The ultimate goal of banking activity is to channel societal savings towards productive investment. Banking intermediation thus becomes a fundamental part of the mechanism that enables economic growth. Many of the measures taken by European authorities during the crisis have favored the diversification of funding sources, especially for large corporations with access to wholesale financing. However, the most recent data published by the European Central Bank (ECB) indicate that banks remain the primary source of external financing for businesses and households in Europe.
Bank loans accounted for 44.9% of the debt of non-financial European companies in 2017, representing a significant decrease from the 59.5% at the start of the financial crisis. This decline is attributable to large corporations, favored by the high liquidity in financial markets generated by the central bank, while European SMEs have continued to rely primarily on bank loans for financing.
For households, the importance of bank financing is undeniable. Bank loans have barely changed their share in household financing over the past year, remaining at levels of 87%. Of these loans, 75% were allocated to housing acquisition, the main asset decision for families. Like businesses, European households have benefited from very favorable financing conditions over the last ten years, as banks have served as a transmission channel for the extraordinary measures approved by the ECB.
The creation of a common capital market stems from the desire of European authorities for it to truly function as a stable source of economic financing, complementary to banking. We could then speak of cyclical and structural factors behind the recent increase in the weight of non-bank financing for large corporations. The exceptional nature of current monetary policy would fall into the first group. Structural measures would include the fight against market segmentation observed during the crisis and many of the new regulatory measures approved to make it more open and deep.
The significant development of the European capital market in the last decade has therefore largely been supported by exceptional monetary conditions, such as negative real interest rates and the direct intervention of the ECB as another investor. An atypical investor, insensitive to profitability levels. This has led to warnings from supranational authorities such as the Bank for International Settlements or the International Monetary Fund regarding potential distortions in asset price formation and risk management by private investors. All of this could negatively affect the financial stability achieved with such effort during the crisis.
Throughout this period, banks have fulfilled their obligation to provide families and businesses with the best possible financing, under a context of strict and uncertain regulation and also under extreme supervision. This indirectly favors the emergence of new non-bank competitors focused not so much on providing financing to the economy as on capturing part of the banks’ value chain. Specifically, the most profitable part, in a context of zero interest rates like the current one, such as providing financial services. Payment services are the best example. The new regulation approved has sought to provide the payment ecosystem with greater transparency and depth, under a context of high competition. This regulation is an opportunity for further development of payments, albeit under the obligation of equal requirements for operators (banks and non-banks) to strengthen financial stability and customer protection.
Banking union is an indispensable requirement for the creation of a common capital market. European authorities acknowledge this, although obstacles remain for its materialization, such as national regulatory disparities or difficulties in creating a common deposit fund. It is important to overcome these challenges so that banks can continue to fulfill their role of providing financing and efficient service to their clients.
