European banks: under global competitive pressure?

VIDEO AND AUDIO RECORDINGS

European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

In this session on the second day of Bruegel’s 2020 Annual Meetings we were delighted to welcome José Antonio Alvarez (Chief Executive Officer, Santander) and Mairead McGuinness (European Commissioner for Financial Stability, Financial Services and the Capital Markets Union).

summary

by Giovanni Sgaravatti

Mairead McGuinness (European Commissioner for Financial Stability, Financial Services and the Capital Markets Union) pointed to the differences between the US and the EU in the banking sector, calling for further integration among EU countries as well as the completion of the monetary and the capital markets unions. Commissioner McGuinness also underlined the better shape of the EU banking system in face of the most recent crisis when compared to 2008, despite the extraordinary circumstances of the global pandemic and the smoothness of business-as-usual on 1 January 2021 after the finalisation of Brexit. She also reassured the room that she appreciates that the recent role of the European Central Bank has been exceptional and she called for further implementation of the Basel III reforms. The Commissioner then talked about the perception of the banking system by new generations and how it changed after the global financial crisis. She also touched on the risks of digitalisation in the sector from a labour market perspective and challenged Mr Alvarez Alvarez on whether banks have the skills and capabilities required to embrace the enormous technological advancements of our times. Finally, the Commissioner said that a roadmap on the capital markets union (CMU) has been developed and that the hope, despite the political fragmentation of EU countries, is to see some progress already by the end of this year. She said that the EU’s best chance to move forward on CMU may be the twin climate & digital transition, as well as the recent work on taxonomy and disclosure standards. Nonetheless, CMU will most likely require a multi-step approach and it will be difficult to see it completed all in one go.

José Antonio Alvarez Alvarez (Chief Executive Officer, Santander) pointed out the importance of clear and consistent rules, which help the different players in the banking sector to deal with regulators and meet local needs (especially when a player is active in multiple countries in different parts of the world). Among different causes for smaller margins and lower profits, Mr. Alvarez Alvarez sees new tech-heavy players as the main one. He stressed that often these new players are not subject to the same rules to which more traditional banks are held accountable, creating distortions in the market. Mr. Alvarez Alvarez also shared the urgency of the Commissioner in completing the capital markets union as the precondition to compete on the same level-playing field as everyone else in the rest of the world. He also stressed that the EU banking sector is much more fragmented and is more local-focussed than in other advanced economies, he sees this as another reason for low profitability in recent years as well as tougher regulations, M&A and insolvency rules etc. On Brexit, Mr. Alvarez Alvarez said that the most liquid instruments of the financial market are still mostly traded in London and he does not expect that to change overnight due to the incredible financial and business environment that can be found in the city.