Banking on Europe: 1992 and EMU
Nancy Louise Kessler, Banking on Europe:
Banking on Europe: 1992 and EMU
Nancy Louise Kessler 0
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BANKING ON EUROPE: 1992 AND EMU
NANCY LOUISE KESSLER
The market for transnational financial services is rapidly expanding.
In order to take advantage of this increasingly important situation, the
members of the European Community ("EC" or "Community")1 have
turned their attention to making the EC a major international banking
center. To accomplish this, the EC recognizes that it must increase its
efforts to remove barriers between Member States.2 Toward this goal,
the EC has passed certain directives to integrate the EC banking market
by 1992.1 The EC and the European Free Trade Association ("EFTA")'
signed an accord in October, 1991, that extended the EC's banking
directives to all EFTA states.' In conjunction with the desired integration of
1.The twelve Member States constituting the EC are Belgium, Denmark, France,
Germany, Great Britain, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
and Spain. See Treaty Between the Member States of the European Communities and the
Kingdom of Spain and the Portuguese Republic Concerning the Accession of the
Kingdom of Spain and the Portuguese Republic to the European Economic Community and
to the European Atomic Energy Community, 1985 OJ. (L 302) 9.
2. See Clarke, Introduction, in Planning for Europe: 1992 at 1, 2 (W. Clarke ed.
1989) [hereinafter Clarke, Introduction].
3. See, e.g., Second Council Directive 89/646 of 15 December 1989 on the
Coordination of Laws, Regulations and Administrative Provisions Relating to the Taking Up
and Pursuit of the Business of Credit Institutions and Amending Directive 77/780/EEC,
1989 OJ. (L 386) 1 [hereinafter Second Banking Directive]; Council Directive 89/299 of
17 April 1989
on the Own Funds of Credit Institutions, 1989 OJ. (L 124) 16 [hereinafter
Own Funds Directive]; Council Directive 89/647 of 18 December 1989 on a Solvency
Ratio for Credit Institutions, 1989 O.J. (L386) 14 [hereinafter Solvency Ratio Directive].
4. The EFTA members are Austria, Finland, Iceland, Norway, Sweden,
Switzerland, and Liechtenstein. See Lest a FortressArise, Economist, Oct. 26, 1991, at 81, col. 1
5. See Hill, Pact Extends EC Banking and InsuranceRules to EFTA States, Fin.
Times, Oct. 23, 1991, at 2, col. 2. Although there are some restrictions, the EFTA states
will be able to take advantage of the single license to set up branches within the EC, and
EC banks will be able to set up branches within the EFTA. See id.These restrictions
include limits on "outright takeovers of Nordic banks and insurance companies,"
temporary limits on the percent of Norwegian banks that can be held by foreign investors,
temporary restrictions on the purchase of Norwegian securities by foreign investors,
temporary restrictions on direct foreign investment in Norway and Sweden, and temporary
restrictions on real estate investment in Austria, Finland, Switzerland, and Iceland. See
id. These restrictions reflect "Efta sensitivity about an EC invasion of their vulnerable
financial services sector." Id The outcome of this deal will be a European Economic
Area ("EEA"), the "world's biggest free trade area." Fortress,supra note 4, at 81. col. 1.
The EFTA will not adopt the entire single market program. See id.
This deal may be in jeopardy, however, because "[t]he European Court of Justice in
Luxembourg has declared the EEA to be incompatible with the EC treaties." Jealous
Judges, Economist Dec. 21, 1991 - Jan. 3, 1992, at 58, col. 2. The EC now has two
options---it can amend the Treaty of Rome, thus overruling the Court, or it can
renegotiate with the EFTA. See id.
the banking sector, the EC has also sought to complete an effective
Economic and Monetary Union ("EMU").
This Note provides a brief overview of how the EC intends to achieve a
single market in financial services by the end of 1992. This Note also
analyzes some of the problems either caused or not fully solved by the
new legislation and programs. Part I describes and analyzes the various
banking regulations recently developed in the EC to help forge a single
market in financial services. Part II evaluates the plan for EMU, first
formalized by the Delors Report on Economic and Monetary Union in
the European Community, published in 1989,6 and later made binding by
the Treaty of Maastricht.7 This Note concludes that the EC's attempt to
integrate its financial services market (by implementing new banking
directives) and its attempt to achieve EMU (by implementing the Delors
plan or similar proposals) will help establish the EC as a major force in
the increasingly internationalized financial services market. This process
will be gradual, however, and problems not yet apparent may further
delay the process.
The Treaty of Rome, which established the EC on January 1, 1958,
called for total harmonization of banking laws.' Because the Treaty
required total harmonization, progress toward an integrated banking
market was slow.9 Prior to 1985, the Member States failed to reach
agreement on banking regulation;1" indeed, Member States continued to
regulate the provision of financial services in nationally oriented ways,
and such localized regulation prevented the EC from reaching its
enormous potential. 1 To advance efforts toward an integrated market, the
European Commission ("Commission") issued a report entitled
"Completing the Internal Market: White Paper from the Commission to the
European Council" (generally known as the "White Paper"), with the
goal of completing the process of integration by 1992.12 The Single
ropean Act, which reformed the Treaty of Rome, put the White Paper's
proposals into effect.'" The White Paper stressed, as one of its central
objectives, the creation of a free internal market in financial services. 4
Rather than continuing with attempts to harmonize all aspects of
Member States' legislation, however, the Commission altered its aim pursuant
to the White Paper and now seeks mutual recognition of each Member
State's legislation.15 The essential elements of legislation, however, must
still be harmonized.16
There are three main elements underlying the White Paper's approach
to achieving a single market for financial services: "harmonization of
essential standards for prudential supervision and for the protection of
investors, depositors, and consumers; mutual recognition of the way in
which each Member State applies those standards; [and] home country
control and supervision of financial institutions operating in other
Member States."' 7 The Commission sought sufficient harmonization of
supervision standards such that Member States would agree to recognize the
control and supervision of other Member States.'" In order to meet this
objective, the Commission passed several directives, including the Second
Banking Directive, in 1989.19
1. Banking Directives Proposed by the White Paper
The White Paper's proposals covered a wide range of financial
activities including banking, insurance, and securities transactions.2 0 The
White Paper proposed several banking directives "to harmonize the
essential supervisory and prudential rules necessary to secure mutual
recognition of national authorization and supervisory systems."' 2 1 The
cornerstone directive was the Second Banking Directive, designed to
create a single banking license for the EC. 2 In addition, the White Paper
proposed other important directives in the Community's quest to
integrate the financial markets of the EC, including a directive to impose
standards for the own funds (the EC term for bank capital) of a credit
institution2 3 and a directive to impose a minimum solvency ratio for
credit institutions.24 These directives provide the essential minimum
standards required for the Second Banking Directive to be effective.2 5 In
addition to these three major directives, and pursuant to the mandates of
the White Paper, the EC is working on various directives relating to
other banking concerns.2 6
23. See Own Funds Directive, supra note 3; infra notes 123-32 and accompanying
24. See Solvency Ratio Directive, supra note 3; infra notes 133-53 and accompanying
25. See Banking and Securities,supra note 22, § 1.
26. In addition to the Second Banking Directive, the Own Funds Directive, and the
Solvency Ratio Directive, there is a proposal for a Directive monitoring and limiting
exposure to large risks. See Banking and Securities,supra note 22, § 7.2. This proposed
Directive, see Commission Proposal 91/09 of 2
7 March 1991
for a Council Directive on
Monitoring and Controlling Large Exposures of Credit Institutions, 1991 O.J. (C 123)
18, will transform the currently operational Recommendation on monitoring and
controlling large exposures of credit institutions into a legally binding directive. See
Commission Recommendation 87/62 of 22 December 1986 on Monitoring and Controlling
Large Exposures of Credit Institutions, 1987 O.J. (L. 33) 10; Banking and Securities,
supra note 22, §§ 7.1, 7.2. Recommendations are not binding on Member States. See
Banking andSecurities, supra note 22, §§ 7.1, 7.2. The objective of this proposed
Directive is to ensure that credit institutions spread their risk of exposure to default by large
clients. See Coopers & Lybrand Europe, European Banking Law 121 (1990) [hereinafter
European Banking Law]. This will hopefully reinforce the stability of the banking sector
by "strengthening the prudential supervision and solvency of the Community's banking
system." Id. Exposure limits in the Directive are more strict than those in the
Recommendation-exposures of over 10% of own funds are considered large and must be
reported. See Banking andSecurities,supra note 22, §§ 7.1, 7.2.; see also infra notes 123-32
and accompanying text (discussion of own funds). Credit institutions will have to limit
their exposure to any one client to 25% of own funds, and will have to limit their total
exposure to 800%. See European Banking Law, supra, at 151. Credit institutions can
only overstep these confines in exceptional circumstances, and if they do so, the credit
institution must bolster own funds with additional capital. See Banking and Securities,
supranote 22, § 7.1. This Directive will be applicable to credit institutions as defined by
the First Banking Directive. See id.; First Council Directive 77/780 of 12 December
1977 on the Coordination of Laws, Regulations and Administrative Provisions Relating
to the Taking Up and Pursuit of the Business of Credit Institutions, 1977 O.J. (L 322) 30,
art. 1 [hereinafter First Banking Directive]; see also infra note 40 (definition of credit
There is also an unpublished proposal for a Directive on deposit guarantee schemes for
credit institutions. See European Banking Law, supra, at 151. This proposed Directive
will transform the currently operational Recommendation concerning the introduction of
deposit guarantee schemes for credit institutions into a legally binding Directive. See id.
at 122, 151; Commission Recommendation 87/63 of 22 December 1986 Concerning the
Introduction of Deposit-Guarantee Schemes in the Community, 1987 O.J. (L 33) 16.
The objective of the proposed Directive is to ensure the provision of deposit guarantee
schemes in order to protect depositors from potential losses due to bank failures. See
Banking and Securities,supra note 22, § 8.5.
Finally, there is a key banking Directive on Consolidated Supervision of Credit
Institutions. See Council Directive 83/350 of 13 June 1983 on the Supervision of Credit
Institutions on a Consolidated Basis, 1983 O.J. (L 193) 18. This Directive came into effect on
July 1, 1985. See Banking and Securities,supra note 22, § 4.1. The Directive's objective
is to assist national authorities supervising parent credit institutions by consolidating its
supervision with that of other institutions in which the parent has a participation. See
European Banking Law, supra, at 114. This Directive applies to credit institutions as
Pre-White Paper Banking Legislation
The limited early economic success of the EC highlighted the need for
greater integration in the financial services market." The White Paper
provided the foundation for financial integration in the EC. Prior to this
report, harmonization of the banking sector was slow.' Thus, to
understand the impact of the White Paper Directives, it is useful to review
banking legislation in the EC prior to the White Paper. The most
significant such legislation, and the first to attempt to harmonize EC banking
laws, was the First Banking Directive, adopted in 1977.29
The First Banking Directive, by creating uniform requirements for
bank authorization and by encouraging collaboration between Member
States' supervisory authorities, abolished some barriers between Member
States with respect to the provision of banking services.30 Yet, despite
the passage of the First Banking Directive, major obstacles remained to
full liberalization of banking services. These obstacles included: the
need for separate authorization to establish branches in other Member
States; the subjection of out-of-state branches to host-state supervision;
and the imposition on credit institutions of more severe limitations for
out-of-state branch activities than for home-office activities.3
Furthermore, most Member States required that branches of banks established in
other Member States provide endowment capital, thereby treating the
branch as a new credit institution rather than as a branch office of an
existing credit institution.32 In direct response to these and other
obstadefined by the First Banking Directive. See id; see also Note, Putting the Super Back in
the Supervision ofInternationalBanking Post-BCCI,in Annual Survey of Financial
Institutions and Regulation, Transnational Financial Services in the 1990s, 60 Fordham L
Rev. S467, S470-71 (1992) (discussion of consolidated supervision) [hereinafter
PostBCCI]. In 1990, a Proposal to Extend the Scope of the 1983 Directive was submitted to
the Commission. See Banking andSecurities,supra note 22, § 4.2. "The aim of the
proposal is to improve protection for depositors by extending the scope of the 1983 Directive
to banks owned by financial holding companies, i.e., with parent companies other than
credit institutions." Idl
27. See 1992-Planning, supra note 11, at 4.
28. In fact, the EC passed only three banking directives prior to the White Paper. See
1992 Handbook, supra note 17, at 115. In contrast, the White Paper suggested 279
proposals for completing the single market. See Speech by Mr. Martin Bangemann to the
"Institut Royal Des Relations Internationales" on "The Process of European
Unification" (Sept 1
), available in LEXIS, Europe Library, RAPID File. Of these 279
proposals, 220 have already been adopted by the European Council. See id.
29. See 1992 Handbook, supranote 17, at 115; 1992-Planning, supra note 11, at 39.
30. The conditions for authorization enumerated in the First Banking Directive
include requirements for minimum and separate own funds and a requirement that credit
institutions be directed by at least two persons "who effectively direct the business of the
credit institution." Frst Banking Directive, supra note 26, art. 3(2). The supervisory
collaboration consists primarily of requiring the sharing of information necessary for
monitoring liquidity and solvency. See id. art. 7(1).
31. See Reynolds, Community Law, in The Regulations Governing Banking Across
the European Community, 8 Int'l Fin. L. Rev. 8,
11 (Sept. Supp. 1989
); 1992 Handbook,
supra note 17, at 115.
32. See 1992 Handbook, supra note 17, at 127.
eles, the Commission passed the Second Banking Directive. 3
The Second Banking Directive
The Second Banking
Directive, passed in December of 1989, re
sponded to the continuing need for integration in the banking market.3 4
This Directive builds upon the work of the First Banking Directive, 35
and is scheduled to be effective January 1, 1993.36
The objective of the Second Banking Directive is to create a single
The Directive aims to achieve this single market via
mutual recognition by the Member States of each state's authorization of
This recognition "will allow credit institutions the
freedom of establishment and the freedom to provide services across the
host state.4 1
The Second Banking Directive applies to all credit institutions as
defined by the First Banking Directive except those exempted under Article
Specifically, this Directive does not apply to branches that have
already initiated banking activities by conforming to the regulations of the
Provisions of the Second Banking Directive
The Second Banking Directive creates a single license for banking
within the EC, and mandates that a credit institution's home country
regulate the activities of an institution it has authorized.42 Additionally,
reserves some specific powers to the host state.47
the Second Banking Directive introduces common standards for
authorization,4 3 demands reciprocity,'
requires harmonization of certain
business conditions, 45 creates standard steps for initiation of services,4 6 and
Authorization for the single EC banking license is granted by the state
in which the head office of the credit institution is located.4 The single
license provides that an authorized credit institution can establish
branches or provide services in other Member States after notifying its
home state of its intentions.49
In addition to the single license, the Second Banking Directive
introduces the principle of home-country control, whereby a credit
institution's home state supervises the institution's banking activities in all
Member States.50 Home-country control is intended to regulate the core
banking activities5 1 that may be practiced throughout the EC,52 such as
commercial and investment banking services. 3 A credit institution may
only engage in activities that are authorized by its home state,' and these
activities may be more limited than those core activities permitted by the
Directive.55 Each Member State, however, must permit credit
institutions authorized elsewhere to engage in the full range of activities
permitted by their home state. 6 The home state will provide the host state with
48. See i& recital 4, art. 6(1).
49. See id arts. 19(1), 20(1).
50. See fi recital 4, art. 13(1).
51. See &Lannex. Specifically, core banking activities include:
52. See i recital 12, art. 18.
53. For a listing of core bank activities, see supra note 51.
54. See Second Banking Directive, supra note 3, recital 12. The Second Banking
Directive, by virtue of mutual recognition, permits credit institutions "authorized in their
home Member State to carry on, throughout the Community, any or all of the activities
listed in the Annex." Id. (emphasis added).
55. See 1992 Handbook, supra note 17, at 130.
56. See Second Banking Directive, supra note 3, art. 18(1). The Second Banking
Directive requires that "[t]he Member States shall provide that the activities listed in the
Annex may be carried on within their territories." Id.
information on the credit institutions operating within its territory.5 7
The Second Banking Directive also introduces certain common
standards for authorization to engage in banking activities. One such
condition is the requirement that the credit institution raise five million ECU58
in initial capital to become established, although Member States have
limited discretion to reduce this amount.59 Also, prior to authorization,
major shareholders must be identified and evaluated for eligibility. 6°
Host states can no longer require that branches of credit institutions
obtain additional authorization or additional endowment capital to operate
within their borders, as they could prior to the operation of the Second
Banking Directive. 61 Furthermore, prior consultation is required with
host-state authorities if the institution to be authorized is a subsidiary of
a credit institution already operating in that host state.62
The Second Banking Directive also demands reciprocity, requiring
that non-EC states seeking to take advantage of the single EC license
afford both effective access and national treatment to EC credit
institutions.63 The European Commission has defined "effective access" as
access similar to that accorded to non-EC credit institutions operating
within the EC.64 When Community credit institutions are denied
effective access to non-EC financial markets, the European Council can
demand that the European Commission negotiate to secure effective access
for Community credit institutions. 65 The Commission has defined
"national treatment" in financial services as granting a foreign-owned
institution "the same competitive opportunities as are available to domestic
credit institutions. ' 66 When Community credit institutions are denied
national treatment in a non-EC country, new authorizations for that
country's credit institutions can be suspended, either temporarily or
permanently, depending on the success of the Commission's negotiations. 67
The Second Banking Directive further requires that certain business
57. See id art. 19.
58. The ECU is the EC's currency unit. For a discussion of the ECU, see infra notes
239-41 and accompanying text.
59. See Second Banking Directive, supra note 3, art. 4. Member States can only
reduce the amount of endowment capital to a minimum of one million ECU, and must
follow stringent reporting requirements. See id. art. 4(2). This special minimum capital
requirement is available specifically "for small enterprises and banks." Banking and
Securities,supra note 22, § 3.3.
60. See Second Banking Directive, supra note 3, art. 5.
61. See id. art. 6(1). The First Banking Directive allowed host states to require credit
institutions operating within their borders to be authorized by both host states and home
states. See Banking and Securities, supra note 22, § 2.3. Prior to the Second Banking
Directive, host states were also allowed to require additional endowment capital from
credit institutions to set up branches within their borders. See id. § 3.3.
62. See Second Banking Directive, supra note 3, art. 7.
63. See id. art. 9(3)-(4).
64. See id. art. 9(3).
65. See id. art. 9(3); European Banking Law, supra note 26, at 128.
66. See Second Banking Directive, supra note 3, art. 9(4).
67. See id.
conditions be harmonized. First, a credit institution's own funds must
not fall below the initial capital requirement for authorization.6" Second,
acquisition of a major holding in a credit institution must be approved by
the home state.69 Third, the home state must be given an annual list of
major stockholders.70 Fourth, the credit institution must follow limits on
the proportion of its own funds that it can invest in non-financial services
undertakings.7 ' Fifth, a credit institution must "have sound
administrative and accounting procedures and [must also have] adequate internal
control mechanisms."7 2 Sixth, prudential supervision is the
responsibility of the home state.73 Seventh, host-state authorities will share
responsibility with home-state authorities for supervision of liquidity and
market risk and implementation of monetary policy. 4 Eighth, host
states must allow on-the-spot verification by the home-state authority of
information relating to management and ownership of a branch."'
Finally, all information acquired is subject to the requirements of
professional secrecy. 76
Additionally, the Second Banking Directive creates standard
procedures that credit institutions must follow in providing services in another
Member State. Initially, a credit institution must notify its home-state
authorities of the activities that it plans to undertake in other states,'
and the home-state authority similarly must notify the host-state
authority within one month.7 ' The credit institution must then provide the
home state with specified significant information about the proposed
branch and its activities, which then must be passed on to the host state
within three months.79 The branch can begin business upon receipt of
notice from the host state, or after two months have passed since the host
state received notification from the home state."
Finally, the Second Banking Directive reserves some powers for the
68. See id art. 10(1).
69. See id art. 11(1).
70. See id. art. 11(4).
71. See id art. 12.
72. Id art. 13(2). Sound administrative and accounting procedures and internal
control mechanisms may necessitate that credit institutions employ auditors and disclose to
them information enabling them to examine financial statements, ensure compliance with
banking laws, and assess the financial condition of the credit institution. See, eg. G.
Penn, Banking Supervision 69-70 (1989) (supervision under UK banking law mandates
that a credit institution's reporting accountants perform certain functions).
73. See Second Banking Directive, supra note 3, recital 4,art. 13(1). Prudential
supervision essentially requires that the home state supervise a credit institution's activities
and operations to assure that the institution is in compliance with the applicable banking
regulations. This may require credit institutions to disclose necessary information to
auditors and regulators. See Penn, supra note 72, at 145-50.
74. See Second Banking Directive, supra note 3, art. 14.
75. See id art. 15(1).
76. See id art. 16.
77. See Second Banking Directive, supra note 3, art. 20(l).
78. See id. art. 20(2).
79. See id art. 19.
80. See id art. 19(5).
host state. These powers include the ability to require a branch to
provide periodic reports on its activities."' In addition, host states, after
notifying the home state, can take action to ensure that any irregular
activity being conducted is ended.8 2 Lastly, host-state authorities can
also enforce "rules they have adopted in the interest of the general
Advantages and Comparison to the First Banking Directive
The Second Banking Directive solves many of the problems created by
the First Banking Directive. First and foremost, the single banking
license will remove the key barrier to integration in the banking market.8"
That is, a credit institution will no longer have to be separately
authorized by each Member State in which it does business.8 5
The principle of home-country control will also ensure that all
branches of a credit institution, both inside and outside the home state,
will be subject to the same supervision.8" The new EC legislation should
help protect the banking industry from another BCCI-style scandal.87
One cause of the BCCI scandal was an uncertainty over who was
ultimately responsible for supervising the bank's activities.8 8 This confusion
might have been alleviated had the Second Banking Directive been in
effect, since the Directive places responsibility for supervision squarely in
the hands of the credit institution's home state.89
The harmonization of minimum prudential banking rules, such as
those relating to initial capital, liquidity, and solvency, will also enable
banks to offer services more freely across the EC. Even commentators
who have criticized the legislation's effectiveness in integrating the EC
have recognized that
[t]he new directives will prevent countries from introducing rules that
keep each other out, and will also set minimum regulatory standards
beneath which member states cannot fall. The effect of the hype itself
may also be helpful, perhaps prompting countries to liberalise faster
than they otherwise might, and encouraging companies to stop
thinking national. 91
Potential Difficulties Relating to the Second Banking Directive
While the Second Banking Directive solves a number of the problems
created by the First Banking Directive, others still remain. For example,
local control by the host state may cause difficulty. A Member State can
legislate for the public good in areas that are not dealt with at the EC
level, such as consumer protection.92 Credit institutions will have to
conform to these local rules even if they are branches of institutions
headquartered in another state.93 Therefore, one of the problems with the
First Banking Directive-that a branch office may be subject to greater
regulatory restraints than would its home office-will still exist under the
Second Banking Directive.9 4
The Second Banking Directive's effectiveness may also be hindered by
the delay thrust upon credit institutions in obtaining authorization to set
up a branch-in particular, delay caused by the notice required to open a
branch, to offer new services, and to offer cross-border services.95 This
delay will dilute the effect of the single license, and will also create
unnecPost-BCCI,supra note 26, at S477-87 (discussion of BCCI and the problems facing EC
90. See Clarke, supra note 34, at 130-31. The EC plan to create a single market in
banking has been criticized, however. Some commentators warn that there will be little
change in banking as a result of the single license. See Lascelles, Early Alliances FailTo
Impress--Towards 1992-And the World's Largest Single Market, Fin. Times, May 9,
1990, at II, col. 1 [hereinafter Lascelles, EarlyAlliances]. "[Blanks expect[ ] to see few
major changes in the big corporate and wholesale banking markets, because these are
almost totally international anyway." Ia;see also Kellaway & Dickson, PainfulBirth of
the Single Market, Fin. Times, Dec. 19, 1990, at 16, col. 3 ("in the wholesale markets,
which process large transactions, there is already plenty of cross-border action"). This
lack of fundamental change may also extend to the retail sector because of the national
character of banking. See Lascelles,EarlyAlliances,supra,at II, col. 1; see also Keilaway
& Dickson, supra, at 16, col. 3 ("deep cultural differences remain in the way business is
done"). In addition, setting up a retail banking network will be prohibitively expensive.
91. Kellaway & Dickson, supra note 90, at 16, col. 3.
92. See Second Banking Directive, supra note 3, recital 15.
93. See id
94. See Clarke,supra note 34, at 131.
95. See Second Banking Directive, supra note 3, arts. 19, 20.
essary bureaucracy.9 6
Additionally, the reciprocity provision has caused concern in non-EC
countries. The provision states that the authorization of a subsidiary of a
non-EC credit institution to offer services within the EC, and the
acquisition by a non-EC credit institution of an interest in an EC credit
institution, may be conditioned on reciprocal treatment being accorded to EC
institutions in the non-EC country in question.97 First, the exact
implications of the reciprocity requirement are far from clear. The
Commission is given a great deal of discretion in determining whether all EC
credit institutions enjoy reciprocal treatment in the non-EC country at
issue. 98 The only statements made by the Commission concerning the
meaning of reciprocity have been made to counter fears that reciprocity
may lead to protectionism.99 The Commission has specifically stated its
intention to use reciprocity to advance world trade, not to limit it,"° and
has also declared that reciprocity will not apply retrospectively. 10 Yet,
despite these assurances, the results of the provision will not be definite
until the Second Banking Directive is fully implemented.
A second reciprocity hurdle centers on the difficulty in applying a
single reciprocity standard to different banking practices inside and outside
the EC.1 12 For example, some Member States and outside countries have
a universal banking system, allowing authorized banks to practice
commercial banking and securities business simultaneously, while
Member States and outside countries separate the two activitieost.h'0er3
These different laws may cause confusion when the Commission tries to
determine whether reciprocity has been granted." Presumably, the
Commission will "have to accept that the federal and state rules
regulating the geographical scope of banking activity and separating banking
from securities business will apply equally to Community banks."'' 0
A third question about reciprocity concerns whether non-EC branches
or subsidiaries already authorized to engage in banking within the EC
can take advantage of the single license, and thus establish further
subsidiaries in other EC states."°6 The Commission has issued a report
stating that subsidiaries can take advantage of the single license because they
are considered separate undertakings under the Treaty of Rome, Article
58.107 This report resolves any question with respect to subsidiaries.
Branches, however, are not considered separate undertakings under
Article 58 of the Treaty of Rome, and therefore, have no right to the single
license even though they may be established within a Member State."'
A final criticism of the Second Banking Directive is that the single
license will not effectively integrate financial services. Although intended
to create a single market, the EC rules have been criticized for, in effect,
"continu[ing] to divide the EC according to territorial boundaries""' 9 by
subjecting credit institutions to differing regulations. If there is really to
be a fully integrated EC, perhaps regulation of banking should take place
at an EC, rather than a national, level. 1
The liberalization of banking called for by the White Paper
necessitated the creation of capital adequacy'II standards to ensure that the
Second Banking Directive's single license would be grounded on uniform
minimum standards." 2 In order to rely on the supervision and
regulation of the credit institution's home state, the host state needs assurance
that minimum standards will be maintained. Thus, standardization of
capital adequacy minimums is essential for the success of home-country
control, one of the principle aims of the White Paper.
Capital adequacy standards have become increasingly
internationalized. In July 1988, the Basle Supervisors Committee on Banking
Regulations and Supervisory Practices, representing the major Central Banks
and supervisory authorities of Europe, developed the International
Convergence of Capital Measurement and Capital Standards, for the Group
of 10 nations ("G-10") and Luxembourg." 3 The Basle Committee
adopted these new capital standards to encourage and safeguard
international financial activity by reducing the risk of insolvency for credit
institutions. 4 These standards were also adopted to create a level playing
field among competing international banks.' 1 5 Since a majority of the
G10 nations are also members of the EC, it is not surprising that the
capital adequacy standards subsequently developed for the EC parallel those
for the G-10 countries.' 16
Two directives have been adopted to establish capital adequacy
minimums: the Own Funds Directive and the Solvency Ratio Directive.'17
"Own funds" is the EC term for bank capital and is used to assess
solvency. 18 A common definition of "own funds" is essential for future
banking coordination" 9 because capital is a cornerstone of banking
supervision. The EC issued its Own Funds Directive on April
The Solvency Ratio Directive expresses the own funds of each credit
institution as a proportion of the risk-adjusted value of its assets and
offbalance-sheet business 12 ' and was passed by the EC on December 18,
1. The Own Funds Directive
The Own Funds Directive applies to all credit institutions as defined
by the First Banking Directive.' 2 The own funds of credit institutions
"are the funds which are the property of the bank, as opposed to client
funds, which are on deposit with the bank but the property of the
clients."' 24 The Own Funds Directive defines own funds, or capital, for EC
banks. 125 Article Two of the Own Funds Directive identifies a wide
range of elements constituting own funds. 126 After the own funds of a
[o]wn funds consist of: (i) capital plus share premium accounts but excluding
cumulative preferential shares; (ii) reserves and profit and losses brought
forward as the result of the application of the final profit or loss; (iii) revaluation
reserves; (iv) funds for general banking risks; (v) value adjustments; (vi) other
items so long as they are freely available to the credit institution to cover
normal banking risks disclosed in internal accounting records and amounts
determined by the management. Securities of indeterminate duration can also be
included under this heading; (vii) the commitments of members of credit
institutions set up as co-operative societies; (viii) fixed-term cumulative preferential
shares and subordinated loan capital so long as in the event of bankruptcy or
particular credit institution are measured, regulatory bodies then use that
measure to calculate acceptable levels of lending for that institution.'2 7
Under the Own Funds Directive, own funds are divided into core
capital and supplementary capital.12 Core capital is composed of equity
capital and disclosed reserves, which are the highest-quality capital.' 29
Supplementary capital consists of revaluation reserves, undisclosed
reserves, subordinated loans, and other items of lower quality.' 30 Core
capital must compose at least fifty percent of the capital base.' 31
Member States, however, are free to adopt more restrictive rules regarding the
composition of the capital base or of own funds. 31
The Solvency Ratio Directive
The Solvency Ratio Directive applies to all credit institutions as
defined by the First Banking Directive. 1 33 The Directive works in
conjunction with the Own Funds Directive"M to achieve the White Paper's goal
of financial market integration. The Solvency Ratio Directive is intended
to provide harmonized and strengthened solvency standards for EC
credit institutions in order to safeguard depositors' and investors' funds
and to stabilize the banking sector.'3
The Directive applies only to
credit risk,136 other kinds of risk will be dealt with in future proposals.' 3 7
As with the Own Funds Directive, national authorities are free to impose
more stringent requirements than those required by the Directive.' 1
The Solvency Ratio
Directive sets out risk weights for measuring
credit institution assets as a basis for solvency ratios.' 39
The ratio con
sists of the own funds of a credit institution over the total assets and
offbalance-sheet commitments, adjusted to reflect risk."°
liquidation they rank after the claims of all other creditors and are not to be
repaid until all other debts have been settled.
European Banking Law, supra note 26, at 125-26. The following items must be deducted
from own funds: "(ix) own shares at book value; (x) intangible assets; (xi) material losses
of the current financial year;, (xii) holdings in other credit and financial institutions
amounting to more than 10% of their capital." Id at 126.
127. See Common Market for Services, supra note 97, at 17.
128. See id
129. See id
130. See id
131. See Own Funds Directive, supra note 3, art. 6.
132. See ih .recital 6.
133. See id art. 1; see also supra note 40 (definition of credit institution).
134. See Solvency Ratio Directive, supra note 3, art. 4.
135. See 1992-Planning, supra note 11, at 62.
136. Credit risk is the "risk that a borrower will not pay a loan as called for in the
original loan agreement, and may eventually default on the obligation." T. Fitch,
Dictionary of Banking Terms 164 (1990) (emphasis omitted).
137. See Zavvos, Banking Integration and 1992: Legal Issues and Policy Implications,
31 Harv. Int'l L.J. 463, 491 (1990).
138. See Solvency Ratio Directive, supra note 3, art. 10(2).
139. See European Banking Law, supra note 26, at 133.
140. See Solvency Ratio Directive, supra note 3, arts. 4-5; see also Common Market for
Services, supra note 97, at 25 ("own funds of each credit institution are expressed as a
In order to reflect risk, the value of each asset and off-balance-sheet
item will be multiplied by the appropriate risk weight (0, 10, 20, 50 or
100 percent), representative of assessment of risk based on the nature of
the counter party. 4 1 Before being weighted, off-balance-sheet items are
given a risk grouping of full, medium, medium/low, or low. 142 Some
offbalance-sheet activities increase the risk a bank faces, and as a result are
given higher credit-risk groupings. Items secured by collateral will be
given a lower weight.143
In reflecting risk, distinctions are drawn between different categories of
borrowers-for example, Central Banks, governments, credit
institutions, and non-bank sectors." Loans to governments and banks are
considered less risky than loans to private borrowers.1 4
In addition, distinctions are drawn between EC and non-EC
borrowers. 1 6 All borrowers from Zone A (EC, OECD,and countries with
lending arrangements with the IMF) and Zone B (all other) will be
generally treated alike.1 47 Loans to domestic borrowers will receive a lower
risk weight when dealing with foreign Central Banks and
governments.' 48 In order to prevent the assignment of undeserved high-risk
weights, loans to foreign borrowers may receive domestic weights when
the standards of the foreign borrower are equivalent to those of the
proportion of the risk-adjusted value of its assets and off-balance sheet business")
(emphasis in original). For a discussion of off-balance-sheet items, see infra note 142.
141. See Solvency Ratio Directive, supra note 3, art. 6. For some examples of asset
risk weights, cash on hand would be given a 0%-risk weight, claims on domestic credit
institutions would be given a 20%-risk weight, and claims on foreign governments would
be given a
100%-risk weight. See id.; 1992
Handbook, supra note 17, at 123.
For a discussion of off-balance-sheet items and the risk weights assigned to such items,
see infra note 142.
142. See Solvency Ratio Directive, supra note 3, annex 1. Off-balance-sheet activities
are bank activities which "involve trading financial instruments and the generation of
income from fees and loan sales, all of which affect bank profits but are not visible on
bank balance sheets." F. Mishkin, The Economics of Money, Banking, and Financial
Markets 224 (3d ed. 1992). There are three categories of off-balance-sheet items: 1)
"trading in financial futures, options for debt instruments, interest-rate swaps" and
foreign exchange market transactions; 2) loan sales, also known as secondary loan
participations; and 3) activities involving generation of income from fees from specialized service
provisions for customers, such as foreign exchange trades, "servicing a mortgage-backed
security," guaranteeing debt, and providing backup lines of credit, such as a "standby
letter of credit." Id at 224-25; see also Basle Capital Convergence Accord, supra note
108, 42 and annex 3 (discussing off-balance-sheet engagements and their appropriate
143. See Solvency Ratio Directive, supra note 3, art. 8.
144. See Common Market for Services, supra note 97, at 25; see also Solvency Ratio
Directive, supra note 3, art. 6 (weights applied to "various categories of asset items").
145. See Solvency Ratio Directive, supra note 3, art. 6.
146. See id. arts. 6-8.
147. See id. art. 6.
8. See 1992
Handbook, supra note 17, at 123; Banking andSecurities,supra note 22,
E C. 149
Thus, as examples of asset weights, a loan to a non-EC credit
institution would be given a 20%-risk weight, a loan to a non-EC private
borrower would receive a 100%-risk weight, and a loan to an EC central
government would be given a 0%-risk weight. 5 ' As examples of
offbalance-sheet risk weights, a guarantee would be given a full risk weight,
while an undrawn agreement to make a guarantee would be given a
The overall minimum threshold for the solvency ratio is equal to the
Basle Committee's minimum of eight percent.1 52 Compliance was
expected by January 1, 1991, and is required by January 1, 1993.153
3. Problems with Capital Adequacy Standards
Although the Own Funds and Solvency Ratio Directives will go a long
way toward standardizing capital requirements, the detailed plans may
be difficult to apply, difficult to supervise, and difficult to regulate."
There is debate over whether the detailed plans will actually protect
banks from insolvency.15 5 In some situations, the Directives may
actually encourage banks to make risky loans. 56 Consider the case of a
nearly insolvent bank and a blue chip corporation. A bank may lend to
the nearly insolvent bank with a risk weight of twenty percent rather
than lend to the private-borrower blue chip corporation at one hundred
percent risk weight. 5 7 Thus, the bank actually makes a riskier loan
under this scenario because the risk weights favor a loan to a bank over a
loan to a corporation. Also, in order to compensate for lower profits
caused by the higher capital requirements, some banks may actually
assume riskier loans. 158
Additionally, commentators are debating whether the eight percent
capital requirement is really a meaningful minimum. A higher level of
capital will not necessarily be a guarantee of financial stability. I5 9 As one
commentator has argued, ratios "are not magic wands that make banks
financially stronger. Banks go bust, by and large, because they make bad
loans, not because they lack sufficient capital. If an eight percent capital
ratio were a sign of financial virility, rating agencies would pay attention.
They do not.'""W
Finally, governments have exploited loopholes in the regulations to
help their national banks meet the capital adequacy standards. 16 1 Thus,
some banks that appear to be meeting the standards are not in fact
meeting them as they were intended to be met. 162
D. Effect of Legislation on Banking
As a result of the EC banking legislation, credit institutions fear that
after 1992 only the financially strongest will survive.' 63 Thus, credit
institutions are trying to increase their market share and financial strength
both domestically and internationally.'6 This effort is evidenced within
the EC by consolidations, acquisitions, and alliances, and is evidenced
internationally by increased expansion into the United States banking
markets. 165 However successful the EC is in implementing its legislation
by 1992, the single banking market will not occur immediately; 6 6 it will
take some time for barriers to be eliminated, because national traditions
and habits are hard to break.
The single license will affect banking services offered within the EC,
both in terms of how they are offered and what the consumer expects.' 67
The single license will cause geographic specialization, since a credit
institution authorized in a Member State or group of states is only
permitted to engage in certain activities. 16 Also, because expansion in all
directions simultaneously is tremendously expensive, banks will probably
target specific areas.' 69 These divisions will likely form along cultural
In fact, there will probably be few, if any, pan-European
The single license, at least initially, may also lead a credit institution to
seek product specialization based on the national regulations and
historical traditions of that institution's home country.'72 EC legislation
cannot instantly erase the distinction between the highly developed banking
markets (like those of London and Frankfurt) and the underdeveloped
markets (such as those of Greece, Spain and Portugal). 7 a If the
forecasted race for the bottom takes place 7 4 and banking sectors become
more equal, product specialization may dissolve as credit institutions
uniformly offer all services. 175
The single license will also affect banking services by changing
consumer expectations. The potentially intensified competition in the EC
should lead to a greater source of services for consumers.' 7 6 This
increase in the availability of services may cause credit institutions to lower
their prices in order to attract customers. 17 7
The legislation should make cross-border financial service offerings
less costly and easier to complete. 78 This should help to increase a
credit institution's access to consumers 179 in three ways: by starting in
new locations, by merger and acquisition across borders, and "by forging
cross-border business links."' 0 The first is the most costly, in terms of
time, management, and resources.' ' The second method is also
relatively costly, and national barriers still exist.'1 2 The last alternative is the
170. See id. Specifically,
the banking sectors of West Germany, the Netherlands, Flemish-speaking
Belgium, Austria and German-speaking Switzerland have long been so bound
together by language and history as to set them apart from France, Spain or
Italy, while the UK's links with North America, and Denmark's with the other
Nordic countries, put them in regions which straddle the very division, between
EC and non-EC members, on which the 1992 project is being constructed.
171. See ih.Although there will probably be few pan-European banks, Deutsche Bank
has expressed its intentions to become one. See id.
172. See id. at 94-95.
173. See id at 94.
174. For a discussion of race for the bottom, see infra notes 209-21 and accompanying
175. If no fundamental change in wholesale and retail banking occurs, as forecasted by
some commentators, see supra note 90, none of these product changes may ultimately
176. See 1992, supra note 167, at 9
8; Albrecht, Europe 1992
Banks and FinancialServices, in 1992-The Single European Market, 77, 81 (1988)
[hereinafter Implicationsfor Banks].
177. See Implicationsfor Banks, supra note 176, at 81.
178. See id
179. See 1992, supra note 167, at 95.
180. Id; see also Lascelles, Early Alliances, supra note 90, at II, col. 1
1992 has accelerated cross border alliances)
181. See 1992, supra note 167, at 95.
182. See id. A proposed merger between a Dutch bank and a Belgian bank failed after
each bank's management got "cold feet". See Lascelles, Early Alliances,supra note 90, at
least expensive and least risky, and may be particularly attractive to
credit institutions who wish to offer complementary services, rather than
directly competing services."'
Effect on Banking Within Individual Member States
Some of the EC Member States will be well situated to take advantage
of the overall integrated banking market. Others will receive some
benefits, but will experience some difficulty in complying with the new
legislation. Still others-because they are highly regulated, underdeveloped,
small, or inefficient-will, at least initially, face competitive
disadvantages under the single license.
Credit institutions in the United Kingdom and Germany should be
very competitive in the single market. These credit institutions are
currently allowed to offer the full range of services permitted under the
Second Banking Directive, which should give them a competitive edge in
engaging in these activities. 84 The German banking market is
"relatively conservative,.., is dominated by the commercial banks," and is
"subject to strict regulation" and cautious consumers, all of which may
help protect this market from competition."8 '
Luxembourg has favored the implementation of the single market in
banking since the single market was first proposed. 86 In addition,
Luxembourg enjoys a position as a leading international banking center in
the EC, partially as a result of its flexible regulatory scheme and its
farII, col. 1. Although the failure of this merger may indicate that mergers may be difficult,
alliances and defensive consolidation are widespread. See id.
183. See 1992, supra note 167, at 98; Lascelles, Early Alliances, supra note 90, at II,
184. See 1992-Planning, supra note 11, at 141; see also Haslam, Tether, and Barrie,
UnitedKingdom, in The Regulations Governing Banking Across the European
Community, 8 Int'l Fin. L. Rev. 48, 48-58 (Sept. Supp. 1989) (discussing regulations to which
United Kingdom Banks are subject); Schneider, Nissen, and Heckel, West Germany, in
The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L.
Rev. 59, 59-6
6 (Sept. Supp. 1989
) (discussing regulations to which German banks are
subject). The London banking market "is such a clear leader that [unfortunately] it can
only yield some of that strength to others," especially since its main strength lies in
wholesale banking markets which are already highly internationalized. See Lascelles,
Prospects Look Less Certain-The Impact of the Free Movement of Capital, Fin. Times,
Nov. 29, 1990, at 35, col. 1 [hereinafter ProspectsLook Less Certain]. However, the
United Kingdom charges high interest rates on personal and commercial loans (not
including mortgage loans) and this may lead to competition in the form of lower rates. See
1992-Planning, supra note 11, at 141. The United Kingdom's market is also highly
internationalized so a non-EC banking partner's need to satisfy the reciprocity
requirement may hurt the United Kingdom's global ambitions. See id.
185. 1992-Planning, supra note 11, at 142. A concern for German banks is that their
strict standards for capital adequacy "may leave them facing tougher capital standards
than their competitors." Id. at 143. Recall that the Member States may impose more
strict requirements than those contained in the Own Funds Directive and the Solvency
Ratio Directive. For a discussion of capital adequacy requirements, see supra notes 132,
138 and accompanying text.
186. See Schmitt, Luxembourg, in The Regulations Governing Banking Across the
European Community, 8 Int'l Fin. L. Rev. 34,
34 (Sept. Supp. 1989
sightedness in being very open to foreign banks." 7 These two factors
should place Luxembourg in a good competitive position for 1992.
Despite some weaknesses, Belgian, Danish, and Dutch banking
markets should be strong enough to take advantage of the integrated market
in 1992. Belgian banks are highly productive, but are relatively small
may be vulnerable to the increased competition
caused by the single license.18 8 Danish banks are also small, but are in
the process of deregulation, 8 9 and are trying to expand internationally
and to increase their range of offered services." 9 If successful, Danish
banks will be relatively well-placed for 1992. In addition, Danish banks
are well-capitalized and efficient with high-quality products. 19' These
two factors should place Danish banks in a good position to compete in
requirements, 19 which should help them compete in 1992.
1992.192 Dutch banks are highly regulated, conservative, and behind the
times in electronic banking,'9 3 but are trying to increase their
competitiveness by seeking cross border banking alliances. 191 Dutch banks,
however, should have no difficulty in complying with the capital adequacy
Additionally, Spanish, French, and Irish banks should be relatively
successful in 1992 despite some weaknesses.
Spanish banks are
overabundant and overpriced,' 9 6 but have been merging and expanding into
new areas to compete more effectively in the financially integrated
Europe of 1992.197 In addition, the strict Spanish capital adequacy
requirements of the 1980s will enable credit institutions there to meet the capital
adequacy requirements of the new legislation, thus placing them in a
good position for 1992.198 The French banking sector is in the process of
deregulation and privatization, 19 9 which should help French banks in
1992. However, banking in France is expensive2 and French credit
institutions may have particular difficulty in meeting the capital adequacy
requirements.2" 1 Ireland's major retail banking groups have relatively
decent market share, operate internationally, and are fairly
well-managed, but Ireland lacks strong, local, specialist banks.20 2 Irish banking
regulation has recently been changed to allow for the wider definition of
banking business mandated by the EC.20 3 Since this change was recent,
Irish credit institutions may have difficulty in holding their own, at least
initially, in the newly permitted areas of banking.
Finally, the single license will probably cause Italian, Portuguese, and
Greek credit institutions the most difficulty, at least initially. Italian
credit institutions are gradually deregulating, although they are still
mostly government-controlled.2 °4 Retail banking in Italy is inefficient,
overstaffed, and expensive, yet the quality is poor.2 05 Thus Italian credit
institutions have a number of obstacles to surmount to be competitive in
1992. Portuguese banks are similarly strictly controlled by the
government, which will create problems in the integrated market of 1992.206
Finally, the Greek banking market is the most susceptible of the EC
markets to an influx of competition after 1992.207 Such an influx could be
very profitable for both the incoming banks and for Greece in general,
but Greek banks may not survive to reap the benefits." 8
Effect on Regulation: The Race for the Bottom
In addition to affecting the provision of banking services, the single
license may also have a profound effect on the regulation of banking.
The single license may force EC Member States to design their
regulatory scheme to attract banks. In some ways, this potential for inter-state
competition resembles the dynamics of American corporation law.
With respect to American corporations, Professor William Cary has
theorized that individual states have adopted very lenient corporation
laws to woo corporations to their state.' °9 States are motivated by the
valuable revenues that they collect from franchise taxes on corporations
incorporated within their borders.2 10 This competitive process has been
referred to as a "race for the bottom." 2 11 To counter this effect,
Professor Cary proposed that there be a federal corporate law which sets out
minimum standards for incorporation." 2 Under this proposal, Congress
would not adopt specific corporation statutes like those of the states, but
would instead adopt a statute that set minimum standards in selected
areas of corporation law to govern the largest publicly held corporations,
leaving everything else to the states.213
The EC's banking regulations are analogous to Professor Cary's
proposed federal corporate law. The Second Banking Directive allows a full
range of universal banking services, but does not force Member States to
permit all of these services, thus leaving it to the home state to decide
which services a bank it licenses will be able to pursue.21 4 The single
license will force a Member State to allow branches authorized elsewhere
to engage in any activity permitted by its authorization state. 1 5
Therefore, there may be incentive for Member States to allow all of the
activities permitted within the Annex, in order to reap the revenue earned
from authorization, and also to be as competitive as credit institutions
authorized in other Member States.21 6
Moreover, Member States will have incentive to impose loose
regulation.217 Credit institutions will have strong incentive to be regulated
under the least restrictive system available.21 Thus, "regulation is likely
to be designed to attract business, rather than to provide the highest
possible degree of protection for small investors."2'19 Therefore, there may
be a race for the bottom in the EC both in terms of what activities each
Member State permits, and in terms of what regulations a Member State
applies. 220 This race could potentially be ended by creating an EC-wide
Cary's proposal for minimum standards imposed at the federal level is
applicable to the recent regulatory framework adopted for banking by
the EC. The Second Banking Directive, the Own Funds Directive, and
the Solvency Ratio Directive comprise the EC's attempt to set minimum
standards for banking in the Community. These standards, while
ostensibly true minimums which will help to integrate the EC and create
stability, may need some bolstering if it becomes apparent that they are
insufficient to achieve the desired ends.
ECONOMIC AND MONETARY UNION
Economic and Monetary Union ("EMU") 22 2 will provide a foundation
for the unification of Europe beyond the single market in financial
services. In order to achieve a truly single European market, EMU should
accompany the drive to achieve integration in the financial services
In June 1988, at the Hanover Summit, the EC endorsed a program for
a Single European Market, and the push towards EMU began. 224 The
Hanover Communique established the Delors Committee, comprised of
217. See Bradley, supra note 109, at 157.
218. See id.
219. Id. at 133.
220. See id. at 133-34, 157. The EC has recognized that loose regulation may be a
problem, and has stated in the preamble to the Second Banking Directive that Member
States should not authorize banks which appear to be trying to avoid the more strict rules
and regulations of another member state. See Second Banking Directive, supra note 3,
recital 8. Alternatively, there may be a race for the top, with Member States imposing
even stricter rules in order to draw banking business to their state. See Bradley, supra
note 109, at 128.
221. See Bradley, supra note 109, at 161. See generally Lascelles, Flaw in the
Argument, Fin. Times, Nov. 7, 1990, at 24, col. 7 (suggesting that EC "will almost certainly
need to centralise supervision" for numerous reasons).
222. EMU is the process of creating one integrated market in which there is a single
currency, a single monetary policy, and a single economic policy for the entire EC. For a
more detailed definition of EMU, see infra notes 228-33 and accompanying text.
223. Cf Koeune, Europe-One CompleteMarket, in 1992-The Single European
Market 15, 19 (1988) (the drive to achieve integration in financial services should be
accompanied by a strengthened European Monetary System, see supra notes 235-51 and
accompanying text, which was a forerunner of the current program for EMU).
the Central Bank governors from the twelve Member States.' The EC
gave the Committee specific instructions to explore and formulate
tangible steps leading toward EMU.22
6 In April 1989
, the Delors Committee
published its report entitled Report on Economic and Monetary Union
in the European Community, intended to provide non-binding guidance
in the Community's effort to achieve EMU." 7
What is EMU?
The Delors Committee defined economic union and monetary union
separately, but the Committee recognized that "[e]conomic union and
monetary union form two integral parts of a single whole and would
therefore have to be implemented in parallel."" 8 The Committee defined
economic union in terms of four basic elements: (1) a "single market
within which persons, goods, services, and capital can move freely; (2)
competition policy and other measures aimed at strengthening market
mechanisms; (3) common policies aimed at structural change and
regional development; and (4) macroeconomic policy coordination,
including binding rules for budgetary policies."" 9 In addition, the Committee
noted that economic union should be "based on the same
market-oriented economic2 3p1rinciples that underlie the economic order of its
The Delors Committee stated that "monetary union constitutes a
currency area in which policies are managed jointly with a view to attaining
common macroeconomic objectives.""2 The Committee identified three
conditions necessary for monetary union: (1) the assurance of total and
irreversible convertibility of currencies; (2) the complete liberalization of
capital transactions and the full integration of banking and other
financial markets; and (3) the elimination of margins of fluctuation and the
irrevocable locking of exchange rate parities." 2 The Committee also
noted that a single currency, while potentially desirable, is not strictly
necessary for a monetary union. 3
Prior to the Delors Report, the EC made several attempts to achieve
EMU. 34 The European Monetary System ("EMS") was the most
successful of these attempts. 235 EMS was created on March 13, 1979, by a
resolution of the governors of the Central Banks of the EC Member
States.2 3 6 EMS is comprised "of three complementary parts: the ECU,
the exchange rate mechanism, and the mechanisms for monetary
cooperation."2'37 Of the twelve EC members, only Greece and Portugal have
not included their currencies in EMS.2 3
The European Currency Unit ("ECU"), the first component of EMS,
is "a basket of the existing currencies, weighted according to the
importance of each currency and country in the Community."2'3 9 The ECU is
the "official accounting unit" of the EC and is used somewhat in the
private marketplace.2 4' The ECU may ultimately become the single
currency of Europe.2"4 '
The second part of EMS is the Exchange Rate Mechanism ("ERM").
Each currency belonging to EMS is included in the ERM, which is a
central exchange rate set in ECUs that serves as the basis for calculating
exchange rates among the member currencies.2 42 Thus, each currency
has a set exchange rate with all of the other member curren24c3ies and these
set exchange rates can only fluctuate within strict limits.
The third aspect of EMU consists of monetary cooperation
mechanisms. Because the currencies within EMS have strict fluctuation limits
with respect to other EMS currencies, the Central Banks of the various
EMS countries may need to intervene if the currencies begin to fluctuate
too widely. 2' If the currencies are fluctuating too widely, the EMS
countries have the option of realigning the currencies, with the strongest
currencies being revalued and the weakest devalued.24 5 Early in EMS,
several currency realignments occurred, but they are becoming far less
frequent-the last major one occurred in 1987.246
EMS has been fairly successful. Following the realignment of member
currencies in March 1983, there has been greater convergence of costs
and prices, and fewer realignments.24 7 Also, inflation has been kept
low. 48 EMS has further succeeded "in reducing exchange rate volatility,
which was its main goal.12 49 EMS established fixed exchange rates and
eliminated exchange controls.2 0 By taking exchange rates and controls
out of the hands of national authorities, national sovereignty over
monetary policy is rendered impossible.2"5 '
Renewed Enthusiasmfor EMU?
The success of EMS in integrating financial markets and in reducing
inflation has convinced Member States that it is best to operate through
EMS, even though it means giving up national sovereignty over
monetary policy. 252 This success, in combination with the formation of a
single internal market by 1992, has "giv[en] rise to beliefs that over the next
few years, a solid groundwork will be laid" for EMU. 5 3 Now that EMU
is considered desirable, debate will center on "questions of whether,
when, and to what extent, countries will be ready to surrender
sovereignty in the economic, and in the last analysis, the political field."'
This debate was ignited by the Delors Report, and later extinguished in
part by the Treaty of Maastricht.
1. The Delors Report
The Delors Report recommended 255 a three-stage process to achieve
EMU. Stage one, which commenced on July 1, 1990, emphasized greater
coordination of economic and monetary policies and strengthening and
standardizing of the EMS.25 In addition, during stage one, the internal
market should be completed and all Community currencies should be
included in the EMS.2 57
Also during stage one, the Member States were to design a new
comprehensive treaty to complete EMU.2 5s Even though amended by the
Single European Act in 1985 to allow for changes mandated by the 1985
White Paper on Completing the Internal Market, the Treaty of Rome
was still insufficient for the completion of EMU, and thus the new treaty
was needed. 25 9 The EC reached agreement on this monetary union
treaty at the December 1991 Summit in Maastricht, the Netherlands.2 6°
The Delors Report scheduled stage two of EMU to begin on January
1, 1994.261 The Report suggested that, during stage two, the
Commission should reform existing institutions and set up the European System
of Central Banks.2 62
The Delors Report also proposed that the European Central Bank
("ECB") would have full authority as an EC institution and would be
independent from the dictates of the national authorities.26 3 The ECB
would be expected to foster price stability, to support the EC's economic
policy, to control the monetary policy, to manage the national reserves
and exchange rates, and to participate in the coordination of bank
supervision by the national authorities. 26" The ECB would be directed by a
Council composed of Central Bank governors from the Member States,
and by an Executive Board appointed by the leaders of the Member
States.2 65 The ECB would also manage the monetary policy of the
integrated Community during stage tWo. 2 6 6 Although national authorities
would retain ultimate responsibility for decisionmaking during stage two,
there would be some collective decisionmaking, and the ECB would issue
non-binding rules for national budget deficits. 2 67 The ECB would
replace all current EC monetary authorities and realign exchange rates
only as a last resort.268
The Delors Report further proposed that during the third stage,
national authorities transfer all economic and monetary policy-making
ability to EC institutions. 269 The Council would then decide economic
questions and constrain national budget deficits.2 7 °
According to the Delors Report, the ECB's decisions would become
258. See Delors Report, supra note 6, 1 18.
259. See id. $ 61. The Treaty of Rome paved the way for economic union and closer
relations among the Member States. See id. 1 18. As the EC develops, the Commission
will need more authority to implement its policies and will therefore need a new treaty.
260. See EuropeansAccept a Single CurrencyandBank by 1999, N.Y. Times, Dec. 10,
1991, at Al, col. 1 [hereinafter Currency and Bank].
261. See FinancialServices, supra note 241, § 5.7.3.
262. See Delors Report, supra note 6, 11 55-57.
263. See id. 1 32.
264. See id.
265. See FinancialServices, supra note 241, § 5.4.
266. See Delors Report, supra note 6, 1 55-57.
267. See id.
268. See id. $ 57.
269. See id. 11 58-60.
270. See id.
binding during stage three. The ECB would decide all monetary issues,
including exchange-rate intervention with non-EC currencies, 271 and
would acquire and manage the reserves of the Member States.772
Also during stage three, the EC would irrevocably fix exchange rates
among the European currencies,2 7a and then introduce a single
currency.274 Finally, EC decisionmaking would change in the third stage.
Unanimous decisions would no longer be required and majority decisions
would be binding.27 5
After the Delors Report was published, but prior to the Maastricht
Treaty, the Member States differed over many of the Delors Report
proposals. First, the Member States disagreed about the proposal for a single
currency.27 6 Germany, for example, supported a single currency, but not
necessarily the ECU,2 77 perhaps hoping that the deutschemark would be
the future single currency for all of Europe. The Commission took the
view that it was politically unacceptable for any national currency to
become the future EC currency. 278 The United Kingdom "proposed a
common currency as an alternative and did not rule out the idea that this
might one day become a 'single currency.' ,,279 The United Kingdom
plan proposed that a thirteenth currency, a hard ECU, be introduced
during the second stage; this ECU would never be devalued in relation to
national currencies. 28 0 This proposal initially won some support from
Spain, Portugal, and France. 28 1 This debate has been silenced by the
Maastricht treaty, however, which has made a single currency-the
Prior to the Maastricht Treaty, the Member States also differed over
the level of power they believed the ECB should have in the second stage.
Germany insisted that before moving to the second stage, Member States
must achieve progress toward greater economic convergence to assure
price stability and healthy public finances.2" 3 Germany further proposed
that the ECB should not be established until stage three.28 4 France and
the Commission feared that the German demands were merely a ploy to
delay EMU.2" 5 This debate was settled by the Maastricht treaty, wherein
it was decided that a forerunner of the ECB-the European Monetary
Institute ("EMI")-would be established in stage two, with the full ECB
not being established until stage three.28 6
The Maastricht Treaty, agreed to in December 1991, details the
contents and arrangements for advancing to stages two and three.28 7 The
Treaty, covering both EMU and political union, "creates a so-called
European Union and sets its course for years ahead. ' 2 8 The Maastricht
Treaty "may eventually make the European Union a superpower. '2 89
The intent of the Treaty is not, however, "to melt member countries into
a United States of Europe, but rather to retain the present mosaic of ever
more closely cooperating nation states.' ' 2 ° This Treaty has made EMU
significantly more likely to occur by the end of the 1990s. 291 The Treaty
calls for the second stage of EMU to begin on January 1, 1994.292 Stage
tawdvoewntillofbtrhinegE"MtigIhttheart ciosnttorobles tohne efxocrheraunngneerratoef tfhluecftuuatutiroensE"CaBn. d293the
The Treaty provides an opportunity to move to the third stage of
EMU as early as January 1, 1997.294 In 1996, the Member State
governments will determine which Member States' economies have met the
strict convergence criteria spelled out in the treaty, including specified
levels for inflation, interest rates, budget deficits, and currency
ity.2 95 Meeting these criteria will enable Member States to move to stage
three and adopt a single currency. 9 6 In order to move to stage three on
January 1, 1997, a majority of the Member States must meet the
convergence criteria, and a two-thirds majority must approve the move to a
single currency and Central Bank.29 7
If the Member States are unable to move to the third stage at that
time, stage three and the single currency will be automatically
established on January 1, 1999.298 This move will occur even in the absence of
a majority of the Member States or of further approval by the
Community.29 9 Member States must still meet the convergence criteria to take
part.3 "a The remaining Member States would then join the third stage as
their economies met the required criteria.3"'
During stage three the EMI will be transformed into the ECB.3 °2
Finally, during stage three, the value of the ECU will become irrevocably
fixed. 30 3
The Treaty contains an opt-out clause which allows Britain alone to
opt out of joining the single currency. 3 Many commentators agree,
however, that Britain will be eager to join the Central Bank and the
single currency. 30 5 One commentator has stressed that it would be almost
suicidal for Britain to stay out of EMU because "[t]he financial
institutions of the City of London, which are so important now in the world of
finance, would be relegated to the sidelines. ' , 3 1 Uncertainty over
Britain's future in EMU, however, could hurt Britain,3°7 as the confusion
could prevent London from being the future site of the ECB.3 °s
The economic implications of this Treaty for Europe are twofold. In
the short term, "[t]he initial effects will be antigrowth" because countries
will be striving to meet the convergence criteria. 3 9 In the long term,
however, Europe's economy should "become more dynamic" with
"Europe's capital stock and production potential ... grow[ing] faster than
before."3 1 °
C. Pros and Cons of EMU
The European Commission issued a report in October 1990 on the
advantages and disadvantages of EMU for the Community. 1 The
advantages include: stable exchange rates; a savings of fifteen to twenty billion
ECUs (as a result of elimination of transaction costs among the member
currencies); permanent price stability; stronger growth within the EC;
and a strengthening of the Community's economic standing
internationally. 3 12 Fundamental problems still exist in the plans for EMU,
however. First, convergence of economic and monetary policies will take
time.3 13 Most Member States only began convergence in earnest at the
end of 1991.314 Some countries which currently enjoy low inflation fear
the higher inflation that will accompany convergence, and actually tend
to diverge instead of converge "in terms of inflation and the public
debt., 315 Also, EMU did not initially have the full support of all
Member States-most notably that of the United Kingdom.3 16 Now that John
Major is Prime Minister of the United Kingdom, however, the
government is more solidly behind EMU.3 17 The Maastricht Treaty has
garnered solid support for EMU,3 18 but the position of the United Kingdom
is still uncertain.3 19
Second, the creation of the ECB will cause numerous problems.
Member States will have to sacrifice sovereignty over monetary policy to the
independent ECB as their Central Banks become mere branches of the
ECB. 320 Losing the ability to issue currency will have large fiscal
implications, perhaps causing budgetary problems for Member States. 32 1 The
Delors Committee recognized these potential budgetary problems but
hoped there would be "a tight system of multilateral surveillance or peer
pressure to keep national budget policies moving in the same
Third, the proposed ECB is to be independent from Member States
and from EC institutions, so accountability may be a problem.3" The
ECB cannot be allowed to act entirely independent from government
because it could potentially create and implement disastrous policies if left
unchecked. The United Kingdom in particular found democratic
accountability wanting in the Delors Report proposal. 324 Germany, on the
other hand, found democratic control assured because the ECB will
come about through democratic agreement and will be provided with a
clearly defined mandate.3 25
Fourth, the ECB poses massive administrative problems due to
employment and responsibility shifts. 326 Because the ECB will effectively
dismantle the existing Central Banks and will assume responsibility for
the monetary policy of the entire Community, a large experienced staff
will be needed. There will be a corresponding loss of employment and
responsibility at each of the existing Central Banks. Moreover, in order
to control the external value of the single European currency, the ECB
will need to control the monetary reserves of the EC members.3 2 This
shift in national reserves will again raise administrative problems and
Fifth, the ECB's ultimate location will be controversial because it is
certain to become the EC financial center.328 London would be a
possible choice to be the center of EC monetary operations because London is
currently the European banking center. 32 9 London's chances for
becoming the future site of the ECB may be hurt however, by the confusion
surrounding Britain's right to opt out of EMU.330 Furthermore, London
has some stiff competition. Paris has its own serious ambitions as does
Frankfurt, which benefits from its position at the center of Europe's most
powerful economy. 33'
Finally, the introduction of a single currency for Europe poses
national sovereignty problems. Britain in particular resisted the idea of
forsaking the pound for a single European currency, 332 and has not yet
322. McCune, supra note 287.
323. See Ungerer, supra note 225, at 14, col. 1.
324. See id.
325. See id.
326. See Lomax, supra note 224, at 77.
327. See id.
8. See 1992
, supra note 167, at 162-63.
329. See Lascelles, ProspectsLook Less Certain,supra note 184, at 35, col. 1; Riley, Big
Three Join Battlefor Supremacy, Fin. Times, July 4, 1991, at III, col. 1.
330. See Atkins, supra note 307, at 3, col. 6.; Riley, supra note 329, at III, col. 1; see
also supra notes 304-08 and accompanying text (discussion of opt-out provision).
331. See Riley, supra note 329, at III, col. 1.
332. See Debate Stage Two, supra note 283, at 2.
totally committed itself to the single currency. 33 Similarly, Germany
was not initially receptive to the idea of the ECU becoming the single
currency. 34 Indeed, Jacques Delors feared that hesitation might be fatal
for EMU, and that his Committee's plan for EMU might go the way of
past attempts at economic and monetary union.3 35 These differences and
fears have been largely stilled, however, by the Treaty of Maastricht. 336
Although the actual imposition of the single currency will probably be
difficult, the future of EMU is virtually assured.
The recently enacted banking directives and the renewed effort to
achieve EMU will help integrate financial services and create a single
market in the EC. These directives, however, have many problems
which need to be addressed, and still more problems may become
apparent after the legislation is fully operational. Despite these probable
difficulties, though, the EC will certainly become a major force in the
increasingly internationalized financial services market of the future.
333. See supra notes 304-08 and accompanying text, for a discussion of Britain's right
under the Maastricht Treaty to opt-out of the single currency.
334. See id.
335. See Hatch an EMU, supra note 235, at 45, col. I.
336. For a discussion of the single currency agreed to by the Treaty of Maastricht, see
supra notes 298-305 and accompanying text.
6. Committee for the Study of Economic and Monetary Union, Report on Economic and Monetary Union in the European Community ( 1989 ) [hereinafter Delors Report] .
7. The EC reached a binding agreement on EMU at Maastricht, the Netherlands , in December 1991. See The Dealis Done , Economist, Dec. 14 , 1991 , at 51, col. I [hereinafter Deal is Done].
8. See Clarotti , Community Objectives and Plansfor Banking, in 1992-The Single European Market 55 , 55 ( 1988 ).
9. See id.
10. See Golembe & Holland, Banking and Securities, in Europe 1992-An American Perspective 65 , 68 (G. Hufbauer ed. 1990 ).
11. See IBI International Business Intelligence , 1992 - Planning for Financial Services and the Insurance Sector 4 ( 1989 ) [hereinafter 1992-Planning].
12. See Completing the Internal Market: White Paper from the Commission to the European Council , COM(85)310 final 27 - 29 [hereinafter White Paper]; Clarke, Introduction, supra note 2 , at 2.
13. See Single European Act , 1987 O.J. (L 169) 1; Clarotti, supra note 8 , at 55-56.
14. See Budd , FinancialServicer CapitalMovements and Controls , in Planning for Europe: 1992 , at 119 , 122 (W. Clarke ed. 1989 ).
15. See Golembe & Holland, supra note 10, at 68.
16. See id
17. Brealey & Quigley, Completing the Internal Market of the European Community- 1992 Handbook 114 ( 1989 ) [hereinafter 1992 Handbook] .
18. See id.; Second Banking Directive, supra note 3, recital 4.
19. See Second Banking Directive, supra note 3.
20. See 1992 Handbook, supra note 17, at 114.
21. Id at 116.
22. See Coopers & Lybrand, Banking and Securities, in Euroscope § 3 .1, Sept . 26 , 1991 , available in LEXIS, Europe Library , EURSCP File [hereinafter Banking and Securities];see also infra notes 34-110 and accompanying text (discussion of Second Banking Directive) .
33. See id.
34. See Second Banking Directive, supranote 3; Clarke, FinancialServices: Banking, in Planning for Europe: 1992 , at 128 , 129 (W. Clarke ed. 1989 ).
35. See Second Banking Directive, supra note 3, recital 2.
36. See Banking and Securities,supra note 22, § 3 .6.
37. See European Banking Law, supra note 26 , at 127.
38. See Second Banking Directive, supra note 3, recital 4.
39. European Banking Law, supra note 26 , at 127.
40. See Second Banking Directive, supra note 3 , art. 2 ( 2 ). A credit institution, as defined by the First Banking Directive, is "an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account." First Banking Directive , supra note 26, art. 1.
41. The Second Banking Directive, supranote 3, Article 2(2), refers to Article 2(2) of the First Banking Directive . See First Banking Directive, supra note 26 , art. 2 ( 2 ).
42. See Second Banking Directive, supra note 3 , recital 4, arts. 6 ( 1 ), 13 .
43. See id. arts. 4-7.
44. See id arts. 8-9 .
45. See id arts. 10 - 17 .
46. See id. arts. 18 - 20 .
47. See id. recital 15, art. 21. 2.
81. See id. art. 21.
82. See ia art. 21 ( 2 ) - (4).
83. Id . art. 21 ( 5 ).
84. See European Banking Law, supra note 26 , at 132.
85. See Second Banking Directive, supra note 3 , art. 6.
86. See Clarke, supra note 34 , at 130.
87. BCCI was incorporated in Luxembourg, a member state of the EC . Thus, had the new legislation been in effect, BCCI would have been subject to it . See Post-BCC1,supra note 26 , at S489; see also New, G-1O Bankers May Discuss Bank Regulation Post-BCCI, Reuters, Sept. 5 , 1991 , availablein LEXIS , Europe Library , MONRPT File (the Second Banking Directive puts regulation in the hands of the credit institution's home country ).
Some commentators fear that the EC legislation will not prevent scandals such as BCCI, noting that the EC legislation in preparation for 1992 does not address the problem of deposit insurance . See Brasier , European Business: In Pursuit of Bank Safety, Daily Tel., July 22 , 1991 , at 23, available in LEXIS , Europe Library , TELEGR File; Home Thoughts From Abroad , Economist, Aug. 17 , 1991 , at 74, col. 1. The EC is now, however, considering a Directive on deposit insurance . See Struggling Through the Wire, Economist, Aug. 3 , 1991 , at 69, col. 1. The Directive places ultimate responsibility for bank losses on the state which authorized the bank to operate. See Banking: Sir Leon Brittan ConsidersEEC-wide Legislation to ProtectDepositors,Eur . Rep., July 27 , 1991 , at 2, available in LEXIS, Europe Library , EURRPT File [ hereinafter Protect Depositors]. Thus, the Directive would force Member States to be more cautious before authorizing a bank to operate . See id.
88. See ProtectDepositors ,supra note 87, at 2.
89. See id.; McCune, BCCIScandalRaises Tough QuestionsForEC , Reuters, July 23 , 1991 , availablein LEXIS , Europe Library , FINRPT File; see also Behind Closed Doors , Economist, July 13 , 1991 , at 14, col. 1 (warning that the single license creates an even larger need for a strong lead regulator and stating that the EC's new legislation on capital adequacy and limiting large exposures is designed to tackle this problem) . See generally
96. See Clarke, supra note 34 , at 132.
97. See Commission of the European Communities, A Common Market for Services 9 ( 1988 ) [hereinafter Common Market for Services] .
98. See Reynolds , 1992 and the Regulation of the SecuritiesIndustry, in 1992-New Opportunities for U.S. Banks and Businesses in Europe 71 ( 1989 ) [hereinafter Regulation of Securities] .
99. See id. at 76.
100. See id.; 1992-Planning, supra note 11, at 141-42; Speech by Sir Leon Brittan , in Toronto (Sept. 20, 1991 ), availablein LEXIS , Europe Library , RAPID File.
101. See 1992-Planning, supra note 11, at 142.
102. See Regulation of Securities, supra note 98, at 71.
103. See id.
104. For a discussion of reciprocity , see supra notes 63-67 and accompanying text.
105. Regulation of Securities,supra note 98, at 71.
106. See id. at 71-72.
107. See id.
108. See id
109. Bradley , 1992 : The Case of FinancialServices, 12 Nw . J. Int'l. L Bus . 124 , 128 ( 1991 ).
110. See id
111. Capital adequacy of credit institutions refers to the minimum level of capital necessary for the safe and prudent operation of the credit institution . See Note, The Proposed Risk-Based Capital Framework. A Model of International Cooperation? , 11 Fordham Int'l L .J. 777 , 784 ( 1988 ) [hereinafter CapitalFramework] .
112. See Banking and Securities supra note 22, § 1 .
113. Committee on Banking Regulations and Supervisory Practices, International Convergence of Capital Measurement and Capital Standards ( 1988 ) [hereinafter Basle Capital Convergence Accord]. The Basle Supervisors Committee is composed of representatives of the Central Banks and supervisory authorities of the G-10 nations and Luxembourg . See Capital Framework, supra note 111 , at 781. The G-10 nations are Belgium , Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States . See id at 777 n.3.
114. See iL at 783
115. See id
116. See Basle Capital Convergence Accord, supra note 113 , 1 4 .
117. See Banking and Securities,supra note 22, § 1; Own Funds Directive, supra note 3, recital 1; Solvency Ratio Directive, supra note 3, recital 9 .
118. See 1992 , supra note 167, at 93.
119. See Banking and Securities,supra note 22, § 1 .
120. See Own Funds Directive, supra note 3 , at 16.
121. See Solvency Ratio Directive, supra note 3 , art. 3 ( 1 ) ; see also infra note 142 (discussing off-balance-sheet business).
122. See Solvency Ratio Directive, supra note 3 , at 14.
123. See Own Funds Directive, supra note 3, art. 1; see alsosupra note 40 (definition of credit institution).
124. Common Market for Services, supra note 97 , at 17 (emphasis in original).
125. See European Banking Law, supra note 26 , at 125.
126. See Own Funds Directive, supra note 3, art. 2. Specifically , 2 .
149. See 1992 Handbook, supra note 17, at 123; Banking andSecurities, supra note 22, § 6.3.
150. See Solvency Ratio Directive, supra note 3, annex 1.
151. See idL
152. See Solvency Ratio Directive, supra note 3 , art. 10; Basle Capital Convergence Accord, supra note 113, § III , 44 .
153. See Banking and Securities,supra note 22, § 6 .5.
154. See , eg., CapitalFramework,supranote 11 , at 790-92 (referring to Basle Capital Convergence Accord); Note, A Note to Congressand the FDIC After FIRREA . Where's the BIF?, in Annual Survey of Financial Institutions and Regulation, The S&L Crisis: Death and Transfiguration, 59 Fordham L. Rev. S411 , S442 - 45 ( 1991 ) (discussing riskbased premiums and their potential problems ).
155. See CapitalAdequacy: Bringingout the Tin Helmets , Economist, Oct. 13 , 1990 , at 88, col. 2 [hereinafter Tin Helmets]; see also CapitalFramework,supra note 111, at 791- 93 ( capital adequacy proposals may actually encourage giving risky loans).
156. See Tin Helmets, supra note 155 , at 88, col. 2; see also CapitalFramework,supra note 111, at 792-93 ( capital adequacy proposals may actually "encourage banks to take on higher credit and interest-rate risks").
157. See Tin Helmets, supra note 155 , at 88, col. 2; see also CapitalFramework supra note 111, at 791 (discussing Basle Capital Convergence Accord).
158. See Tin Helmets, supra note 155 , at 88, col. 2; see also CapitalFramework,supra note 111, at 792-93 (discussing Basle Capital Convergence Accord).
159. See Tin Helmets, supra note 155 , at 88, col. 2.
160. Id .
161. See id.
162. See id.
163. See Dickins , Banking in Europe: A Brave New World?, in The Regulations Governing Banking Across the Community, 8 Int'l Fin. L. Rev . 5 , 5 (Sept. Supp. 1989 ) [hereinafter Brave New World?].
164. See id.; see also 1992-Planning, supra note 11, at 181-82, 185 - 86 ( preparing for the single market in banking, from British bankers' perspectives).
165. See Brave New World?, supra note 163 , at 5-6.
166. See Reynolds, supra note 31 , at 11.
167. See Euromoney Publications, 1992: A Euromoney Book 94 ( 1990 ) [hereinafter 1992 ].
168. For a discussion of race for the bottom , see infra notes 209-21 and accompanying text.
169. See 1992 , supra note 167, at 94. 1.
187. See id at 36-37.
188. See 1992-Planning, supra note 11, at 144; see also Belgium, in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 67 app ., 67 - 68 (Sept. Supp. 1989 ) [hereinafter Belgium] (discussing Belgian banking regulations) . Belgian banks are pursuing alliances as a defense to potential foreign takeover . See 1992 - Planning, supranote 11 , at 144. One example of this is the 1988 alliance between Generale de Banque of Belgium and AMRO of the Netherlands . See Id. Belgian banks are undercapitalized and may have difficulty complying with the EC capital adequacy requirements. See id;see alsoBelgium, supra , at 68 ( Belgian banks are not "hugely capitalized" so it will take a while to comply with requirements).
189. See 1992-Planning, supra note 11, at 141; see alsoDenmark, in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 68 app ., 68 - 69 (Sept. Supp. 1989 ) (discussing regulations pertaining to Danish banks) .
190. See idat 68 ; 1992 -Planning, supra note 11, at 198.
191. See 1992-Planning, supra note 11, at 198 , 211 - 13 .
192. See id
193. See idat 144-45; see also Kleyn & Perrick, The Netherlands,in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 38 , 38 - 42 (Sept. Supp. 1989 ) (discussing regulations to which Dutch banks are subject).
194. See 1992-Planning, supra note 11, at 144-45.
195. See Kleyn & Perrick, supra note 193, at 42. They will have no trouble complying with the capital requirements because the Netherlands credit institutions already comply with the Basle Capital Convergence Accord . See id.
196. See 1992-Planning, supra note 11, at 145; see also Grant, Spain's Banks Stay Profitable But Doubts Ahead, Reuters, July 30 , 1990 , available in LEXIS, Europe Library , MONRPT File ( "operating costs are far too high" ).
197. See 1992-Planning, supra note 11, at 145; Grant, supra note 196. Larger Spanish banks are also expanding into investment banking, in light of the activities permitted by the Second Banking Directive . See 1992-Planning, supra note 11 , at 145; Grant, supra note 196.
198. See Grant, supra note 196; see also Pombo & Bazan, Spain, in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 43 , 43 - 47 (Sept. Supp. 1989 ) (discussing Spanish banking regulations ).
199. See 1992-Planning,supra note 11, at 141 , 143; see also, Lee, Martin, & Carreau , France,in The Regulations Governing Banking Across the European Community , 8 Int'l Fin . L. Rev. 16 , 16 - 23 (Sept. Supp. 1989 ) (discussion of deregulation of French banking market ) [hereinafter France];see generally Note, The World Bank and the IMF.: At the Forefrontof World Transformation,in Annual Survey of Financial Institutions and Regulation, Transnational Financial Services in the 1990s, 60 Fordham L. Rev. S349 ( 1992 ) (discussing privatization).
200. See 1992-Planning, supra note 11, at 143. The typical French banking consumer's penchant for writing checks and having bank accounts has pushed the price of banking in France to high levels . See id.
201. See 1992-Planning, supra note 11, at 143. In fact, French state-controlled banks have turned to creative sources of funds in their attempt to comply with these requirements . See France,supra note 199 , at 16.
202. See 1992-Planning, supra note 11, at 238.
203. See Johnston , Ireland,in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 24 , 28 (Sept. Supp. 1989 ).
204. See 1992-Planningat 143-44; see also Tonucci, Italy, in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 29 , 29 - 33 (Sept. Supp. 1989 ) (effect of single license on banking in Italy) .
205. See 1992-Planning, supra note 11, at 143.
206. See id. at 145; Portugal,in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 70 app ., 70 (Sept. Supp. 1989 ).
207. See Greece, in The Regulations Governing Banking Across the European Community, 8 Int'l Fin. L. Rev . 69 app ., 69 (Sept. Supp. 1989 ). 2.
208. See id,
209. See Cary , Federalism and Corporate Law: Reflections Upon Delaware , 83 Yale L.J. 663 , 665 - 68 ( 1974 ).
210. See id,
211. See id.at 666.
212. See iL at 701 -03.
213. See id
214. See Second Banking Directive, supra note 3 , at 2; see also Gruson & Nikowitz, The Second Banking Directiveof the European Economic Community andIts Importance for Non- EEC Banks, 12 Fordham Int'l L .J. 205 , 216 ( 1989 ) (home states may decide what banking activities it will authorize credit institutions to pursue).
215. See Second Banking Directive, supra note 3 , art. 18 .
216. See Gruson & Nikowitz, supra note 214, at 216-17; Bradley, supra note 109, at 128 , 158 .
224. See Lomax , Towards A Common Currency, in-I'lanning for Europe: 1992 , at 69 , 71 (W. Clarke ed. 1989 ).
225. See id. The EC Commission President Jacques Delors chaired the Committee . See Ungerer, Europe-TheQuestfor Monetary Integration , Fim. & Dev ., Dec. 1990 , at 14, col. 1.
226. See Lomax, supra note 224 , at 71.
227. See Delors Report, supra note 5 , 115 .
228. Id . 21 (emphasis omitted).
229. i i 25.
230. Id .
231. Id . 22 .
232. See id.
233. See id. 1 23 .
234. See Ungerer, supra note 225 , at 14, col. 1.
235. See How to Hatch an EMU, Economist , Apr. 22 , 1989 , at 45, col. 1 [hereinafter Hatch an EMU].
236. See The European MonetarySystem , Eur. Rep ., Oct. 10 , 1990 , at 8, available in LEXIS, Europe Library , EURRPT File [ hereinafter EuropeanMonetary System] .
237. Id .
238. See EMS : Member States Welcome Pound's Entry into ERM but Commission Remains Cautious , Eur. Rep ., Oct. 10 , 1990 , at 6, available in LEXIS, Europe Library , EURRPT File [hereinafter Commission Remains Cautious]. On October 8 , 1990 , the British Pound Sterling entered into EMS . See id .
239. Lomax , supra note 224, at 75.
240. Id (emphasis omitted).
241. See Coopers & Lybrand, FinancialServices in Euroscope § 5.7.4, Mar. 7 , 1991 , available in LEXIS, Europe Library , EURSCP File [ hereinafter FinancialServices]. In an act of support for the ECU, the European Commission proposed extending the use of the ECU for transactions within the Community budget . See ECU . Commission Seeks to Extend Use of ECUfor Transactions , Eur. Rep ., Jan. 9 , 1991 , at 1, availablein LEXIS , Europe Library , EURRPT File.
242. See European Monetary System, supra note 236 , at 8.
243. See id.
244. See id.
245. See id.
246. See id.; see also Ungerer, supra note 225 , at 14, col. I (following a comprehensive realignment of currencies in 1983, realignments have occurred less frequently).
247. See Ungerer, supra note 225 , at 14, col. 1.
248. See Commission Remains Cautious, supra note 238 , at 6. A major reason that inflation has been kept low is that "EMS is presaged on a fixed exchange rate with Germany, and since Germany has operated a tight money policy, so the EMS has become a core of low inflation . " Lomax, supra note 224 , at 70.
249. Hatch an EMU , supra note 235 , at 45, col. 1.
250. See Lomax, supra note 224 , at 70.
251. See id at 70-71.
252. See id; see also Ungerer, supra note 225 , at 14, col. 1 (success of EMS has given rise to belief that EMU can be achieved).
253. Ungerer , supra note 225, at 14, col. 1.
254. Id .
255. The Treaty of Maastricht varies somewhat from what the Delors Report proposed . Compare infra notes 261-75 and accompanying text (stages two and three of the Delors Report) with infra notes 287-310 and accompanying text (discussion of the Maastricht Treaty) .
256. See Delors Report, supra note 6 , 50 - 54 ; Ungerer, supra note 225, at 14, col. 1; Economicand Monetary Union FirstStage Gets Underway , Eur. Rep., July 4 , 1990 , at 4, available in LEXIS, Europe Library , EURRPT File [hereinafter FirstStage].
257. See Delors Report, supra note 6 , 50 - 54 ; Ungerer, supra note 225, at 14, col. 1; FirstStage, supra note 256, at 4. 2.
271. See id.
272. See id.
273. See id A proposal that the ECU basket be irrevocably fixed in the second stage is gaining support and its passage is becoming more probable . See ECU Freeze Becoming More Probable-DutchMinister , Reuters, Oct. 23 , 1991 , available in LEXIS, Europe Library , MONRPT File.
274. See Delors Report, supra note 6 , 58 - 60 .
275. See id.
276. See Economic andMonetary Union: European Commission Callsfor Clear Commitmentfrom Member States in Favorof ECU and EMU , Eur. Rep ., Sept. 5 , 1990 , at 2, available in LEXIS, Europe Library , EURRPT File [hereinafter Clear Commitment].
277. See id
278. See Clear Commitment, supra note 276 , at 2.
280. See EMU : Lukewarm Reception for Hard ECU , Eur. Rep ., Jan . 12 , 1991 , at 2, available in LEXIS, Europe Library , EURRPT File [hereinafter Lukewarm Reception]; Economic andMonetary Union: 11 -SidedAgreement on EurofedStatutes, Eur. Rep ., Dec. 5 , 1990 , at 2, available in LEXIS, Europe Library , EURRPT File [hereinafter 1 )-Sided Agreement].
281. See Lukewarm Reception, supra note 280 , at 2; 1) -Sided Agreement , supra note 280 , at 2.
282. For a discussion of the single currency agreed to in the Maastricht treaty , see infra notes 298-305 and accompanying text. 3.
283. See Economic andMonetary Union: MinistersDebateStage Two, Eur. Rep ., Apr. 6 , 1991 , at 2, available in LEXIS, Europe Library , EURRPT File [hereinafter Debate Stage Two]; EMU- Germany Backs Off From DelorsPlan, Eur. Rep ., Feb . 27 , 1991 , at 5, available in LEXIS, Europe Library , EURRPT File [hereinafter Germany Backs Of].
284. See Germany Backs Off, supra note 283 , at 5.
285. See Debate Stage Two, supra note 283 , at 2.
286. For a discussion of the Maastricht Treaty provisions relating to the implementation of the ECB , see supra notes 293 , 302 and accompanying text,
287. See McCune , Delors to Propose Eurofed to Manage ECU in Transition to Union, Reuters, Dec. 13 , 1990 , availablein LEXIS , Europe Library , LBYRPT File.
288. Deal is Done, supra note 7 , at 51, col. 1.
289. Id .
290. Buchan , A Heath Robinson Designfor Europe , Fin. Times, Dec. 12 , 1991 , at 14, col. 3.
291. See Balls , Why Widening the EC Makes DeepeningLess Risky , Fin. Times, Dec. 16 , 1991 , at 4, col. 3; Buchan, supra note 290, at 14, col. 1.
292. See Riding , Measured Steps Toward One Europe: What Was Decided , N.Y. Times , Dec. 12 , 1991 , at AI8, col. 2.
293. See id.
294. See id; Balls, supra note 291, at 4, col. 3.
295. See Riding, supra note 292 , at A18 , col. 2; Balls, supra note 291, at 4, cOL 3.
296. See Riding, supra note 292 , at A18 , col. 2; Balls, supra note 291, at 4, col. 3.
297. See Riding, supra note 292 , at A18 , col. 2.
298. See i.
299. See id.
300. See id.
301. See Currency and Bank, supra note 260, at Al, col. 1.
302. See Riding, supra note 292 , at A18 , col. 2.
303. See Mappingthe Road to Monetary Union, Fin. Times, Dec. 12 , 1991 , at 6, col. 1.
304. See Greenhouse , Europe's Pact on Money Seen as Business Boon , N.Y. Tmes , Dec. 12 , 1991 , at A18, col. I; Deal is Done, supra note 7 , at 51, col. 1.
305. See Greenhouse, supra note 304 , at A18 , col. I; Hollow Victory for Britain as it Launches Two-Tier Europe, Fin . Times, Dec. 12 , 1991 , at 3, col. 1; Lewis , Still Little England?, N.Y. Times , Dec. 16 , 1991 , at A19, col. 2; Opting Out P /illNever Be An Option, The Independent, Dec. 15 , 1991 , Bus. Sec., at 10, available in LEXIS , Europe Library , INDPNT File.
306. Lewis , supra note 305, at A19 , col. 2.
307. See Atkins , Ashdown Says UK is Condemned to 'Semi-Detached' Status, Fin. Times, Dec. 12 , 1991 , at 3, col. 6.
308. See id
309. See Greenhouse, supra note 304 , at A18 , col. 1.
310. Id . (quoting Paul Home, Chief European Economist for Smith Barney) .
311. See FinancialServices , supra note 241, § 5.7.1.
312. See id.
313. See EMU Convergence is not Built in a Day , Eur. Rep., July 6 , 1991 , § II, at 2, availablein LEXIS , Europe Library , EURRPT File [ hereinafter Built in a Day] .
314. See EMU . EEC Ministers Achieve Progresson Economic Convergence but Still Split on Stage Two, Eur. Rep., May 15 , 1991 , § II, at 3, available in LEXIS, Europe Library , EURRPT File [ hereinafter Split on Stage Two] . As of July 1991 , only Italy and Greece had attempted to accomplish any real convergence . See Built in a Day , supra note 313 , at 2.
315. Built in a Day, supra note 313 , at 2.
316. See Economic and Monetary Union: UK Seeks GreaterInvolvement in European Integration, Monthly Rep . on Eur., Mar ., 1991 , § III, at 7, availablein LEXIS , Europe Library , MONREP File.
317. See ia
318. See Deal is Done, supra note 7 , at 51, col. 1.
319. For a discussion of the opt-out clause , see supra notes 304-08 and accompanying text.
320. See Lomax, supra note 224 , at 77 ; 11 Sided-Agreement, supra note 280 , at 2.
321. See Lomax, supra note 224 , at 78.