Structural analysis of the EU banking sector

28 November 2003

The European Central Bank (ECB) is today releasing a second report on structural developments in the EU banking sector. (The first report was published in November 2002.)

This report has been prepared by the Banking Supervision Committee (BSC) of the European System of Central Banks. (The BSC comprises representatives from national central banks and banking supervisory authorities of the EU as well as from the ECB.) The report summarises the outcome of the Committee's regular monitoring of structural developments in the EU banking sector.

The main purpose of the report is to review structural developments in the EU banking sector in 2002 and, to a certain extent, in the first few months of 2003, as well as to provide an overview of potential new developments. The analysis is based on a wide range of indicators drawn from different data sources as well as on an exchange and assessment of qualitative information by the Committee's member organisations.

The main findings of the report can be summarised as follows:

  • Difficult economic and financial conditions in 2002 had an impact on some of the longer-term trends under way in the EU banking sector. In particular, internationalisation, consolidation and disintermediation slowed down. While international banking activities were scaled down in various countries, linkages to specific regions, such as central and eastern Europe, and regional cross-border banking activities grew further. Consolidation continued to advance, albeit at a slower pace. While this led to some further increase in concentration, competitive pressures remained high in most countries' banking sectors. Disintermediation lost ground as challenging conditions in financial markets led to lacklustre equity and bond issuance activity, and a fall in securities investment, with bank loans and deposits becoming more important.
  • Banks stepped up their cost-saving and efficiency-enhancing efforts, as income streams suffered from the challenging operating environment. This entailed further restructuring of branch networks and a scaling down in the number of employees, albeit to a lesser extent than in 2001.
  • Banks also took steps to further improve their risk management procedures with a view to controlling credit and operational risks as well as in response to expected changes in the regulatory capital framework (Basel II).
  • The banking sector remains predominant in financial intermediation in the EU. In a difficult operating environment, banks increasingly focused on their traditional retail operations in their home markets. Branches remained the core distribution channel, but simultaneously banks became more focused on the provision of advice-intensive services and moved away from the pure processing of transactions. Remote distribution channels are still widely seen as complementary to the branch network. Consumer protection and the restoration of investor confidence have become more important structural issues to which banks responded via organisational changes and efforts to improve corporate governance.

Overall, banks in the EU have remained robust despite temporary and isolated pressures on liquidity and profits. With regard to the potential future outlook, internationalisation, consolidation and disintermediation may regain importance in the future if the banking environment improves and if, as expected, the gradual economic recovery proves to be durable. In this case, some unwinding of the concentration on core activities in home markets could be expected. The banking sector will also benefit from current investments in risk management procedures, which are expected to contribute to preserving financial stability in the medium to long term.

The report can be downloaded from the "Publications" section of the ECB's website [pdf 200 kB]. Printed copies are also available free of charge from the ECB's Press and Information Division (fax: +49 69 1344 7404).

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