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The persistently weak profitability of the euro area banking sector remains a key concern for financial stability, as it constrains banks’ ability to build up buffers against negative shocks. While cyclical factors have helped improve bank profitability over the last few years, progress in tackling structural challenges has clearly been insufficient.
Reducing costs and improving efficiency are necessary steps, and digitalisation can be an important and permanent cost-saving strategy for banks, but it needs to be underpinned by the structural requirements such as a general environment that is conducive to digitalisation. Many banks also need to improve their income-generating capacities, for example by enhancing fee and commission-based activities.
Luis de Guindos concludes: “In terms of the euro area banking sector as a whole, consolidation, both domestic and cross-border, is vital if we want the sector to become more efficient. We need to facilitate this. And we urgently need to make further progress towards completing the banking union and the capital markets union.”
The Single Market is still fragmented along national lines. National options and discretions in the regulatory and supervisory frameworks reduce the economies of scale for banks operating across borders. Decisive steps to overcome these, the establishment of a European deposit insurance scheme as well as the harmonisation of insolvency laws and judicial frameworks are necessary bold steps to allow for the emergence of efficient pan-European banks and greater private risk-sharing in the European Union.