Banks are a supporting pillar of the European economy: they perform a key function in financing businesses, thus supporting growth, trade and employment.
At the heart of European financial market policy, as fleshed out in the capital markets union project, is an overarching objective to strengthen the financing of businesses. Europe’s banking sector has a central role to play in achieving this goal.
Banks are a core element of corporate finance in Europe. In addition to loans, they offer their customers a wide range of modern financial services, especially in the area of payments, export financing, risk management (e.g. of interest rate or FX risk) or in arranging private placements. Globally operating universal banks are important partners for internationally active companies. State development funds (from the EIB, for example) can also be delivered most efficiently through the corporate client’s principal bank (intermediated loans).
Banks normally have close, long-term business relations with their corporate clients. This enables them to carry out informed risk analysis and cooperate with customers throughout and beyond economic cycles. The bank acts as a go-between and offers support and backup in the form of bespoke solutions for all funding needs. It performs an intermediation function.
Banks’ role as intermediaries has come under pressure in recent years as a result of market developments and regulation. European financial policymakers have set themselves the objective of reducing “dependency on banks”.
The desire of policymakers to reduce risks in the banking sector and distribute them more throughout the market is understandable. But this objective need not, and should not, lead to the role of banks as intermediaries being excessively restricted until it disappears altogether. Banks’ core strengths – namely the analysis and management of risk and the ability to offer customers holistic, long-term support – should not be destroyed.
Banks and capital markets need to work together: they do not exist in isolation from one another. The advantages of capital-market-based and bank-based funding are complementary and should supplement one another. Even countries with highly developed capital markets, such as the US and UK, also have strong banks. Whether the financing culture is mainly capital-market based or bank based, banks perform important functions in either case.
The article will be available on Association of German Banks's website
© BDB - Bundesverband Deutscher Banken
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