Even before the pandemic, the European banking sector was suffering from a long malaise. Will it be able to rise again and lead the economic recovery?

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While the European banking sector has weathered the Covid-19 storm, proving its mettle in the face of severe economic downturns, now is the time to take stock and plan how to tackle some of the big issues facing the region’s economy.

By taking action, the sector can gain a strong sense of purpose, increase profits and ensure its ongoing relevance, according to Oliver Wyman’s recent report, “Ready to lead: how banks can drive the European recovery”.

It estimates that up to 25%, or €160bn, of European banking revenues could be realised if the banks get it right. However, it also warns that the toughest tests are still to come, including potential asset bubbles, a speculative frenzy in digital assets, and the possibility of rising inflation and interest rates.

The threat of credit losses also hangs over the industry, as governments begin gradually withdrawing support measures. According to Oliver Wyman’s analysis, actual 2020 figures for single-year credit losses were €110bn, which as 2.2 times greater than 2019 but only 60% of what the industry was expecting. This is good news for 2020, but many believe that the expected credit impact has been deferred rather than abated.

The banking system is in a robust position to play a central role in driving Europe’s economic recovery with strong capital ratios

However, the banking system is in a robust position to play a central role in driving Europe’s economic recovery with strong capital ratios. The industry’s average common equity Tier 1 (CET1) ratio stands at 15.4%, increasing from 14.4% in 2019. Less than 1% of total industry capital sits in banks with CET1 ratios below 12%.

The report outlines five challenges and the actions banks need to take in order to help the European economy get back on track:  

  1. Transition from the emergency: standardised approaches and collaboration to minimise solvency issues and further support businesses;
  2. Rollout of new public sector-backed lending approaches: lead on co-investing in the recovery, strengthening corporate finance advisory and moving to a co-investment model;
  3. Financing the climate transition: develop the financing opportunities and lead on the climate change agenda;
  4. Enabling the digital economy: banking-as-a-service partnerships, closing the customer service gap and creating “beyond banking” offerings;
  5. Building tomorrow’s financial infrastructure: design and build the solution, expand the positive role of banks. 

“Banks need a new mindset and capabilities to deliver this change,” says the report. “In the transition, there will inevitably be a tension with the narrow goal of maximising shareholder value in the near term. Banks that do not step up risk either being marginalised or coerced into doing governments’ bidding anyway — but without the benefits of being on the front foot.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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