The European Market: Creating A Unified Competitive Banking System
ILSA Journalof Int'l & ComparativeLaw
EUROPEAN MARKET: CREATING A UNIFIED COMPETITIVE BANKING SYSTEM
Cam F. Justice
* Juris Doctor Candidate at Nova Southeastern University, Shepard Broad Law Center.
The author wishes to dedicate this article to the memory of his father, the late James C. Justice,
Esq., and would like to thank his wife and family for their support.
B. Establishinga Bank within the European Economic Community ............................................... 761
VII. CONCLUSION ................................................................ 762
The creation of a single market among countries, which just
over fifty years ago were engaged in one of the bloodiest wars in
history, is one of the greatest experiments ever. The movement
toward a single market in Europe has undergone countless changes
since the creation of the European Coal and Steel Community
(ECSC) in 1951.1 Today, with the exception of some proposals
which did not enter into force as scheduled on January 1, 1993,2 a
single financial services market in Europe appears near completion. 3
The purpose of this Comment is to provide an overview of
the movement toward a single market in Europe and the creation of
a unified competitive banking system among the European Union
member states.4 This Comment will trace the evolution of the
European Union and will examine its progress towards
harmonization. Next, this Comment will discuss the mechanisms
for achieving a unified banking system in Europe, and the regulation
of that system. Finally, this Comment will evaluate the impact
which these measures are having and will likely have on
nonEuropean Union banks.
OVERVIEW OF THE EUROPEAN UNION
Following the devastation of World War II European
political leaders began envisioning an integrated Europe for two
reasons. 5 First, World War II left Europe in economic disarray. 6
Second, with the growing political power of both the United States
and the Soviet Union, Europe was left in a political vacuum, leaving
the smaller countries of Europe in an uncertain and potentially
With the passing of World War II, Europe began the
evolution toward a single market. In the fifty-one years following
World War II, Europe has achieved remarkable results in both
economic and legal integration.8 From the ECSC in 1951, 9 which
united Germany and France with regard to the regulation of coal and
steel, to the Treaty of Rome,' ° which worked to bring about
common external trade policies and a single internal market, Europe
appears to be close to attaining a unified market.
B. European Community Law and a Unified Market Today
Although the objective of the EEC Treaty to bring about a
common market in which goods, services, and capital could move
freely among members states failed, the desire to create a common
market continued among leaders in Europe.' In 1985, the European
Commission issued the White Paper containing approximately
twenty pieces of proposed legislation which needed to be passed to
ensure the goals of financial unification would be met. 12 The White
Paper encouraged greater liberalization of capital movements 3 for
three reasons: to enable access to efficient financial services; to
achieve monetary stability; and to promote an optimal allocation of
European savings. 14
As a result of the White Paper, the Single European Act
(SEA) was signed in 1986 by all twelve member states. 5 The
significance of the SEA is its focus on creating a single internal
market to eliminate all legal, economic, and technical barriers to
trade between member states.1 6 The SEA combines 320 million
people in twelve countries, making it the largest market of all, and
enables the member states to compete with the United States and
Japan.' 7 Although the deadline of January 1, 1993, has passed, it
appears that the ambitious program set forth in the SEA will soon be
Following the passage of the SEA, a committee of central
bank directors and monetary experts produced a report which
outlined the essential features of the European Monetary Union
(EMU).' 9 In December 1991, the European Council reached a final
agreement on the EMU at Maastricht. 20 The resulting agreement
imposed a commitment on member states to bring about a
convergence of monetary policies while at the same time reducing
deficit spending and inflation. 2'
The criteria set forth for the EMU included: the creation of
the European Monetary Institute in 1994 to coordinate the activities
of central banks and to make recommendations on general monetary
policies; the requirement that member states without central banks
create them; the elimination of excessive deficits among member
states; and plans for total monetary unification.2 2 Moreover, the
plan for the EMU provided that in 1996 the European Council
would decide whether to begin the third stage of creating a European
System of Central Banks (ESCB) in 1997. The ESCB system is
analogous to the United States Federal Reserve System, with a
European Central Bank (ECB) at its core.23 In the final EMU stage,
national currencies would be replaced by a single currency.2 4 With
the emergence of the EMU much legislation has been passed
through directives. 25 These directives have had a profound effect on
the regulation of banking in Europe, as well as other financial
service areas of the economy. These directives have resulted in the
creation of an integrated European banking system.26
III. DIRECTIVES AND BANKING
A. The Foundationfor a Unified Competitive System
Harmonization in the banking sector has come about in
Europe through a series of directives which are the foundation for
the single market in financial services.27 The most significant
directives which have been passed by the Council are the Freedom
of Capital Movements Directive, 28 the First Banking Directive, 29 and
the Second Banking Co-ordination Directive.3" While other
important directives have been passed,3' these three directives have
been the most important because they establish the foundation for
the single market in the financial services sector.32
1. The Freedom of Capital Movements Directive
The Freedom of Capital Movements Directive was passed in
1988, and mandates the abolition of all restrictions on capital
movements between member states before July 1, 1990. 33 It allows
the free transfer of capital for any purpose, thus permitting
crossborder banking.34 The Freedom of Capital Movements Directive
serves two other key purposes. First, its implementation date has
been used as a mark to begin the first stage of the EMU. Moreover,
the directive helps to create a sense of community because
individuals and enterprises can transfer their funds freely throughout
the member states. 3
2. The First Banking Directive
Although the First Banking Directive was passed before the
SEA established minimum harmonization and mutual recognition as
its objectives, it is key to understanding later developments. 36
The First Banking Directive accomplished three
a. It cleared away most of the obstacles to the freedom of
establishment of banks and other credit institutions.
b. It laid down common standards for the granting of
c. It introduced the basic principle of the cooperation
between the supervisory authorities of different
member states (by setting up the banking Advisory
Despite accomplishing these goals, several obstacles had to
be eliminated before a truly unified European Community Banking
Market could be established. First, a bank or other credit institution
33. Council Directive 88/361, supra note 28. This mandate provides an exemption for
Ireland and Spain which may keep certain restrictions until 1992, and Greece and Portugal which
may maintain their restrictions until 1995.
34. Id. art. 4. Member states may verify the nature of capital movements for statistical
and tax administration purposes, as well as for the supervision of financial institutions. Id.
35. BERMANN, supra note 5, at 616.
36. David H. Lui, A Bankers Guide to the European Community's 1992 Program, 107
BANKING L.J. 148, 156 (1990).
37. See CLAROTT1, supra note 2, at 2.
required authorizations from eleven different supervisors to establish
branches in all member states.38 Second, banking services could not
be provided in all member states because permissible banking
activities were not defined." Thus, banks were required to conform
with activities approved by host' member states." The final
obstacle was that a branch in a host country was required to keep its
funds separate from its parent's funds. 42 The result was that a
foreign branch was required to have its own dedicated capital, thus
imposing a greater barrier to operating in foreign countries. 4"
The First Banking Directive failed because it sought to
centralize the supervision of banking activities.' Member states
realized that this directive would prevent uniformity within a
reasonable period of time45 because regulatory policies of different
member states reflect different factors such as "geographic location,
expertise of banking professionals, and the relationships between the
central banks and their respective banking systems.946
3. Second Banking Co-ordination Directive
In light of the obstacles under the First Banking Directive, a
Second Banking Co-ordination Directive was passed by the Council
in 1989. This directive creates a single banking license which is
valid throughout all of the member states. 8 This approach allows
EEC based banks to provide financial services throughout the
Comnunity, and promotes growth and efficiency in the banking
industry. Thus, EEC banks should be stronger competitors within
the EEC and throughout the world. 49 The Second Banking Directive
sets forth the general rule that each Member State must honor the
banking laws and supervisory practices of all other member states."
Therefore, member states will be required to accept branches from
other member states without the need for applications."
Beyond establishing the principal of mutual recognition,52 the
Second Banking Directive defines the activities which are subject to
mutual recognition.53 These activities include:
1. Acceptance of deposits and other repayable funds from
the public.5 4
2. Lending. 55
3. Financial leasing.
Money transmission services.
5. Issuing and administering means of payment (e.g.
credit cards, travelers' cheques and bankers' drafts).
6. Guarantees and commitments.
7. Trading for own account or for account of customers
(a) money market instruments (cheques, bills, CDs,
(b) financial futures and options;
48. CLAROTTI, supranote 2, at 3.
49. Banking Integration,supra note 26, at 187.
50. Id. at 188-89.
51. CLAROTI-i, supra note 2, at 1.
52. E. Waide Warner, A Mutual Recognition and Cross Border Financial Services in the
European Community, 55 L. & CONTEMP. PROBS. 7 (1992).
53. Council Directive 89/646/EEC, supra note 30, at Annex.
54. Id. This activity may only be performed by banks, not non banks. All of the other
activities listed may also be performed by non banks. See CLAROTI, supra note 2, at 3.
55. Council Directive 89/646/EEC, supra note 30, at Annex (including consumer credit,
mortgage credit, and financing of commercial transactions).
(d) exchange and interest rate instruments; and
(e) transferable securities;
8. Participation in share issues and the provision of
services related to such issues.
9. Advice to undertakings on capital structure, industrial
strategy and related questions, plus advice and services
relating to mergers and the purchase of undertakings.
10. Money brokering.
11. Portfolio management and advice.
12. Safekeeping and administration of securities.
13. Credit reference services.
14. Safe custody services.56
If a bank is authorized to engage in these activities under the
terms of its home member state license, it is permitted to engage in
them in all of the other member states. Although this directive does
not impose the universal bank as a model5, for banks to be
competitive, member states will adopt the most favorable banking
measures. 9 To eliminate the initial competitive advantage enjoyed by
banks from member states which currently permit all of the activities in
the annex, member states will eventually allow all of these activities. 60
This movement to deregulate banking activities is commonly referred
to as "the race for the bottom."6M This competitive system creates a
unified banking system which is competitive both within the European
Union and the world. 62
56. Council Directive 89/646/EEC, supra note 30, at Annex.
57. CLAROTTI, supra note 2, at 3.
58. A universal bank is a bank which offers a variety of financial services including those
listed in the Council Directive, supra note 28, at Annex. While the Directive allows the
universal bank, it does not impose it, and allows it to compete with other models such as
specialized banks and multifunctional banks. CLAROTTI, supra note 2, at 3.
59. Banking Integration, supra note 26, at 192.
62. See Warner, supra note 52, at 26.
B. Regulating a Unified EuropeanBanking System
As discussed previously, the Second Banking Directive
establishes a single license approach,63 which authorizes a bank or
credit institution to supply services throughout the European
Community through either branches or cross-border services.' In
order to obtain a unified banking system, the Second Banking Directive
and other related directives have established standards which regulate
the adequacy of a branch's administrative structure and its financial
situation.65 Thus, a minimum harmonized supervisory standard for
credit institutions has been created.'
1. Second Banking Directive and Minimum Harmonization
The Second Banking Directive establishes several provisions for
minimum harmonization which must be established by banks for mutual
recognition and the issuance of the Single Banking License.67 First, a
minimum capital base is required before a bank is permitted to receive
authorization to conduct business in another Member State. 68 The
minimum capital base requirement provides that authorities shall not
grant authorization in cases where initial capital is less than five million
European Currency Units (ECU). 69 Although this provision does not
preclude member states from applying higher minimum capital levels
for its own institutions, it is unlikely that member states will do so
because of competition against foreign institutions. 7' This is an
example of the "race to the bottom," 71 and how the unified banking
system will enjoy stability while maintaining intra-community
Second, the Second Banking Directive requires the supervision
of major shareholders as a prerequisite to receipt of authorization to do
business in another Member State.72 This provision requires disclosing
the identity and the amount of holdings of any major shareholders who
own or control greater than ten percent of the bank, before
authorization is granted.73 If the authorities deem that these
shareholders or members are not suitable, they may refuse
authorization.74 Competition prevents member states from enforcing
more stringent levels of control on local banks because foreign credit
institutions are not required to comply with local rules that are more
rigid than their own. 7
Third, the size of participation in non-credit institutions by
credit institutions is limited for purposes of stability.76 This limitation
provides that credit institutions are limited to qualified holdings of no
more than 15% of that institution's own funds in a single non-financial
undertaking.77 Moreover, financial institution's total participation in
non-financial undertakings may not exceed 60% of that firm's own
Fourth, the Second Banking Directive requires Home States to
have sound administrative and accounting procedures, as well as
adequate internal control mechanisms .9
Fifth, under the Second Banking Directive, a minimum level of
capital is required for new banks.' This provision differs from the
First Banking Directive 8 because it eliminates the requirement that
branches operating in a separate Member State meet separate minimum
IV. SECOND BANKING DIRECTIVE AND HOST COUNTRY CONTROL
While the Second Banking Directive establishes the regulations
for minimal harmonization among member states,83 Host member states
will retain primary responsibility for other regulations. 4 The areas
which host member states will likely retain regulatory power include
supervision of liquidity and monetary policy. 85 Moreover, Host
Countries may also apply additional restrictions based on general public
OTHER RELATED EUROPEAN COMMUNITY LEGISLATION
Although the Second Banking Directive provides a wide range
of provisions to ensure the protection of depositors,87 other legislation
was required before mutual recognition and Home Country control
would take effect.88 Although the required date for the implementation
of these measures, January 1, 1993 has passed, the major legislation
required for setting up the single European market in financial services
is in place. 9 The purpose of this additional legislation is to ensure the
solvency of European banks, and protection for depositors. 9°
A. Own Funds
A directive on own funds was approved in April, 1989.91 The
purpose of this legislation is to harmonize the meaning of capital. 92
The definition of "own funds" is a credit institution's own capital,93
which is divided for assessment by distinguishing between internal and
external elements. 9' The internal element is primary capital and is
comprised of paid up equity, share capital, share/premium accounts,
and reserves. 9' External elements are funds which are not exclusively
controlled by the bank. 96 External funds include subordinated debt and
redeemable shares. 97 Under this directive, external elements must not
exceed 50% of the internal elements.9" Thus, the minimum level of
capital which a bank must have is maintained beyond capital which the
bank does not have sole control over.
B. Solvency Ratios
A directive on solvency rations was also adopted in December,
198999 to limit the amount of exposure to a banks own funds. l°
Limiting exposure is accomplished by establishing a minimum level,
whereby a bank's own funds must be at least eight percent of all its risk
based assets, including off balance sheet items."10 This percentage is
adjusted to reflect varying degrees of risk with the level of a bank's
own funds which are available to meet such risks.'02 The level of a
bank's own funds thus reflects the amount of risk which the banks'
assets are exposed to.' 03
C. Large Exposures
A directive regulating the level of large exposure a credit
institution may have was adopted on December 21, 1992.' 4 This
directive limits a credit institution's exposure to a particular client or
group of connected clients.0 5 Exposure is considered large, and thus
prohibited, when its value exceeds ten percent of the institutions own
funds. " Moreover, a credit institution's total level of large exposure
is limited to 25 percent of the institution's own funds."17 The result of
this directive, like the others, is to ensure competition among credit
institutions while protecting depositors.
A system for establishing a minimum level of deposit insurance
for credit institutions has been recommended by the Commission, but
no final directive has been passed.10 8 The recommendation provides
that deposit insurance should be mandatory among Member State credit
institutions, but leaves each Member State free to determine whether
these systems should be publicly or privately organized."° While a
minimum level of deposit insurance has not yet been established, the
member states are discussing a base level of 15,000 ECUs." 0
The issue of regulating credit institutions on a consolidated basis
was dealt with in the 1992 directive on the rules on the annual and
consolidated accounts of banks.' This directive broadens the scope of
the 1986 directive " 2 on the rules for regulating banks on a consolidated
basis." 3 The 1992 directive expands which institutions are regulated
on a consolidated basis from institutions where the parent company is a
credit institution," 4 to groups where the parent company is a financial
106. Council Directive 92/121, supra note 104; see CLAROTI, supra note 3, at 5.
107. Council Directive 92/121, supra note 104. see CLAROTrI, supra note 2, at 5.
108. CLAROTT1, supra note 2, at 6.
109. Id. at 6. Currently only four member states have followed this recommendation and
six others already have a deposit insurance scheme.
110. Id. at 6 (stating that coverage should focus on the depositors and not the deposits).
111. Council Directive, 92/30/EEC, 1992 O.J. (L 110/52); see CLAROTri, supra note 2,
112. Council Directive, 86/635/EEC, 1986 O.J. (L 372/1).
113. See CLAROTII, supra note 2, at 6.
114. Council Directive 92/30, supra note 111.
holding company with financial companies and primary credit
institutions as subsidiaries." 5 Therefore, supervisors are better able to
control the overall solvency and risk exposures of a related group of
companies. This is accomplished by preventing these related
companies from working around the minimum requirements. Hence,
related companies will no longer be permitted to work together to
The Capital Adequacy Directive (CAD) was proposed by the
Commission in 1990, and relates to the field of securities market
regulation." 6 Although it did not take effect until January 1, 1996, this
directive applies to firms which participate in the trading of
securities."17 Moreover, it provides for a minimum capital requirement
against a particular securities position." 8 The CAD provides for the
same requirements among banks and non-banks in the securities field,
thus creating a level playing field which enables banks and non-banks
to compete equally. n 9 This measure also establishes minimum
standards to protect institutions from instability created by market risk.
G. Investment Services Directive
The Investment Services Directive 120 (ISD) provides the
framework for establishing a European Passport in the securities field
and took effect on January 1, 1996.121 The ISD allows banks to
participate in trading securities under the Second Banking Directive. 122
However; because banks will gain a European banking license under
the Second Banking Directive, only three provisions of the ISD may
apply to credit institutions.123
115. CLAROTTI, supra note 2, at 6; see Council Directive, supra note 111.
116. Council Directive, C152/6, 1990 O.J.
(revised C50/5, 1992 O.J.)
117. Council Directive C152/6, supra note 116; see CLAROTrI, supra note 2, at 7.
118. Council Directive C152/6, supra note 116; see CLAROTTI, supra note 2, at 7.
119. CLAROTTI, supra note 2, at 7.
120. Council Directive, 93/22/EEC, 1993 O.J.
121. Council Directive C152/6, supra note 116; see CLAROTTI, supra note 2, at 8.
122. Council Directive 89/646/EEC, supra note 30, at Annex; see Clarotti, supra note 2,
123. CLAROTTI, supra note 2, at 10.
ILSA Journal of nt'l & ComparativeLaw
1. Investment firms must comply with the proposed
Capital Adequacy Directive; 124
Member states shall draw up prudential rules to be
observed by investment firms; 125 and
3. Investment firms may have access to stock
exchanges and organized securities markets. 126
The CAD affects banks which participate in the trading of
securities in three ways. 127 First, it establishes minimum capital levels
for investment firms, including banks which participate in various
investment activities. 128 These levels range from 50,000 ECUs to
73,000 ECUs, depending on the activity. 129 This standard differs from
the requirement of five million ECUs under the Second Banking
Coordination Directive because investment firms participate in a narrower
range of activities, thus requiring less capital.1 30 Second, the CAD
defines the calculation of capital requirements for investment firms and
banks with regard to their trading businesses.131 Third, the CAD
establishes definitions for banks and investment firms. 132 Because the
definitions of capital for banks and investment firms were originally
different, a common definition of capital for banks and non-banks was
established. 133 Again, the directive puts banks on a level playing field
with non-banks. 134
The ISD is also important because it requires Home States to
draw up mandatory prudential rules for firms authorized within those
states. 35 Prudential rules are basic rules of conduct and require as a
prerequisite to obtaining authorization that firms:
2. make adequate arrangements for securities or
money belonging to investors so that their
ownership rights or claims are protected, and to
prevent the firm from using the securities or
money for its own account (banks can use money
for their own account);
3. are either members of a compensation scheme
effective on bankruptcy or default of the firm, or
make individual arrangements giving equivalent
protection to investors.
4. provide their regulators with such information on
request and at such intervals as requested (but not
less than quarterly) so that the firm's financial
soundness and adequacy or provisions for market
risk can be assessed;
5. arrange for adequate records to be kept and
retained for a prescribed period, where such
records relate to executed transaction (and are of a
type sufficient to allow Home States to monitor
prudential rules, including rules about market
6. are structured and organized in such a way as to
minimize the risk of clients' interests being
prejudiced by conflicts of interests between the
firm, its clients, and another. 36
Moreover, the ISD will allow banks which participate in
investment activities to become members of stock exchanges in other
135. Id. at 10.
136. CLAROT-I, supra note 2, at 10.
member states without setting up subsidiaries in those countries.13 7
Banks will be on a level playing field with investment firms, thus
creating more competition in the field of investment services.
H. Prevention of Money Laundering
Another important piece of legislation is the Directive on the
Prevention of Money Laundering which was approved by the
Council on June 10, 1991.138 It prevents abuses in the freedom of
the movement of capitals between member states because of drug
and other criminally related activities.1 39 This directive requires:
1. financial institutions must require identification of
their customers (and beneficial owners) when
entering into business relations or when
conducting one-off transactions over specified
thresholds (15,000 ECUs);
2. financial institutions must exercise due diligence
in examining unusual transactions;
3. financial institutions must report suspicious
transactions to the competent authorities for
combating money laundering, and to that extent,
bank secrecy has to be lifted;
4. financial institutions are required to establish
internal procedures against money laundering,
including suitable staff training programs.14
These measures have resulted in the standardization of
Member State banking laws. 14' The minimum harmonization of
supervision and the regulatory standards serve several purposes.
First, they provide the basic framework under which mutual
recognition can operate.14 2 Second, these measures operate as a
safeguard to ensure that in the pursuit of a competitive advantage,
banks will not race to the bottom in an unrestricted manner.
Moreover, these regulations ensure that banks will enjoy cost
savings'43 because banks are only required to meet one set of
regulations rather than multiple Member State regulations.'"
Through these measures, credit institutions within the European
Community will enjoy equality of competition and the stability of a
stable banking system that protects investors. 45 While not all of
these directives have been approved, those already in place provide
a single European market for financial services."
VI. THE EUROPEAN MARKET AND NON-EEC BANKS
A. From Reciprocity to National Treatment
As discussed previously, the Second Banking Directive
establishes a European Passport which allows banks of the different
member states to operate freely throughout the European
Community. 147 The Second Banking Directive will also create
benefits for non-EEC banks.'"4
The benefits which non-EEC banks will enjoy vary, and have
been a source of controversy in the area of which non-EEC banks
will enjoy the benefits of a European Passport. 149 First, under the
Second Banking Directive, subsidiaries of nonEEC banks which are
already established in a Member State will be able to operate the
143. Banking Integration,supra note 26, at 195.
145. See CLAROTrI, supra note 2; Lui, supra note 36.
146. See CLAROTTI, supra note 2, at 17.
147. See Council Directive, supra note 30.
148. See Creation of a European FinancialArea, 36 EUR. ECON. 35 (1988); Banking
Integration, supra note 26, at 195. The Communities financial market will be characterized:
1. by the freedom of establishment and the freedom to provide services within
2. by coordinated rules relating to the access to or exercise of the profession of
financial intermediaries, which are intended to ensure that all users of financial
services enjoy the same protection;
3. by coordinated systems of surveillance and control, designed to ensure the stability
of the financial system.
149. Lui, supranote 36, at 160-61.
same as any other EEC bank. 50 However, branches of non-EEC
banks will not have the benefit of operating under a European
passport,' 5' and will thus be regulated and authorized separately by
each of the EEC member states. This is because branches do not
have to meet all of the regulatory requirements of subsidiaries.'12
Second, the guidelines for the regulation of non-EEC banks
which are not currently operating in Europe are also contained in the
Second Banking Directive. 153 In the initial version of the Directive,
the Commission required that without reciprocity of banking laws
between the non-EEC banks and the European Community, the
Commission could deny non-EEC banks access to the European
Community. 1 4 This requirement was abandoned in 1989.155 Today,
there is a revised standard for reviewing whether a non-EEC bank
may enjoy the benefits of a European Passport.1 56 Rather than
allowing a bank to be denied a European Passport because its Home
Country does not have reciprocity of banking laws with the
European Community, a non-EEC bank may only be denied a
European passport if the bank's Home Country discriminates against
European banks.'57 In other words, non-EEC credit institutions can
only be denied access to the European market if that bank's Home
Country does not provide the same competitive opportunities for
European credit institutions.1 58 "Although the revised standard is
vague and [may be] vulnerable to political undercurrents within the
Community, [it] provides an anti-discrimination mechanism under
which Common Market banks must be treated in the foreign nation
the same way the foreign nation would treat a domestic bank." 159
Prior to the revision of the standard from reciprocity to
national treatment, the United States might have been prevented
from enjoying entry into the European market because of barriers
between commercial and investment banking." 6° Under the
requirement of reciprocity, because European banks would be
prohibited from participating in securities activities in the United
States, the United States could have been denied access to the
European Market. 16' However, under the revised standard, it is
likely that United States banks and other non-EEC countries will
benefit from the European market as long as they do not participate
in discriminatory banking practices. Thus, foreign banks incur
fewer costs while operating in Europe because they may establish
themselves in any Member State, and set up branches wherever
market conditions are favorable.' 62 In the end this will create more
competition in the banking sector while providing tremendous
opportunities for non-EEC banks. 163
B. Establishinga Bank within the EuropeanEconomic Community
Non-EEC countries may also establish companies as well as
banks within the EEC. 64 The ability of non-EEC countries to do
this is provided for in the Treaty of Rome.
Companies constituted in accordance with the law of
a Member State and having their registered office,
central management or main establishment within the
Community shall, for the purpose of applying the
provisions of this chapter, be assimilated to natural
persons being nationals of member states. The term
Companies shall mean companies under civil or
commercial law, including cooperative companies and
other legal person under public or private law, with
the exception of non-profit companies.165
Under the EEC Treaty a foreign company must satisfy two
conditions to benefit from the European market and from the rule of
non-discrimination."6 First, the foreign company must form a firm
or company under the laws of one of the EEC member states. 1 67
"The second requirement is that the company [including a foreign
bank] must have its registered office, central administration, or
principal place of business in the Community.' 68 Thus, a foreign
bank may be established in the EEC if it is established under the
laws of one of the EEC member states, and has its registered office,
central administration, or principal place of business is in the
These requirements are subject to two different
interpretations. The broad interpretation is that these place no
impediments on a foreign firm seeking to establish its business in
that country. 69 The narrow view is that there are restrictions on
third-country companies. 70 Because of these differing views and
because the EEC has not acted on this issue, it may be advantageous
for a foreign bank to establish itself in a Member State with the
broader interpretation of the EEC Treaty as soon as possible. 71
Since the end of the Second World War, Europe has undergone
countless changes which have resulted in the creation of a unified market.
While all of the mechanisms for creating a single European market in
financial services are not in place, a unified market in Europe has been
created,1 72 resulting in a unified banking system which is designed to be
166. Single European Act, supra note 11, at 191.
169. Id. Examples of countries which follow this view include the United Kingdom, the
Netherlands, Spain and Luxembourg. These countries do not require companies to actually
conduct business in that member state. Id. at 191.
170. Single European Act, supra note 11, at 191. Examples of countries which place
restrictions are Germany and France. Restrictions include the requirement that a foreign
company formally register in that country, that it maintain a place of business in that country,
and that it conduct genuine business activity in that or another specific Member State before it
granted rights under article 58. Id.
171. Id. at 191-92.
172. CLAROTrI, supra note 2, at 1.
both competitive and stable. 173 Moreover, the single European market
could provide tremendous opportunities for non-EEC firms.174 While the
end result is still unknown, as the world becomes more global, a unified
European investment services market may become a world leader in what
is now a competitive global marketplace.
1. Treaty Establishing the European Coal and Steel Community, April 18 , 1951 , 261 U.N.T.S. 140 , as amended , Treaties Establishing the European Communities (EC Official Pub . Office, 1987 ) [hereinafter ECSC].
2. PAOLO CLAROTTI , E.C. HARMONIZATION IN THE BANKING SECTOR 1 ( 1992 ).
4. Id . Currently there are fifteen members of the European Union: Belgium, Denmark, the Federal Republic of Germany , France, Great Britain, Greece, Ireland, Italy, Luxembourg, Portugal, Spain, and the Netherlands.
5. GEORGE A. BERMANN ET AL; CASES AND MATERIALS ON EUROPEAN COMMUNITY LAW 3 ( 1993 ).
6. Id. at 3.
9. ECSC, supra note 1,at 140.
10. Treaty Establishing the European Economic Community , Mar. 25 , 1957 , 298 U.N.T.S. 11 [hereinafter EEC Treaty].
11. Farzaneh Marvasti , The Single European Act: A Profitable Perspective Not Only for the European Community , 20 Sw. U. L. REV. 175 , 175 ( 1991 ).
12. CLAROTIri, supra note 2, at 1.
13. Completing the Internal Market: White Paper from the Commission to the European Council , COM (85)310 ( 1985 ) [hereinafter White Paper] .
83. Council Directive 89 /646/EEC, supra note 30, art. 4 , 5 , 12 and 13.
84. Lui , supra note 36, at 161.
85. Id .
86. Id . at 161-62.
87. Id . at 162.
88. Id . at 162. See Council Directive 88 /361/EEC, supranote 28 , art. 22 .
89. CLAROTTI, supra note 2, at 1 , 6. The major legislation which is currently in place includes, the Freedom of Capital Movements Council Directive, supra note 28; the Second Banking Directive , Council Directive 89 /646/EEC, supra note 30; the directive defining funds , Council Directive 89 /299/EEC, 1989 O.J. (L 124/16); the Solvency Ration Directive , Council Directive 89 /647/EEC, 1989 O.J. (L 386/14); the Large Exposure Directive , Council Directive 92 /121/EEC, 1993 O.J. (L 29/1).
90. Lui , supra note 36, at 162.
91. Council Directive 89 /299/EEC, 1989 O.J. (L 124/16).
92. Id .; see Lui, supra note 36 , at 162.
93. Council Directive 89 /299/EEC, supra note 89; see Lui, supra note 36, at 162 . 2.