Report on EU banking structures

The European Central Bank (ECB) today published its annual report on EU banking structures, prepared by the Banking Supervision Committee of the European System of Central Banks (ESCB). The Committee comprises representatives of the national central banks and banking supervisory authorities of the European Union and the ECB.

The report, which has been published every year since 2002, reviews the main structural developments in the EU banking sector in 2006 and until mid-2007. It also contains two topical studies on the liquidity risk management of cross-border banking groups in the EU and the distribution channels in retail banking.

The most important structural developments that took place in the EU banking sector are as follows:

The consolidation process (as indicated by the decreasing number of credit institutions) continued at aggregate level, although at a declining rate (approximately 2% in both the euro area and the EU in 2006). At the same time, intermediation (in terms of total assets of the banking sector) grew at an even higher rate than that of GDP (i.e. 12% in the EU and 10% for the euro area), reaching 321% and 297% of their GDP respectively. The decline in the number of credit institutions and the increase in the total assets of the EU banking sector signal the emergence of larger institutions. The overall number of M&A transactions has been declining since 2000, with the exception of cross-border deals between EU banks in third countries, which have been increasing especially in the last two years. In contrast, the pick-up in the value of M&As observed since 2003 indicates the prominence of a relatively small number of large-scale deals. Finally, concentration in the EU banking sector remained unchanged at the previous year’s level, while showing a wide divergence across Member States. Overall, EU banking markets are still characterised by significant structural differences; nevertheless, the dispersion of many of the structural indicators included in Annex I has been declining over time, indicating that the gap between Member States has been narrowing.

The study on liquidity risk management of cross-border banking groups in the EU focuses mainly on issues related to liquidity regulation and to developments in the organisation of the liquidity risk management of banks in the period covered by the EU banking structures report (i.e. mainly until the end of 2006), as well as their financial stability implications.

Cross-border banks do not perceive the fragmentation of liquidity risk regulation in the EU as imposing undue restrictions on the cross-border management of intra-group liquidity. Other regulations highlighted by banks as posing potential obstacles to efficient liquidity risk management pertain to the home/host arrangements and the large exposures limits. Moreover, while cross-border banks acknowledge the initiatives taken by central banks to address problems of international flows of liquidity and the cross-border use of collateral, they still identify certain obstacles regarding the pooling of liquidity and the cross-border use of collateral.

Despite the differences in the organisation of liquidity risk management of cross-border banks, the trend towards the centralisation of liquidity management policies and procedures, and the decentralisation of day-to-day liquidity management was confirmed. Sophisticated internal liquidity risk management approaches are still not widely employed, but the larger banks that developed them for their internal management of liquidity risk would also opt to use them for regulatory purposes. On the other hand, smaller banks currently use the regulatory liquidity ratios also for internal management purposes.

Finally, the shortening of the time horizon for payment obligations, the use of more market-based and potentially more volatile funding sources and the increasing need for high-quality collateral were identified as being among the major market developments affecting banks’ liquidity risk management.

The study on distribution channels in retail banking identified the following developments in the distribution strategies of banks: first, branches are being redesigned in terms of location and services in order to become more cost-efficient and better integrated into the new distribution channels used by banks. Second, electronic channels are growing rapidly, not only providing information and transaction services, but also being used for the promotion and sale of banking products. Third, in an effort to address the fierce competition in the area of consumer credit, banks are increasing their cooperation with third parties, such as retailers, financial companies and financial agents/services groups.

These developments, and especially the increasing use of electronic channels, could involve different types of risk (i.e. operational, reputational, liquidity, legal and strategic risk). However, as the importance of electronic channels is still limited for the majority of banks, no significant financial stability concerns have been identified to date. Still, the distribution strategies of banks need to be monitored, also in view of their potential impact on competition and integration in the banking sector.

The report can be downloaded from the “Publications” section of the ECB’s website (http://www.ecb.europa.eu/pub/). Printed copies are also available free of charge from the ECB’s Press and Information Division at the address given below.