Main Challenges and Prospects for the European Banking Sector: A Critical Review of the Ongoing Debate

Abstract

This paper discusses the competing forces that are reshaping the European banking industry and the medium-term consequences for profitability and competition within the sector. The paper highlights that banks are rethinking their business model to address four challenges to emerge in the last decade: low interest rates, tighter regulation, technological innovation, and increasing competition from non-bank intermediaries. The shock generated by the Covid-19 pandemic adds to those developments and has the potential to accelerate them. Our analysis suggests that in order to successfully compete in the medium term banks will likely have to exploit the benefits of digitization, mainly deriving from the reduction in operating costs and the increase in the scale of production. Accommodating the surging demand for green finance is also likely to represent an important source of profits, resulting from the growth of the green market and the development of new specialized products and advisory services. Success in these strategies will presumably require a significant reorganization of banks’ activities to leverage on economies of scale and scope.