Tuominen highlights banking resilience but warns of geopolitical risks
Anneli Tuominen, Member of the ECB Supervisory Board, stated that Europe's banking sector is significantly stronger but faces vulnerabilities from geopolitical tensions and operational risks. She emphasized the need for further integration to unlock its full potential.
Stronger foundations, new vulnerabilities
Europe's banking sector has significantly strengthened since the creation of European banking supervision.
The Common Equity Tier 1 ratio has risen from 12.7 percent to 16.2 percent, and non-performing loans have fallen from 7.5 percent to 1.9 percent.
Profitability has also improved, with return on equity reaching 9.5 percent last year, compared to an average of 5.4 percent in 2015-21. However, macro-financial uncertainty due to geopolitical tensions and rising cyberattacks pose significant challenges.
These risks impact credit, liquidity, market, and operational resilience, prompting supervisors to focus on targeted reviews and cyber stress tests.
Addressing market fragmentation and CRE risks
Supervisors are preparing for potential downturns, requiring banks to model negative scenarios and conducting reverse stress tests on geopolitical risks.
Vulnerabilities persist in commercial real estate (CRE) markets due to tighter lending standards and higher interest rates, with Austria noted as a country facing relatively high CRE risks in certain banks.
European banks' profitability and global dominance lag US peers, largely due to market fragmentation across 27 Member States.
Tuominen stressed the need for a complete banking union and capital markets union to facilitate cross-border operations and achieve scale effects.
Integration is the imperative
Despite significant improvements in capital and asset quality, the European banking sector remains hampered by its fragmented structure.
Geopolitical and operational risks highlight the urgency for a unified approach, which current national differences impede.
True resilience and global competitiveness will only be achieved through deeper banking and capital markets union, demanding decisive political will.