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The structurally low profitability of the euro area banking sector remains a concern for financial stability and for monetary policy.
Return on equity below the cost of capital is unsustainable in the long run. The causes of low profitability are for the most part structural and hence require structural solutions. Successful implementation of long-run profitable business plans is essential.
Consolidation remains necessary.
There are a number of benefits arising from cross-border consolidation. Cross-border holdings of deposits and loans can help bolster economic resilience within the euro area by helping to smooth shocks through income sharing. Such private sector risk-sharing channels play an important role in smoothing shocks in the United States, but currently smooth a much smaller share in the euro area. Moreover, it can provide benefits for the banks themselves. In general, more geographically diversified banks have displayed stronger revenue performance in recent years.
But there are a number of national banking sectors that would also benefit from consolidation within national borders, allowing for greater cost synergies and rationalisation of branch networks. Such consolidation would permit small and medium-sized banks to attain sufficient scale to undertake the IT investment necessary to meet the challenges of the digital era.
While both national and cross-border consolidation options are potentially viable, the key consideration for financial stability is that the combined entity should be able to successfully execute the merger, resulting in a bank that can sustain profitability in the long run.