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ECB warns national fragmentation remains key drag on European bank competitiveness
The ECB says European banks have improved profitability and asset quality since the pandemic, but points to persisting national fragmentation in banking markets as the main long-term constraint.
European banks have strengthened since the pandemic, with profitability and cost efficiency now roughly matching or exceeding US peers, the ECB said. In its remarks, ECB official Frank Elderson added that European banks have also seen improving asset quality, including a decline in non-performing loans from 6% in 2015 to 2%, and said bank mergers appear to be accelerating. Elderson cited supervisory statistics due to be published next week and said return on equity has recovered and stabilized around 10%, reaching some of the highest levels seen since the Single Supervisory Mechanism was established. He also pointed to valuation changes, saying the average price-to-book ratio for European banks is now close to 1.5, narrowing the gap versus US banks. Despite the progress, the ECB argued that competitiveness cannot be assessed only by current profitability and that the real question is whether banks can sustain resilience and innovation over time. It said the main long-term constraint is persisting fragmentation along national lines, arguing that Europe does not yet have a truly integrated banking market. The ECB said banks grant around 80% of their loans to households and firms in their own country, while less than 2% is granted cross-border. Elderson framed the issue as a long-run challenge for the region’s ability to continue financing households and businesses when the economy faces shocks, citing the pandemic and the energy shock after Russia’s invasion of Ukraine.
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