. This is the second reason for introducing a reciprocity clause
emphasizing its deterrence impact. In any case, the fact that there are
currently no international rules regulating banking activities cannot be
11 The term "branch" is defined as, "a place of business which forms a legally dependent part of
a credit institution and which conducts directly all or some of the operations inherent to the business
of credit institutions." First Banking Directive, supra note 9, at Art. 9.
12 Article 59, § 2 of the Treaty of Rome provides that "The Council may, acting by a qualified
majority on a proposal from the Commission, extend the provisions of the charter (Services) to
nationals of a third country who provide services and who are established within the Community."
Until now the Commision has not made any proposal. Treaty of Rome, 298 U.N.T.S. at 40-41, art.
59, § 2.
The Poilicy of the European Community Towards Third Countries
Article 7 of the Second Directive has been criticized as a provision
which by endorsing a reciprocity clause is fostering protectionism and
may result in the Community raising barriers and creating the so-called
"Fortress Europe." Thus, before systematically examining the key
aspects of the reciprocity clause, it may be helpful to review some of the
parameters defining the Community's policy towards the outside world
and to bear in mind some policy and legal considerations.
First, there is an increasing interdependency of the Community and
the outside world in terms of trade. This is a factor of crucial importance
in all Community policy. Second, the Community traditionally follows a
liberal financial policy and is undoubtedly one of the most open financial
markets in the world. Hundreds of banks and other financial institutions
of third countries are already established in practically every Member
State. At the same time, the Community's banks and other financial
institutions are established in many third countries.
Third, it has been alleged that the reciprocity clause proposed in the
Second Directive might hamper direct investment in the Community. In
this respect it should be borne in mind a significant distinction which is
frequently blurred. The reciprocity clause stipulated in the Second
Directive relates only to subsidiariesand not to branches'3 of undertakings
governed by the laws of a third country. In other words, even if the
establishment of a banking subsidiary of an undertaking which is
established in a third country is covered by the reciprocity clause, nothing
prevents this undertaking (if it is a bank) from establishing banking
branches in all twelve Member States, if the latters' authorities are
willing to grant the license.
Fourth, it is well known that the key component in the field of
financial integration is the directive liberalizing the movement of capital,
granting free access to the capitals of residents of third countries, the
socalled freedom "erga omnes", the right to invest anywhere in the
Community."4 Finally, reciprocity clauses are endorsed in several
international agreements, like the Organinization for Economic Cooperation
and Development ("OECD"). 5 More particularly, the code on capital
movements provides that it is legitimate for individual OECD members
13 The Directive on Capital Movements, 31 O.J. EUR. COMM. (No. L 178) 5 (1988).
14 31 OJ. EUR. COMM. (No. L 178) 5 (1988).
15 For the purposes of the Organization for Economic Cooperation and Development
("OECD") codes, the status of measures and practices concerning reciprocity is regarded as different
from that of restrictions that can be the subject of reservations. Pursuant to the codes these
measures must be reported to the organisation, and entered on an ad-hoc list.
Northwestern Journal of
International Law & Business
to exercise a control over the access of new foreign firms to the national
market in financial services such as banking and insurance. In addition,
at least twenty out of the twenty-four OECD Members have launched
formal reservations to the capital movements code in respect of such
reciprocity clauses. Needless to say, reciprocity clauses have been always an
object of discussion in the context of GATT negotiations. 16 In other
terms, the adoption of a reciprocity clause, especially in the banking and
more generally the financial field, is viewed and used by the majority of
the most financially developed countries as a means for opening
restrictive foreign markets, not creating more barriers to international trade.
The Meaning of Reciprocity
On October 19, 1988, the Commission, in an important
communique, clarified some of the most crucial issues regarding the external
aspects of its policy relating to the accomplishment of the internal
market.7 By highlighting the major issues of its policy the Commission
pointed out that:
For 1992 as for the other steps, the Community's aim is to strengthen the
multilateral system in accordance with the concept of balance of mutual
benefits and reciprocity.
It added that:
the Commission reserves the right to make access to the benefits of 1992 for
non-member country firms conditional upon the guarantee for similar
opportunities or at least non-discriminatory opportunities in those firms' own
countries. This means that the Community will offer free access to 1992
benefits for firms from countries whose markets are already open or which
are prepared to open up their markets on their own volition or through
bilateral or multilateral agreements.
There is no generally accepted concrete definition of "reciprocity" in
domestic laws or international agreements. The broad terms frequently
used in the various texts take a concrete meaning only though their
enforcement by the competent authorities.18 The Second Directive does
16 J. JACKSON, WORLD TRADE AND THE LAW OF GATT 240-45 (1969). The OECD code on
capital movements provides that OECD members are required to allow from other member "to
invest or establish on the Member Country concerned under terms similar to those applied by the
other Member Country to investors resident in the Member Country concerned."
17 EC COMMISSION, THE COMMUNITY WORLD PARTNER (1988).
18 Certain slow progress was achieved in this field in the United States, particularly through the
series of decisions adopted by the Federal Reserve Board to allow banks to enter in the securities
business. The Federal Reserve Board announced on Jan. 18, 1989, that it had conditionally
approved applications by J.P. Morgan, The Chase Manhattan Co., Bankers Trust, Citicorp and
security Pacific Corporation to engage to limited extent in additional securities underwriting and active
dealing. Fed Moves to Allow Banks to Underwrite CorporateDebt; Equity Powers Withheld, Wall St.
J., Jan. 19, 1989, at A3, col. 2.
not form an exception to this general rule. However, the Commission in
its above mentioned communique provided some helpful statements
which are worth developing.
First, the Commission will take into account the degree of
development of the third country concerned when applying reciprocity. Thus,
the Commission pointed out that reciprocity "does not mean that all
partners must make the same concessions nor even that the Community
will insist on concessions from all its partners." In other words, the
Commission, by applying this clause to developing countries, will not
require concessions which are beyond these countries' means.
Second, the Commission does not intend to apply mirror
reciprocity, Le., asking its partners to adopt legislation identical to its own. This
qualification has particular merit for the banking sector, which expressed
doubts as to whether the Community might make access to banks in
third countries dependent upon those countries' willingness to adopt
identical financial regulation, such as those relating to full interstate and
universal banking. In any case, it would be unrealistic for the
Community to expect that its major partners mirror completely the prudential
rules and supervisory systems adopted in the European Community. It
is widely acknowledged that such harmonization would encounter
enormous difficulties from the Constitutions and laws of the third countries.
Third, with respect to the banking sector, the Commission
emphasized that it does not intend to give the reciprocity clause a retroactive
effect. More specifically, it pointed out in its communique that "the
Second Banking Directive provides for the possibility of reciprocity for
newcomers." However, there can be no questions of depriving the
subsidiaries of foreign firms already established in Community Member
States of the rights they have acquired. This significant political
statement ended the speculation regarding the Community's policy on
reciprocity towards banks already established in the Community.
The Need for Regulatory Symmetry in the Global Financial
The eventual application of a reciprocity clause may be contrasted
against the background of regulatory assymetry existing particularly
between the major financial centers. Two types of regulations do more
than anything else to destroy the smooth functioning of the global
market place. The first type exacerbates the problems stemming from
segmented financial systems which results from maintaining a division
between commercial banking and investment banking. An example of
this is the Glass-Steagall Act of 1934, which prevents banks in the United
Northwestern Journal of
International Law & Business
States from underwriting securities issues.19 It is rather awkward that
some of these countries allow their banks to persue joint activities abroad
which they are not allowed to pursue at home. The second type of
restriction destructive to the market place relates to the geographical
expansion of banks, such as the McFadden Act, which restricts interstate
banking in the United States.20
On the other hand, the Community banks, as well as established
banking subsidiaries of third country banks, will benefit from full
universal and interstate banking, and have the right to full branching by 1992.
If the banking systems of the major international financial nations do not
move in the same direction, this might be a significant handicap for the
international banks abiding by equivalent standards.
Given the fast pace of globalization, if these structural irregularities
are not ironed out, they could greatly disrupt the smooth functioning of
the market. It is interesting to note that some acknowledge a beneficial
effect of the EC reciprocity clause in helping the domestic legislative
bodies of segmented financial systems to advance to further liberalization of
their domestic financial system.21
Defining Reciprocity in Practice: Towards a Functional Approach
Undoubtedly this is one of the areas where the test of reciprocity
should be defined more concretely. The Commission has declared that,
in GATT negotiations, its objective is to obtain "comparable levels of
market access." It can be argued that this EC approach is not different
from the approach the United States took in its Omnibus Trade Act,
which attempts to achieve reasonable comparability in the types of
financial services permissible for financial services companies.2 2 Both these
approaches could be termed as equivalent treatment which, for regulated
fields such as banking, cannot mean identical treatment, which would
imply a complete harmonization of banking regulations.
Any realistic observer of international banking relations will
acknowledge that the GATT negotiations will certainly be focused on
promoting the liberalization concept on unrestricted access (or right of
establishment in the Community's legal jargon) and national treatment
(that the host country will not discriminate against foreign-owned bank
or financial institutions established in any country compared with
domestic competitors). Indeed, these two twin concepts will give a satisfactory
arrangement in most of the cases. However, in certain cases, particularly
in negotiations between OECD countries-negotiations might have more
ambitious goals, because the right of establishment and national
treatment are not always sufficient to ensure comparable market
opportunities. The Community's experience in creating a Common Market is very
instructive in this respect. The non-discriminatory applications of
national rules and regulatory regimes may-for various
reasons-disadvantage providers of services and goods to other Member States. The
Second Banking Directive, based on the principle of thee minimum
harmonization and mutual recognition, goes beyond the principle of
national treatment. These effects will be so far reaching that, as was
discussed above, EC banks which have the single banking license will be
allowed to carry out the same activities throughout the Community, even
in Member States whose supervisors prevent their own national banks
from engaging in those activities.2 3
23 As this Article was going to the presses, the Commission decided on April 13, 1989, to adopt
more flexible procedures regarding article 7. However, the Commission retains the power to use the
reciprocity clause whenever it determines "that credit institutions of the Community do not enjoy
national treatment and the same competitive opportunities as domestic credit institutions in a third
country, and thatthe condition of effective market has not been secured." (emphasis added). In that
case, the Commission may, in addition to other means it has at its disposal, "decide that the
competent authorities of the Member States shall limit or suspend their decisions regarding requests for
new authorizations and acquisitions by a parent undertaking governed by the third country......
19 12 U.S.C. § 378 ( 1982 ).
20 12 U.S.C. § 36 (c) ( 1982 ).
21 H.R. Heller , Member of the Board of Governors of the Federal Reserve System, Reform and Integrationof World FinancialMarkets, Remarks at the Presidential Leadership Summit, Washington D.C., (Sept. 19 , 1988 ).
22 Omnibus Trade and Competitiveness Act , Pub. L. No. 100 - 418 , 102 Stat. 1387 ( 1988 ), § 3602 .