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European regulation: Banks need union for profitability

The drive to integrate the European banking system has taken a back seat as regulators have become concerned at the lack of profitability in the sector. Can banking in the EU be sustainable without union and with so much onerous regulation?


Europe’s two most ambitious financial projects, Banking Union and Capital Markets Union, have suffered a string of setbacks stemming from uneven growth across the continent, a baroque legislative process, global political uncertainty and, of course, the EU’s impending divorce from the UK. Many in the industry blame the lack of progress on those plans for the pallid state of European banking today.

“We have all the responsibilities of a banking union and none of the privileges,” a senior financial services professional tells Euromoney.

Perhaps it is no surprise in a year when centrifugal politics consistently threatened to tear up the rulebook – most notably in Europe and the US – that policies sharing the flavour of federalism should take a back seat. Indeed, on May 19, the ECB noted that financial integration across Europe had “stalled” in 2016, in part because of the aforementioned factors.

Worse still, despite a slowly brightening economic outlook, European banks also continue to lose profitability. The average return on equity across the EU was 3.3% in the fourth quarter of 2016, according to European Banking Authority data – the lowest since it started publishing its Risk Dashboard in 2014 and well below the banks’ 8% to 10% estimated cost of equity.

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