The European Central Bank (ECB) has published an analysis finding that euro area banks are more competitive than for most of the period since the global financial crisis, supported by stronger balance sheets and wider intermediation margins. Greater competitiveness supports monetary policy transmission, while cost efficiency and deeper market integration offer scope for further gains. The assessment distinguishes competitiveness based on sustainable profitability, adequate capital and affordable funding from profits generated by exploiting market power.
Bank valuations have narrowed the gap with US peers since 2023, although significant differences remain across euro area countries. More competitive banks transmit policy rate changes more strongly to household deposit rates, while differences for corporate deposits are less pronounced. Transmission to lending rates does not depend on competitiveness, indicating that higher deposit remuneration at more competitive banks does not come from extracting higher rents from borrowers.
Improvements in cost efficiency have significant and persistent positive effects on competitiveness, whereas the estimated effect of lower capital requirements is not statistically significant. Investment in digitalisation and artificial intelligence, alongside streamlined operations, could deliver further efficiency gains. Completing the savings and investments union and pursuing consolidation, including across borders, could also reduce fragmentation and improve efficiency. However, mergers increase market shares, which could weaken competition in local banking markets and monetary policy transmission. Consolidation across borders in a more integrated euro area lending market could instead strengthen banks’ intermediation capacity and borrowers’ access to credit through the policy cycle.