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

41 Pages Posted: 30 Jul 2021

See all articles by Cardillo Salvatore

Cardillo Salvatore

Bank of Italy - Research Department

Raffaele Gallo

Bank of Italy - Research Department

Francesco Guarino

Bank of Italy

Date Written: July 29, 2021

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.

Keywords: banking sector, bank business model, bank profitability, Covid-19, digitization

JEL Classification: G21, G28

Suggested Citation

Salvatore, Cardillo and Gallo, Raffaele and Guarino, Francesco, Main Challenges and Prospects for the European Banking Sector: A Critical Review of the Ongoing Debate (July 29, 2021). Bank of Italy Occasional Paper No. 634, Available at SSRN: https://ssrn.com/abstract=3896355 or http://dx.doi.org/10.2139/ssrn.3896355

Cardillo Salvatore

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy

Raffaele Gallo (Contact Author)

Bank of Italy - Research Department ( email )

Via Nazionale 91
00184 Roma
Italy

Francesco Guarino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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