Frank Elderson: Fireside chat

European banks are in a strong position, with higher profitability, better cost-to-income ratios and improved asset quality compared to US banks. Their return on equity has stabilized at around 10%, and they now have more capital, liquidity and better risk management frameworks. Investors are recognizing this progress, as the valuation gap with US banks has narrowed significantly. However, despite their current strengths, the question remains whether European banks will remain competitive in the future.

The key constraint to the long-term competitiveness of European banks is persisting fragmentation along national lines. Banks grant around 80% of their loans to households and firms in their own country, and cross-border merger activity has declined. This limits their ability to build pan-European business models, scale up activity and mobilize capital for digitalization, AI deployment, strengthening cyber resilience and developing innovative services.

Limited scale also hampers their ability to channel savings efficiently across Europe and support investment in the digital, green and defence transitions.

The EU faces enormous investment needs, primarily from private sources. To meet these needs, banks need to be able to operate seamlessly across borders, diversify risks and allocate capital wherever it is most productive. To address the current fragmentation, the euro area needs to function more as a single jurisdiction for financial regulation, allowing capital and liquidity to flow freely within cross-border banking groups.

This requires a synchronized approach to core regulatory elements, with a time-bound roadmap for completing the Single Market.