Report on EU banking structures

25 October 2006

The European Central Bank (ECB) today published its annual report on EU banking structures, prepared by the Banking Supervision Committee of the European System of Central Banks (ESCB). The Committee comprises representatives of the national central banks and banking supervisory authorities of the European Union and the ECB.

The report, which has been published each year since 2002, reviews the main structural developments in the EU banking sector in 2005 and until mid-2006. It also contains two topical studies on the impact of an ageing population on EU banks and the changing structure of EU banks’ funding, as well as the implications of this on their activities.

1. The most important structural developments that took place in the EU banking sector are as follows:

The consolidation process initiated in the 1990s is still producing downsizing effects at aggregate level, with a further decline in the number of credit institutions in 2005 of 2.8% and 1.7%, in the euro area and EU, respectively. At the same time, banking assets displayed strong growth (especially in the new Member States with an increase of 21.7% in 2005), while the number of bank branches rose slightly on aggregate. This consolidation process is taking place in parallel with a pick-up in cross-border mergers and acquisitions (M&As) in 2005, following the slowdown registered after 2000. Recent cross-border M&A activity has increasingly involved retail market intermediaries.

Non-bank assets of financial intermediaries grew considerably in 2005. Notably, investment funds’ total assets registered an increase of exactly 14% in the EU and pension funds expanded by almost 20%. This trend towards disintermediation does not necessarily imply a reduced role for banks, as the latter are further developing fee-earning activities and rely to a larger extent on capital market and asset management activities.

2. The study on the impact of ageing on EU banks aims to identify potential channels through which demographic changes, such as changes in life expectancy, fertility rates and migration, could affect retail banking in the European Union.

The overall impact of demographic changes is difficult to assess, as different factors may have counterbalancing effects on banks’ income and profitability. On the one hand, demographic changes may exert downward pressure on banks’ intermediation ratios and on the demand for consumer credit and mortgages, thus reducing net interest income. On the other hand, banks may respond to these developments by offering new products tailored to more senior customers, as well as asset management and advisory services, leading to an increase in non-interest income. At the same time, the potential increase in new products could be accompanied by new risks (e.g. longevity risks), which may require banks to adapt their risk management. Banks could also respond to demographic changes by diversifying their activities on an international level. Competition within the banking sector and from non-bank financial intermediaries may also intensify.

3. The study on the changing structure of EU banks’ funding and the implications for banks’ activities focuses on developments in the composition of banks’ liabilities since 2000. The analysis suggests that customer deposits still constitute the largest part of the banks’ funding base (representing 33% in 2005), although these deposits are becoming more diversified. New and more complex deposit instruments may show different behavioural characteristics than traditional deposit instruments and may also expose banks to reputation risks.

A slight shift towards short-term market funding can be observed. With regard to overall market funding, the report shows banks increasingly using specific instruments such as mortgage bonds and securitisation. A growing reliance on wholesale funding offers scale advantages, but at the same time is more expensive than funding via deposits. The shortening of the average maturity of banks’ funding may have an impact on their profitability and risk exposure. Finally, centralised liquidity management has increased the importance of intra-group funding. Notwithstanding the benefits associated with a more efficient management of groups’ internal capital flows, increased intra-group funding may result in an increase in intra-group and cross-border contagion risks.

The report can be downloaded from the “Publications” section of the ECB’s website ( Printed copies are also available free of charge from the ECB’s Press and Information Division at the address given below.

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