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Europe needs regulatory convergence to address 'dominance of American banks'

European regulators can help domestic banks become more competitive on a global scale through harmonization and the alignment of rules, UniCredit SpA CEO Jean-Pierre Mustier and Deutsche Bundesbank executive Joachim Wuermeling told a banking conference.

Big European banks have lagged U.S. peers since the global financial crisis, and regulation has played a role in that, they said at the FT Banking Summit in London on Dec. 4.

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The ECB is one of several regulatory authorities overseeing European banks. Source: AP Photo

"We are seeing the dominance of American banks, which are doing much better in terms of competitiveness and continue to grow," Wuermeling said. EU regulation is not targeted at boosting the competitiveness of domestic banks that have had to comply with a slew of requirements in the post-crisis period, he said.

"The discussion we are starting now is whether we didn't do too much on regulation," Wuermeling said. There are certain areas where regulation is "exaggerated" and that has created "an administrative burden."

"This also raises the question, whether we should align our regulation [to the U.S.] to allow European banks to be more competitive on the global stage," he said.

Fragmentation is the enemy

European banks have shrunk in value over the past few years, and today the top five European players are worth less than U.S.-based rival JPMorgan Chase & Co., Mustier said. A prerequisite for European banks to compete with peers across the Atlantic is their ability to attract capital, he said.

Fragmentation is the biggest enemy of that, according to Mustier. Looking at Europe, investors do not see the banking sector as a whole and differentiate investments in German, Italian or French banks.

In Europe, the Basel Committee, the EU Single Supervisory Mechanism, the European Central Bank, the European Banking Authority, the EU Single Resolution Board and domestic central banks all play a role in banking regulation and supervision, Mustier said.

Convergence is lacking

On an EU level alone, there are four authorities responsible for different aspects of the regulatory spectrum, and each of them has imposed some rules and guidelines on the sector, he said. This patchwork of rules creates an issue for investors who do not have clarity about the requirements for the EU banking sector, the UniCredit CEO said.

When you add the rules imposed on a national level the picture looks even more complex. "We need to have more convergence on the regulatory side," Mustier said, calling for more rules to be introduced in the form of regulations rather than directives.

Because directives are just EU guidelines, member states can amend them when they are transposed into national law, increasing regulatory fragmentation in the bloc.

As a result, there is not enough clarity about the full implications of the final Basel III capital rules on the sector. Such clarity would be key to attracting more investment into European banks, according to Mustier. "And [then] probably the market capitalization of banks can improve," he said.

Mustier welcomed the recent proposal of German Finance Minister Olaf Scholz for creating a European Deposit Insurance Scheme in the EU, which will pave the way for harmonizing bank supervision across the bloc.