Regulation and Financial Innovation Trends in European Banking and the Impact on the Supply and Demand for Financial Services in Europe
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Philip Molyneux

Abstract
This paper outlines two major regulatory initiatives that are expected to have a substantial impact on the European banking industry and the supply and demand of financial services throughout the European Union. The first initiative is the EU's Financial Services Action Plan (FSAP), approved in 1999 with a calendar of actions to be finalised by 2005. The FSAP aims to review the existing regulatory framework, to adapt it to the demands of single financial markets in order to promote a more integrated and efficient European financial services marketplace. The second regulatory development to be discussed in this paper relates to the implementation of Basle 2, the new capital adequacy guidelines for banks. The New Basle Capital Accord has undergone an extensive review with the last round of consultations being in early 2002. The Basle Committee envisions implementation by 2006. The implementation of Basle 2 into EU banking law is expected to have a substantial impact on capital allocation and bank behaviour. Both Basle 2 and the FSAP place considerable emphasis on areas that are among the least integrated in the European financial services industry - retail lending, SME finance, bancassurance, securitisation and the regulatory treatment of collateral. The removal of barriers to trade in these areas coupled with new capital rules governing their regulation are likely to create a paradigm shift in the way in which this types of business is conducted over the next decade or so.