Current state of Euro Area banking competitiveness
This comprehensive study by the European Parliament’s Economic Governance and EMU Scrutiny Unit provides a detailed analysis of the EU banking sector’s current state and its implications for European competitiveness. Here are the key findings:
Current competitive position
- Global market share decline: European banks have experienced a dramatic loss of global significance since the 2007-2017 financial crisis. EU banks’ share of global banking assets fell from around 40% pre-crisis to approximately 20% after 2017, while US banks maintained their global share despite rapid growth of Chinese banks.
- Fragmented vs. integrated markets: Unlike the integrated US banking market, the EU banking sector remains fragmented along national lines. During crisis restructuring, most EU bank acquisitions occurred within single member states (intra-country consolidation), while US restructuring led to greater cross-state integration.
Regulatory framework comparison
- Capital requirements: EU banks face similar or slightly higher risk-weighted capital requirements compared to their US counterparts. However, non-risk-weighted requirements (leverage ratios) are significantly weaker in the EU than in the US where megabanks have
leverage ratios around 40 percent higher than their EU peers. - Complexity issues: The EU’s capital and loss-absorbency requirements are extremely complex, particularly in the eurozone, due to the “awkward coexistence of national and European decision-makers beyond the Single Supervisory Mechanism.”
Performance and resilience
- Recent resilience: Despite past challenges, the EU banking sector has demonstrated greater resilience than its US counterpart in recent years. The study notes that the US experienced a significant banking crisis in March 2023 (Silicon Valley Bank failure), while EU banks maintained stability.
- Financial conditions: Current survey data shows no evidence of credit scarcity in either the US or eurozone, suggesting that existing capital requirements are not constraining credit availability.
Key structural challenges
- Banking nationalism legacy: The prolonged EU crisis (2007-2017) was largely caused by “banking nationalism” – member states’ tendency to protect national banking champions rather than allowing efficient cross-border consolidation.
- Incomplete banking union: The banking union remains unfinished, with national deposit guarantee schemes, fragmented crisis response mechanisms, and multiple authorities involved in bank resolution compared to the unified FDIC system in the US.
Primary policy recommendations
- Complete banking union: The most important recommendation is to establish a unitary bank crisis response framework including European deposit insurance, coupled with sovereign concentration charges to prevent abuse of the supranational safety net.
- Simplify capital framework: Streamline the complex “capital stack” by integrating macroprudential decision-making at the European level while maintaining current aggregate capital requirements. This would reduce compliance costs without compromising banking sector resilience.
EU Banking Sector & Competitiveness
Authors: Juan Mejino-López, Nicolas Véron
From: Bruegel
Beyond banking competitiveness: Europe’s geopolitical financial challenge
In this article Mathias Dewatripont, Peter Praet, Andre Sapir, and Guntram B. Wolff argue that while regulatory simplification to enhance banking competitiveness is important, Europe must adopt a broader strategic vision that addresses geopolitical vulnerabilities and financial system resilience in an increasingly uncertain global environment.
The authors identify four principal channels through which US geopolitical changes create unprecedented risks for Europe’s financial system, necessitating a broader strategic autonomy approach beyond simple competitiveness measures.
- US Treasury market uncertainty
The US has become a significant source of geoeconomic uncertainty, particularly regarding US Treasuries, which serve as the anchor of the global financial system. Policy flip-flopping on tariffs combined with increasing US deficits has made investors wary of Treasury prospects. While premature to predict loss of status, the safe-haven status of US Treasuries has been questioned during periods when stock prices declined while Treasury yields rose. - Dollar liquidity and financial dominance
The dollar’s role as a vehicle currency extends far beyond direct transactions, with European bond issuers like the European Investment Bank issuing high volumes of dollar-denominated bonds to be swapped into euros due to better market terms. The outstanding obligations to pay in US dollars through foreign exchange swaps and forwards amounts to $80 trillion in 2022, representing roughly 90% of the total. This dependency makes the system vulnerable to funding squeezes and highlights the critical importance of central bank swap lines for global financial stability. - Financial network concentration and US deregulation
A small number of banks, mainly from the US, are at the core of an increasingly complex and interconnected global financial network. While European banks have reduced direct dollar exposure since the Global Financial Crisis, indirect exposure through interconnectedness and non-bank financial institutions remains high. The US appears to be moving toward light-touch supervision and deregulation, with Trump’s appointment of Fed Vice Chair Michelle Bowman interpreted as part of this shift. A possible light-touch US implementation of Basel III Endgame, more “transparent” stress tests, and absence of new debt rules for regional banks may generate new boom-bust financial cycles and greater volatility for which Europe must prepare. - Distributed ledger technology and Stablecoins
The US administration openly supports a financial system with a stronger role for distributed ledger technology, with cryptocurrencies and stablecoins becoming lasting features of the global financial system. Trump’s ‘Genius Act’, passed by the US Senate and currently debated in the House, could push the US financial system toward a period resembling the Free Banking Era from the mid-1830s until the Civil War. The Act would allow widespread adoption of privately issued stablecoins, reintroducing internal exchange rates. Since stablecoins are supposed to be backed by US Treasuries, any instability in stablecoin markets could lead to fire sales of Treasuries. While the stablecoin market currently is worth $200-300 billion, estimates suggest it could quickly grow to $1 trillion, becoming a significant factor in Treasury markets.
Enhancing competitiveness through improved resilience
The article emphasizes that in an environment where finance and geopolitics are increasingly intertwined, the resilience of the banking sector to geopolitical stress must receive greater attention. Improving resilience will inspire trust in euro area banks and thereby enhance their competitiveness.
Promoting the international role of the Euro
Promoting the international role of the euro, as advocated by Christine Lagarde, would reduce vulnerabilities to dollar liquidity stresses and “protect Europe from sanctions and other coercive measures” while opening new business perspectives for major banks. Concrete measures include supplying safe assets, extending the network of ECB euro swaps and repo lines to key partners, and consolidating key financial market infrastructures.
Facilitating country risk diversification
Lower country risk concentration would make the euro area financial system more resilient to asymmetric shocks, strengthening its international position. Key measures include facilitating cross-border mergers, securitization, and implementing risk weights for sovereign risk concentration. More specifically, cross-border mergers within the banking union could reduce the “bank-sovereign doom loop,” which remains a key issue in a monetary union without fiscal union.
Improving crisis resolution framework
Unlike the UK and US, the EU lacks clear mechanisms for providing liquidity to banks in resolution. The Swiss National Bank provided CHF 168 billion in liquidity support during Credit Suisse’s resolution, half through federal emergency ordinance allowing lending against preferential bankruptcy status and public liquidity backstop. In the UK, the Bank of England can provide liquidity in resolution with Treasury guarantee backing. In the EU, the Single Resolution Fund has very limited firepower, and government guarantees to backstop central bank liquidity provision are seen by some as contravening the EU treaty’s prohibition on monetary financing.
Strategic recommendations for European financial autonomy
The article concludes that Europe must adopt a dual-track strategy combining internal banking sector improvements with broader financial system resilience measures. The first track involves enhancing internal efficiency and profitability through completing the banking union, reducing regulatory fragmentation, and improving bank productivity. The second track focuses on bolstering resilience and autonomy of the financial system.
In the new geopolitical context, Europe’s banking discussions need to go beyond competitiveness
By: Mathias Dewatripont, Peter Praet, Andre Sapir, Guntram B. Wolff – Université Libre De Bruxelles, Solvay School of Economics and Management, Bruegel
