At the end of last year, the European Central Bank (ECB) published its report on the characteristics of the financial system (Report on Financial Structures) for 2016. The document provides a good description of the European financial system, the weight and interconnection of its components, and its importance in corporate financing. For the monetary authority, the report\u2019s focus is clearly structural, confirming the degree of achievement of the official objective of promoting a deeper and more integrated European capital market. However, it is also of interest from a cyclical perspective, as it assesses the potential risks posed by its evolution\u2014risks that may have been heightened by the implementation of an exceptionally expansionary monetary policy and by the existence of regulatory asymmetries within the system. <\/p>\n
The size of the European financial system is six times GDP, one point above its weight before the crisis.<\/p>\n
Its valuation at the end of 2016 was \u20ac72 trillion, compared with \u20ac55 trillion in 2008. However, this strong growth over the past decade conceals very different trends among its various components: banks, insurance companies and pension funds, investment funds, and other financial companies and vehicles. <\/p>\n
Banks are the most important component of the financial system, accounting for 45% of total assets. The stability of this percentage over the past two years follows the sharp decline observed since the start of the crisis. This fall is not difficult to explain. On the one hand, there has been sector consolidation and balance-sheet adjustments to make it more resilient. It has also been affected by certain decisions by the authorities, such as stricter regulation and the conduct of monetary policy. Very loose financial conditions have pushed down the entire market yield curve and encouraged end investors to seek returns in assets other than traditional ones. Lastly, innovation has also facilitated the entry of new operators into the financial sector that offer banking services without being banks. <\/p>\n
The counterpart has been the greater weight of the non-bank financial sector, which now accounts for 55% of total assets. Within this group, the share of insurance companies and pension funds has increased moderately to 12.8% of the total, while there has been a sharper rise in the case of non-monetary investment funds and other financial vehicles or companies, which already represent 40% of assets. Just one figure: the size of non-monetary investment funds has increased by 180% since 2008, between revaluations and new inflows of money. <\/p>\n
At present, we have a larger financial sector, corresponding to a larger capital market as well. A more integrated market at the European level, with prices more interconnected, in part due to the ECB\u2019s extraordinary monetary policy measures. However, a larger market does not mean that banks are less important. The report confirms that banks are the largest lenders and borrowers in the market. Banks are essential to add depth to the market, supporting its liquidity. Since risk management is the core of their business, they are also indispensable for maintaining the flow of financing that the economy needs to grow in a future environment of potentially greater instability as monetary policy normalises. At present, bank financing covers between 50% and 80% of companies\u2019 external financing needs in the main euro area countries\u2014especially through loans and, to a lesser extent, through the purchase of corporate debt. <\/p>\n
At its latest monthly meeting, the ECB proposed a prudent framework for monetary normalisation. Communication becomes a priority when implementing the change in the monetary policy stance. It would also be desirable for the withdrawal of part of the monetary stimulus to be accompanied by greater regulatory certainty for banks, under the principle that the same activity and the same risk should be subject to the same regulation and supervision. All of this is aimed at preserving financial stability, starting with banking stability. <\/p>\n