A European Banking Union alongside deeper capital markets is a key lever for mobilising savings, achieving scale, reducing financing costs and narrowing the EU’s investment gap. Ultimately, it would be a driver of competitiveness and growth.
The banking union was initially created to enhance the credibility of supervision and establish common mechanisms for managing banking crises without burdening taxpayers. There has been progress in common supervision and resolution mechanisms, while stronger capital and liquidity positions have made the euro area banking system more resilient than it was before 2012.
However, the question facing banks and policymakers now is whether Europe has a financial architecture capable of transforming its savings into productive investment and, ultimately, fostering competitiveness and growth.
“The Banking Union must cease to be a defensive architecture born out of crisis and become an infrastructure for growth”
The European Commission (EC) is working to resolve this question under the umbrella of the Savings and Investments Union. It is designed to connect citizens’ savings with productive investment, broaden sources of finance for companies and reduce fragmentation within the Single Financial Market.
Three connected constraints have been identified: persistent national fragmentation, an implementation of international standards that does not always reflect the specific features of the EU banking system and undue regulatory complexity.
The banking union has made financial institutions stronger, but it has not yet created truly pan-European banks. As the EC shows, 56% of EU banks’ exposure is in their home country. Cross-border exposures are almost evenly split between other EU countries (21%) and non-EU markets (22%), suggesting that expanding within the EU can be as difficult as growing beyond the bloc.
“Completing the Banking Union is not a matter of technical reform: it represents an agenda for growth, competitiveness and strategic autonomy”
Fragmentation is also evident in corporate operations cross-border banking services remain marginal. Domestic bias reduces effective competition and limits the matching of most productive project with the most suitable sources of finance.
Barriers confronting pan-European banks include “ring-fencing” of certain activities, the lack of a European Deposit Insurance Scheme and lack of common regulations.
Studies by the European Central Bank and International Monetary Fund suggest deeper banking integration could deliver GDP uplifts to the EU of between 1.6% and 3%.
With Europe seeking approximately €6 trillion of additional investment over the next five years to finance its green, digital and defence objectives, the pressure on banks to play their part will be significant.
Total financial integration could amount to almost 40% of that cumulative figure in terms of additional annual economic capacity. The banking component alone would cover slightly more than one quarter. Even the more conservative scenario of a 1.6% increase in GDP would cover approximately one fifth.
Europe must move decisively in a clear direction: less internal fragmentation, greater intra-group mobility of resources, a common deposits guarantee and lower regulatory complexity. There must also be an explicit link between financial stability, competitiveness and the financing of the real economy.