Profitability is currently the main challenge for European banks. It is a fundamental requirement for the stability of institutions, benefiting society as a whole. Achieving the appropriate profitability demanded by investors requires greater efficiency, which is far from simple in a context of zero official interest rates, under the mandatory investment effort in digital transformation, and with the emergence of new digital competition from non-bank entities. The success of our institutions in facing these challenges will depend on the decisions they make and also on the authorities fulfilling their own obligations. <\/p>\n
The banking union seeks to correct past mistakes. This involves strengthening banks and protecting taxpayer money. Banks are now stronger and better prepared to face the future. Regulatory changes and demanding supervision are necessary to limit risks that affect banking stability. However, it is also essential to complete the banking union, strengthen the creation of a common capital market, and reflect on the different national regulations. <\/p>\n
Much is said about the vulnerabilities of banks without considering the responsibility of authorities to help correct them. A common European deposit guarantee would contribute to financial stability by facilitating the creation of cross-border entities that can compete on equal terms with international banking in providing services and access to resources. Taking advantage of the opportunities presented by digital disruption, which customers demand, is also a matter of scale. The same applies to facing demanding regulation and being able to compete on equal terms with large Big Tech companies, which generate so much debate in terms of financial stability and future customer protection. <\/p>\n
Greater integration of financial markets is also important to achieve greater diversification of risks assumed by different agents, improving the capacity for stabilization against shocks. In the case of banks, it will weaken the still-existing link between sovereign and banking risk. Achieving greater European regulatory uniformity affecting the sector, especially distressed entities, is also important to reinforce confidence. And the activity of banks relies on confidence, both from their clients and savers. <\/p>\n
The evolution of financial integration in Europe over the last decade has partly reflected the extreme expansionary measures applied in monetary policy. The European Central Bank itself admits that the greater integration achieved during the crisis is largely a consequence of the convergence of asset prices rather than the desirable creation of a truly integrated and liquid market. There is a risk that the return to monetary policy normality will accentuate the weakness of the financial integration achieved, without being able to consider that banks can function under greater regulation as a bulwark against a potential increase in instability in the rest of the financial sector. Nor would the solution be to postpone the return to monetary normality until better times once the downward phase of the economic cycle has begun. <\/p>\n
European banks will continue to undertake balance sheet adjustments, such as eliminating the legacy of the crisis, while fulfilling their ultimate objective of providing the essential financing and financial services for economic growth. However, authorities, regulators, and supervisors also have their own obligations that can reinforce the effect of banks’ decisions and ensure a medium- and long-term scenario where financial stability is preserved. <\/p>\n