European banks’ competitiveness and integration challenges

European banks have shown significant improvement in resilience and profitability, with return on equity stabilizing around 10% and the valuation gap with US banks narrowing. Asset quality has also improved, with the NPL ratio decreasing from 6% in 2015 to 2%.

Despite these gains, fragmentation along national lines remains a key obstacle to long-term competitiveness. Most loans (around 80%) are granted within national borders, and cross-border mergers have declined, limiting scale and innovation capacity.

The ECB emphasizes that competitiveness depends on resilience, efficiency, and innovation, including deploying new technologies like AI. Achieving a truly integrated banking market is crucial for financing Europe’s investment needs, estimated at around €1.2 trillion annually until 2030 for green, digital, and defense goals.

Progress requires completing the banking union, including establishing a European deposit insurance scheme, and advancing capital market integration. Simplification of regulation and supervision, along with proportionality measures for smaller banks, are also key steps.

The ECB has undertaken reforms to improve supervisory efficiency, such as reducing decision times and streamlining processes, supported by digital tools and AI. Further integration and simplification are seen as vital for strengthening Europe’s financial system and supporting economic growth.

In the German context, the diversity of banking models, including regional and cooperative banks, is a strength. Greater cross-border integration can enable banks to achieve scale, improve cyber resilience, and remain competitive, without replacing local banking traditions.

Overall, the ECB advocates for synchronized progress on market integration, simplification, and proportionality to enhance the resilience and competitiveness of European banks in a changing geopolitical environment.