During the pre-crisis years, European banks’ balance sheets grew rapidly, reaching 274% of EU GDP in 2013. But the continent has been living in a zero interest-rate environment for a long time now and institutions have to deal with the situation.
Speaking recently to a financial audience, Mathias Dewatripont, National Belgian Bank director, expressed some doubts about economies of scale still being the industry’s growth driver. And there are plenty of reasons for that, as the European Systemic Risk Board (ESRB) pointed out in its June 2014 report “Is Europe Overbanked?”
“Our patient [the banking system in Europe] is abnormally heavy,” was the conclusion drawn by the report, citing the fact that the banks have “greatly increased the supply of private credit, and expanded into new lines of business.”
“Growth has been concentrated in the largest banks, which have also become more leveraged.”
The 130 biggest European banks spent almost €100 billion to raise capital in order to pass stress tests. Yet since October, several financial institutions have announced additional ‘robust’ measures. For example, Banco Santander raised €7.5 billion euros in January from a new share sale.
“Banking business is not profitable in Europe right now,” one senior executive said recently during another round of financial conferences in Brussels.
He complained about the current monetary policy and also about “the excessive capital provisions” the banks have had to make.
Furthermore, the lenders have had to endure one legacy from the Barroso Commission. The smooth banking reform allowed them to preserve their investment business after banning propietary trading in financial instruments or commodities.
José Viñals, Director of the Monetary and Capital Markets Department of the IMF, has also insisted on the over-banked idea.
“Maybe within in the context of Europe there are too many players trying to stay in the game,” Viñals said.
“In principal, there are banks with business models which will not be viable over time and they need to exit the scene,” Vinals added.
Viñals presented his ideas alongside Daniele Nouy, President of the Supervisory Council at the ECB.
Banking union would favour cross-border mergers, according to both officials.
And just a few days before the meeting between Nouy and Viñals, Spain’s banking assocation head, José María Roldan, also forecast a fresh round of sector consolidation in the eurozone in the medium term.