Home Country Control and Mutual Recognition

The European Commission has worked for nearly thirty years on the integration of banking and financial markets. Freedom of establishment and entry was achieved in 1973, but further efforts to harmonize banking regulations and promote cross-border services proved to be very slow. This process led to a genial idea, incorporated in the 1985 White Paper on the Completion of the Internal Market, the opening of markets prior to harmonization. Regulation and supervision are guided by the principles of home country control and mutual recognition according to which each country will accept the regulation and supervision enforced by other countries on their domestic firms operating abroad. These principles are very broad: they apply to all products, banking and financial services included. The issue raised in this paper concerns the application of these two principles to banking services. Is there anything special in banking that would justify a different approach?