ECB Vice-Chair Frank Elderson discusses the improved resilience and profitability of European banks, the impact of fragmentation, and the need for deeper integration and reforms to sustain competitiveness.
European banks have shown significant improvement in resilience and profitability, with return on equity stabilizing around 10% and asset quality improving, including a reduction in the non-performing loan (NPL) ratio from 6% in 2015 to 2%.
Despite these gains, fragmentation along national lines remains a key obstacle to long-term competitiveness. Most loans (around 80%) are granted within the same country, and less than 2% of deposits are held cross-border, limiting the ability to build pan-European business models and scale up activities.
This fragmentation hampers investments in digitalization, AI, cyber resilience, and innovative services, and reduces the capacity to support Europe’s strategic priorities, including green and digital transitions and defense spending.
The ECB emphasizes the need for completing the Single Market in banking, including establishing a European deposit insurance scheme and advancing the banking union through concrete steps. Enhancing market integration and reducing regulatory complexity are crucial for enabling banks to operate more efficiently across borders and to finance large-scale investments.
Regarding capital requirements, the ECB states they are aligned with Basel standards and do not constrain lending. The real challenge lies in demand-side factors, such as firms’ investment appetite, which depends on economic confidence and policy certainty.
Reforms suggested include completing the banking union, deepening capital markets, and simplifying regulation through harmonization and proportionality, especially for small and non-complex banks. The ECB has already implemented reforms to streamline supervisory processes, reduce reporting burdens, and leverage digital tools and AI to improve efficiency.
For the German banking sector, the ECB highlights the importance of proportionality, allowing smaller banks to benefit from reduced reporting and supervisory requirements without compromising safety. Greater integration and consolidation are seen as vital for maintaining resilience and competitiveness, enabling banks to share costs, diversify risks, and invest in technology and cyber resilience.
Overall, the ECB advocates for a balanced approach that preserves diversity while fostering deeper integration, which is essential for Europe’s strategic autonomy and future economic resilience.
