Banks can finance EU priorities, but risk-sharing is key

The European Union faces strategic challenges requiring annual financing of around €1.2 trillion for 2025–2031, equivalent to 7.5 percent of its GDP.

These needs span the green transition, digital transformation, and strengthening defence capabilities.

Private financing alone accounts for €690 billion annually, with banks expected to play a major role given Europe's bank-based financing structure.

However, not all strategic investments are equally suited to traditional bank lending.

Projects with long maturities, higher risks, capital intensity, uncertain cash flows, or limited collateral are less naturally suited.

Such investments require alternative structures like project finance, syndicated loans, or securitisation, or other types of market-based finance to spread risks and accommodate their specific profiles.

Prudential regulation has significantly strengthened bank resilience since the Global Financial Crisis, improving capital and liquidity positions and reducing systemic crisis probability.

While higher capital requirements have marginally pushed up lending rates, they have not significantly impacted long-term bank financing levels.

Instead, these requirements have contributed to a shift towards lower-risk lending, as riskier exposures incur higher capital costs.

Banks' lending decisions are also shaped by factors beyond regulation, including expected losses, liquidity costs, internal risk appetite, commercial return targets, available expertise, and market fragmentation.

These considerations collectively determine whether projects are deemed 'bankable'.