Oliver Wyman
The EU banking regulatory framework and its impact on banks and the economy

Two different realities: profitability and capital in US and EU banks

Oliver Wyman released a report commissioned by the European Banking Federation with the aim to provides a quantitative and independent assessment of the regulatory and supervisory costs for EU (European Union) banks compared to US banks. The conclusions could help for constructive and forward-looking dialogue between banks and EU authorities on the direction of future regulatory and supervisory measures which have a direct impact on the banking sector’s ability to support the real economy. According to the report a review of current capital requirements and supervisory processes could, in a hypothetical scenario, provide capacity for €4-4.5 trillion additional bank lending for EU banks to support the financing of the green and digital transitions.

Main takeaways of the report:

  • Lower profitability of European banks vs US banks due to structural factors: The RoE (return on equity) of EU banking sector today (6.7% on av. In 2021) is not earning its cost of capital while US competitors have returned to pre-crisis profitability levels (11% in 2021).  According to the report, this has been driven, among other reasons, by an economic environment of comparably poor growth in the Eurozone, different fiscal and monetary conditions, high fragmentation, in a context of rising minimum cost of doing business, and a long period of negative interest rates that depressed banks’ earnings in a period where they had to strengthen capital buffers. The report highlights how the incomplete Banking & Capital Market Union is a structural obstacle to bank consolidation across the Eurozone, preventing banks from realizing synergies across markets.

  • Lower profitability of European banks also due to differences in how rules effectively work and how they are implemented. The report concludes that EU banks face an incremental regulatory-induced cost compared to US peers that could explain 0.8-1.0 percentage points (p.p) of the ROE gap. This higher regulatory cost is explained mainly by two facts: 1) More complex EU’s approach to determine capital requirements, which gives regulators wider discretion and might be perceived as being less transparent. 2) EU banks face almost twice as high contributions to deposit and resolution funds compared to US peers, while requirements on bail-in-able capacity are 3.9 p.p higher than in the US.

According to the report policymakers should redouble their efforts to complete the banking and capital markets union and additionally, supervisors should place greater emphasis on streamlining and making more efficient key processes to ensure that EU banks don´t have a disadvantage on the global playing field.

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