Europe needs a stable and capable banking sector to support its economy

HIGHLIGHTS FROM THE EBF BOARD

Europe needs a stable and capable banking sector to support its economy

Convened in Stockholm on May 12th, the European Banking Federation (EBF) Board reaffirmed the solid position of the European banking sector, reflected on the lessons learnt from the recent developments and assessed the role of banks in transforming the global economy.

The collapse of the Silicon Valley Bank followed by two other US regional banks and the emergency takeover of Credit Suisse by UBS have put the resilience of the banking sector to the test.

“In a challenging environment, the European banking sector has proven its resilience, supported by a robust supervisory and regulatory framework. This should be considered when discussing the lessons learnt from the events in the US and Switzerland. Europe needs a strong and profitable banking sector which is both stable and capable to support the economy. This is the prerequisite to achieve the long-term, shared objective – financing the sustainable transition and digital transformation that will help build a prosperous and inclusive society and a strong Europe on a global stage,” said Christian Sewing, CEO of Deutsche Bank and EBF President.

Sustainable profitability is essential to ensure that the European banking sector remains resilient and capable of withstanding future challenges, while also attracting investors and fulfilling its core function of financing investments and promoting growth and competitiveness in the European economy. Any measures that undermine banks’ profitability have the potential to cause negative second-round effects on the economy.

Recent developments reaffirm strength of European banks

While it is too early to draw final conclusions from the events in recent weeks, it can be said with certainty that the cases of US regional banks and Credit Suisse do not point to broader trends within the European banking industry. At the same time, these incidents provide an opportunity to reflect on the pillars of resilience supporting European banks and considerations going forward:

Strong risk culture: Risk culture has an impact on the risks banks take, with recent developments highlighting appropriate management and control of liquidity and interest rate risks by European banks.

Balanced and well-diversified business models: Diversification of assets and funding is key for financial stability, while extreme concentration of funding can have negative effects as demonstrated by the case ofSilicon Valley Bank. the European banks’ business model is generally based on a wide and diversified funding with a critical part of stable retail deposits.

A solid regulatory framework featuring:
- Implementation of the Basel Committee standards: The full scope of implementation of the international standards of banking supervision represents a major investment to strengthen the stability of the European banking system.
- Adequate capital and liquidity: The European banking system holds the highest levels of capital and liquidity across world regions. Banks proved to be solid during the turmoil, with no evident need to increase either capital or liquidity requirements. To ensure banks can contribute to financing the green and digital transitions of the European economy as well as to delivering on the strategic autonomy objectives, Europe must uphold the G20 mandate to implement the finalisation of Basel III without significantly increasing the levels of capital.
- Strong Supervision: The strengthening of the supervisory setup in Europe and the integration of supervisory responsibilities in the European Central Bank (ECB) as been a remarkable improvement. The recent situation has made evident that supervisors must not only monitor and formally assess banks’ compliance with regulatory standards and metrics, but also understand the business model and risk situation of every bank.

However, a stable banking system is not based solely on compliance with prudential standards and ratios. Viable competitive business models are essential for stability and thus customer confidence. By also taking into account the competitiveness of a sector, regulatory requirements directly contribute to stability of the financial system.

Exploring the digital euro

The digital euro project is moving towards the conclusion of its investigation phase, with the upcoming holistic review of the design elements. This will largely be the basis of the European Central Bank (ECB) Governing Council’s decision on whether to move to the realisation phase. In March, the EBF set forth its initial vision for the digital money ecosystem of the future, where a retail digital euro, a wholesale CBDC and bank-issued money tokens could play a role in enabling innovation, supporting customer needs and ensuring that Europe stays at the forefront of digital finance and the digital economy.

The issuance of a retail digital euro would be an unprecedented endeavour, with wide implications for all economic actors, including the ECB and the Eurosystem itself. The project goes well beyond the creation of a new tool for payments, and questions related to the impact on the macroeconomic, societal and financial sector levels should be a central part of the strategic, political and technical debates. At the same time, it is fundamental to demonstrate clearly that a digital euro would bring added value for consumers, businesses and banks alike, beyond the existing payment solutions. Given the extensive investments that would be required by banks, it is also necessary to clarify how this project would fit with other parallel initiatives such as the European Payments Initiative (EPI) and the Instant Payments Regulation.

It is crucial that the different aspects are discussed by the competent European bodies, that decisions on the political level ensure the basis for the project, and that appropriate time is devoted to clearly assess the impact of a digital euro on all levels. In that respect, a close public-private partnership and a deep dive into the different outcomes are needed throughout the project.

Unlocking deeper and more integrated capital markets to finance sustainable growth

Although important progress was made in the current European term, by the end of which most of the original proposals of the Capital Markets Union 2020 action plan will have seen the light of day, game-changing reforms needed to truly unleash deeper and fully integrated European capital markets remain partially unaddressed. For example, securitisation, which is currently discussed by co-legislators on the banking package, needs to be boosted by a better regulation to finance the future needs of Europe.

As new challenges arise, European capital markets continue to be underdeveloped and fragmented compared to global peers. Truly deepening European capital markets will be crucial to supplement bank lending and public funding to finance the sustainable and digital transition and support the long-term competitiveness of the EU. That is why the EBF Board is highly concerned by the recent announcement by the Commissioner McGuinness of a partial ban of inducements for financial products in execution only, whose definition is broader than in MIFID II. It will increase the number of European savers without advice.

To achieve this objective, it will be crucial not only to continue removing structural barriers to cross-border investments within the EU, but also to focus on concrete, tangible actions to be implemented at all levels to deepen national markets irrespective of their size, build liquidity and unlock more investment opportunities for European companies and households.

As both service providers and users of capital markets, banks are strong supporters of deep and integrated capital markets in the EU and remain fully committed to collaborating with national and EU partners to realize the full potential of the EU single market.

We will further explore the role of the European banking sector on the global stage at the International Banking Summit on 1^st June, co-organised by the European Banking Federation (EBF) and the International Banking Federation (IBFed). Featuring European Commissioner Mairead McGuinness, Financial Stability Board Chair Klaas Knot, Agustín Carstens, General Manager of the Bank for International Settlements, EBF President Christian Sewing and many more, the event will bring together an audience of more than 450 policymakers, experts, representatives from banks and international financial institutions.

For more information:

Rūta Barthet, Senior Media and Communications Officer, r.barthet@ebf.eu

About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.