In the U.S., the banking system is fairly straightforward. If you have a bank account or credit card, you’re generally guaranteed access to your money. This makes sense; after all, we’re talking about a country with relatively low levels of financial inclusion and where most people have access to some sort of borrowing mechanism. But what about in Europe? The continent has become a hotspot for innovative financial services companies and their alternatives to traditional banking systems. One major reason for this is the unique structure of European banking systems. Let’s explore the five main reasons why European banks are different from their American counterparts…

The Single European Banking Market

Europe’s banking system is one of the most integrated in the world. It’s known as the “Single European Banking Market” (SEBM), and it allows banks based in one country to offer products to customers based in other countries, too. This means there’s no need to open multiple bank accounts. In fact, there are fewer restrictions on cross-border banking than in the U.S. This also makes sense when you look at the statistics. Europe has a high penetration of bank accounts, but it’s still a long way off the U.S. At the end of 2016, only 64% of the European population had a bank account, compared to 99% of Americans.

Liquidity Requirements

American banks are required to keep just enough cash on hand to meet unexpected withdrawals and cash transfers. In other words, they don’t need to keep billions of dollars in the bank. Cash is king in the U.S. and it’s a key reason why banks are so well-established there. On the other hand, European banks need to keep a certain amount of liquid assets on hand — mostly cash and liquid securities, like government bonds. The liquidity requirement is one of the main reasons why European banks are smaller than their American counterparts. Of course, regulators are careful to cap the level of assets that banks need to hold to protect the financial system as a whole.

Central Banks Play A Role

American banks are regulated by the Federal Reserve and the Office of the Comptroller of the Currency (OCC). These agencies scan the banking system and make sure they’re meeting minimum requirements, such as keeping enough liquid assets on hand. European banks are the opposite. They’re regulated by a variety of different bodies, including the European Central Bank. The ECB has two main mandates: price stability and financial stability. Price stability is loosely defined as ensuring that inflation stays low. Financial stability is about ensuring that the financial system as a whole remains stable. This means that the ECB monitors and regulates financial institutions, including banks.

Repository Institutions

If you have a bank account in the U.S., you can generally go straight to the financial center of power — Washington, D.C. — and ask for a bailout. If you have a problem, you can turn to the FDIC or your state’s insurance fund for a helping hand. And if you’re still in trouble, then the Treasury can step in and shield the country’s financial system from collapse. All these institutions — the FDIC, the OCC, the Treasury, and the FDIC — are called depositories. They’re a key part of the U.S. banking system. In Europe, the role of the central bank isn’t quite as clear-cut. The ECB is supposed to provide stability in the European banking system, but it only has indirect oversight of banks. The European Banking Authority is supposed to provide oversight, but it’s not exactly clear how it’s supposed to do this.

Payments Platforms

American banking platforms are generally owned by the banks themselves. If you have an account with Chase, for example, you have access to accounts owned by Chase. In Europe, the system is more open and platforms are generally owned by a group of banks. However, customers can also use non-bank platforms, like TransferWise, to move money around. This is why banks in Europe tend to be more open: They’re generally more open to non-bank platforms, as well. This also explains why there’s a big push towards open banking platforms in Europe: The banks need to compete a little more for your business.

Conclusion

Banking systems are constantly evolving and changing, and it’s fascinating to analyze the many differences between European and American banking systems. The U.S. might be the financial center of the world, but Europe is the place to be for innovation in financial services.