Brussels must make European banking a reality

Further integration would spur consolidation, creating more competitive and stronger champions

As Brussels goes back to work after the elections, banking should be at the top of its agenda as an issue of strategic importance. European financial services must be strengthened in three ways to ensure that we can finance our homes and businesses, not to mention the energy and digital transitions.

First, the EU must be careful and sensible about the way it applies the new global Basel IV rules that set floors for risk-weighted assets for banks. They are likely to hit European lenders harder than their US competitors, forcing some to raise capital at a time when the economic cycle looks set for a downturn.

Second, the European banking union is far from complete. The foundations have been laid, some walls built, but the roof is still missing and the architects have gone on holiday.

And lastly, there is broad agreement that work has not really started on the proposed capital markets union, an essential part of finding more balanced ways to finance the economy.

Failure to seize the opportunities of these two union projects would mean Brussels was taking a purely short-term approach. The EU would be neglecting to build the same kind of efficient all-weather system for finance that we insist we must have for energy or telecommunications.

We are also shifting increasingly towards a world of mounting tensions between the great powers, where the call of protectionism is becoming stronger. Finance has become a diplomatic weapon: from imposing extraterritorial sanctions to seeking influence through the provision of highly competitive funding for infrastructure. Yet Europe is falling increasingly far behind the US and China and risks having to accept a real abdication of sovereignty and loss of influence.

The new European authorities will have two options when they examine these issues.

The first, more ambitious scenario would reflect a shared political determination to equip Europe with a powerful financial sector capable of rivalling that of the US and China. This would involve lifting barriers to the movement of capital and liquidity between EU countries. Further integration of the European banking market would spur consolidation, creating more competitive and stronger European champions. The revival of capital markets union could also be undertaken in parallel. This would mark a genuine step forward.

The second possible scenario would see the EU’s ambition confined to a series of small steps and would not allow for real integration of the European banking market. In such a scenario, Brussels would focus on adopting the Basel IV rules for the EU and strengthening our bank supervisors, but would leave intact the current system of separate national markets. Europe’s economies would still rely mostly on the banking sector for finance in the absence of deeper, unified capital markets.

Banks would have to adapt to this inertia as best they can. Each would seek to deepen its presence in its local markets as much as possible but there would probably be no pan-European mergers. Over time, they are likely to gradually build up their activities outside the eurozone. This second situation would not be good news for either banks or European economies. Yet investors see this scenario as the most likely outcome. That view, combined with persistently low interest rates and never-ending regulatory pressure, continues to weigh on European bank share prices.

But it is not too late to push forward. No miracle is needed, just long-term vision, consistency and steady progress toward meaningful banking union. Let’s not wait for a new financial crisis before we act on this issue and let’s finish building the EU banking sector and, more broadly, the financing system we need for the benefit of all Europeans.

This article was initially published in the Financial Times on Monday 29 July 2019: https://www.ft.com/content/97bfb55c-ad44-11e9-b3e2-4fdf846f48f5