Frank Elderson: Fireside chat

Conversation between Frank Elderson, Vice-Chair of the Supervisory Board of the ECB and Member of the Executive Board of the ECB, and Marlene Schörner, Policy Fellow for EU Financial Markets at the Jacques Delors Centre at the “Fewer Rules or Fewer Borders? What Our Banks Need to Finance Europe’s Future’’ event organised by the Hertie School of Governance, Berlin

European banks are doing much better than they used to. Their profitability has caught up with that of US banks since the pandemic, and cost-to-income ratios in the EU are now better than in the United States. Asset quality is also improving: the NPL ratio has fallen from 6% in 2015 to 2%, and mergers seem to be accelerating. Why are we still talking about a competitiveness problem?

European banks are indeed in a strong position: not only do they now have more capital, more liquidity and better risk management frameworks, their profitability has also improved remarkably. For example, banks’ return on equity has recovered significantly and stabilised at around 10%, reaching some of the highest levels observed since the establishment of the Single Supervisory Mechanism (SSM). Our latest supervisory statistics, to be published next week, will confirm this positive trend.

Investors are increasingly recognising this progress. The valuation gap with US banks has narrowed significantly, with the average price-to-book ratio of European banks now standing close to 1.5. This demonstrates an important point: resilience, competitiveness and profitability are not conflicting objectives for banks. On the contrary, they reinforce one another.

Importantly, banks that are both resilient and competitive deliver a double dividend: they are better able to withstand shocks, but also better able to continue financing households and businesses when the economy needs them most – just as they did during the pandemic or during the energy shock following Russia’s war against Ukraine.