Reflections on the future business model of European banks and the supervisory approach

Abstract

Relevant forces are reshaping the banking sector and redefining banks’ business models. On the one hand, banks have been facing structural difficulties, such as a prolonged low interest rate environment and the costs of excess capacity. In addition, banks need to deal with more recently developing challenges, like the digital transformation, the entrance of new competitors in the banking sector and the climate change. A demanding regulatory environment and the impact of the COVID-19 pandemic further aggravate the situation. As a result, European banks are not being able to produce enough returns to cover their cost of capital, making it necessary to urgently face these challenges. To that purpose, banks may adopt different strategies, some of them complementary, among which the following can be highlighted: the reduction of overcapacity, consolidation, diversification or specialisation and the exploitation of the value of long-term relations with clients, as well as taking advantage of the opportunities stemming from digitalization and sustainable finance. Supervisors will need to stay abreast of the changes in the banking environment and closely monitor the adaptation processes. This article is intended to serve as a basis for discussion, given that several of the issues raised are controversial and uncertain under the current fast changing environment.