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Economic and monetary challenges - Review of EU regulations to support the financing of the EU economy and financial stability

European Banks – How to deal with the challenges ahead

By Ferber Markus - MEP and Vice-Chair, Committee on Economic and Monetary Affairs, European Parliament

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Banks have been hit hard by the financial crisis and the subsequent sovereign debt crises in some Member States of the European Union. In the direct aftermath of the crises, banks’ balance sheets have been full with non-performing loans and the lending levels to the real economy have dropped markedly. The regulatory response by the Union legislator has been swift and comprehensive: the Banking Union, a single rulebook and a new supervisory regime have been established.

While the European Banking sector has been made more resilient, there are three strategic challenges European banks and European policy makers will have to address to make the EU banking sector competitive in the long run: cleaning up balance sheets, coping with the challenges of digitisation and establishing proportionality as the guiding principle of prudential regulation.

It is estimated that SSM banks alone have non-performing loans in excess of 800 billion euros on their balance sheets. Those non-performing loans are a squeeze on profits, tie up significant resources and are a constant cause for concern for market participants and supervisors alike. In order to help banks concentrate on their core business, financing the real economy, one of the key priorities for supervisors – especially the Single Supervisory Mechanism – must be to deal with this inherent risk.

The second strategic challenge for banks is the emergence of a whole new industry of companies operating on the verge of finance and cannibalising banks’ business models. There are already thousands of so called FinTechs offering everything from peer-to-peer lending to payment services and many more will be created. In many instances, the existing regulatory framework for those new players is a poor fit at best. For banks, digitisation is a challenge and an opportunity alike. While there is an obvious threat of increased and ever fiercer competition, there is also the chance of leading innovation and unlocking new markets. Banks are predestined to do so as they can rely on an established network of clients and reputational advantage compared with many of their new competitors. From a regulatory perspective, digitisation comes with the necessity of establishing a level playing field that avoids introducing a two-tier system with high prudential requirements for banks and a lesser system for FinTechs – this applies for supervision, legal liability as well as data protection.

When business models are diverse, proportionality is essential.

The third strategic challenge is to establish proportionality and risk-based regulation and supervision as the guiding principle of European financial services legislation. The European banking sector is as diverse as it can get. It comprises everything from institutions with big investment banking departments engaging in risky trading activities to rock-solid regional banks that only hand out small-scale SME loans. By and large, this diversity has served Europe well. When business models are diverse, proportionality is essential. Regulation and supervision must be designed to reflect this idea. A “one-size fits all approach” is certainly harmful to the diversity of European banking. To sustain the diversity of banking in the EU with all its merits, differentiation is needed in terms of capital requirements, intensity of supervision and reporting obligations. Therefore, proportionality must be key. If we fail to incorporate this idea properly, we will see the European banking landscape change dramatically – and not for the better.

The three challenges listed require decisive and prompt action. The Single Supervisor will need to deal with the issue of non-performing loans quickly. At the same time, the Capital Markets Union must set the course for developing the right framework to deal with digitisation and new emerging players in the field of finance. Concrete and substantial proposal are needed by the Commission rather sooner than later. The call for evidence that came along with the CMU action plan will be the right tool to evaluate the state of play of the Single rulebook, to assess where the post-crisis legislative push has gone too far and where the idea of proportionality has been violated. If it is done well, the call for evidence will lead to more proportionality and thus to a stronger and more competitive EU banking sector. This is the goal we should strive for.