Bank competitiveness and its role for monetary policy

Prepared by Lorenzo Ferrante, Franziska Maruhn and Carla Valero Escribá

This box provides evidence on bank competitiveness in the euro area and its relationship with monetary policy transmission. Recently, European institutions have been exploring measures to improve bank competitiveness by reducing cross-border fragmentation and simplifying regulation and reporting requirements (European Commission, 2026). The definition of bank competitiveness is not straightforward. Banks are competitive if they generate profits based on a sustainable business model (rather than by exploiting market power) and are adequately capitalised, with affordable access to market-based funding and liquidity, allowing them to maintain lending during episodes of economic or financial disruption and through policy cycles. Bank competitiveness in turn supports the effective transmission of monetary policy.^[1]

Euro area banks are more competitive now than they have been for most of the period since the global financial crisis, as intermediation margins have widened and balance sheets have recovered (Chart A). One way to assess bank competitiveness is through valuation-based measures of their performance. These reflect investors’ perceptions of expected future earnings and therefore provide a market view of expected profitability and performance. The price-to-book ratios of euro area banks have substantially improved in recent years, reflecting stronger balance sheets and higher intermediation margins as net interest earnings have recovered, narrowing the gap to their US peers since 2023, although there are still significant differences across euro area countries (Chart A, panel a). Another way to analyse bank competitiveness is by looking at bank profitability, which has also improved relative to peers outside the euro area (Chart A, panel b). While valuation-based measures focus only on listed institutions and bank profitability is backward looking, a broader metric, based on replicating portfolios, also shows a substantial improvement in recent years (see Altavilla et al., 2024).^[2]

Chart A

Price-to-book ratio and return on equity for euro area and other banks

a) Price-to-book ratio

(ratio)

b) Return on equity

(percentages)

More competitive banks have demonstrated greater resilience to shocks and transmitted monetary policy more effectively (Chart B). From a monetary policy transmission perspective, bank competitiveness matters, especially if it supports the intermediation capacity of banks over the cycle. During the pandemic shock in 2020 and 2021, more competitive banks were less reliant on lending backed by government guarantees and on the Eurosystem’s targeted longer-term refinancing operations (TLTROs) and were better able to transmit the monetary policy stimulus (Altavilla et al., 2024). More competitive banks also exhibit a higher pass-through to deposit rates, in particular for household deposits (Chart B, panel a). For corporate deposits the differences are less pronounced, with point estimates differing but confidence bands partially overlapping (Chart B, panel b). It is likely that this reflects the fact that more competitive banks are more able to retain deposits by increasing deposit rates during periods of rising rates and more able to lower rates following monetary policy easing without the risk of losing funding. For lending rates, the pass-through is not dependent on bank competitiveness, indicating that more competitive banks are not achieving a higher remuneration of deposits by extracting higher rents from borrowers.

Chart B

The pass-through of monetary policy to deposit rates by bank competitiveness

a) Household deposit rates	b) Non-financial corporation deposit rates
(x-axis: months; y-axis: percentage points)	(x-axis: months; y-axis: percentage points)

Gains in cost efficiency are emerging as a driver of recent developments (Chart C). Changes in competitiveness may reflect various drivers. First, the estimated effect of lower capital requirements on competitiveness is not statistically significant, likely reflecting offsetting factors (Chart C, panel a). On the one hand, higher capital requirements may increase transition costs for individual banks with specific vulnerabilities, thereby negatively affecting profitability. On the other hand, these requirements support the resilience of the banking system to adverse shocks and help prevent excessive risk-taking. In addition, in an environment of generally solid bank balance sheets, targeted increases in capital requirements for individual banks can be absorbed and are not a hindrance to the competitiveness of the banking system.^[3] Second, a less competitive bank may lose market share against other banks, non-banks or financial assets that offer similar services to customers. Indeed, there is an association between an easing of credit standards originating from perceived increases in competition, as reported in the Bank Lending Survey (BLS), and lower bank competitiveness, even after controlling for observed and unobserved characteristics at bank level and country-specific factors (Chart C, panel b). At the same time, overall competition from non-banks has stabilised in recent years, reflecting specialisation in different customer segments and mutually beneficial interaction between banks and non-banks, for instance via securitisations or mutual exposures. Third, improvements in the cost efficiency of banks have significant and persistent positive effects on bank competitiveness (Chart C, panel c). Thus, it is likely that euro area banks can achieve sustained gains in competitiveness through improved cost efficiency.

Chart C

Impact of changes in potential determinants on bank competitiveness

(x-axis: quarters ahead; y-axis: percentage points)

a) Impact of 1 percentage point lower capital requirements	b) Impact of one quarter of BLS-reported competition from non-banks	c) Impact of 1 percentage point lower cost-to-income ratio

Investment in digitalisation and artificial intelligence (AI) technologies is expected to yield efficiency gains, which can also be achieved by streamlining operations and taking a targeted approach to closing local branches (Chart D). The average size of banking groups in the euro area has steadily increased, while operating expenses (as a share of equity) have generally declined. Banks have reduced their operating expenses by streamlining their group structure, closing a substantial number of local branches and reducing their staff, facilitated by the rise of online banking and digitalisation. Looking ahead, banks are increasingly trying to leverage AI technologies to enhance cost efficiency. Almost half of the references bank executives make to AI adoption specifically focus on potential benefits in terms of cost optimisation in the future (Chart D).

Chart D

Mentions of AI in bank earnings calls by topic

(number of mentions per earnings call)

Euro area banks could become more competitive if progress is made on completing the savings and investments union or through further consolidation (Chart E). Market fragmentation prevents euro area banks from achieving the cost efficiency that would allow them to offer competitive lending terms and conditions to borrowers. More competitive banking groups are typically characterised by greater geographical reach, with benefits in terms of lower cost-to-income ratios (Chart E, panel a). Bank consolidation, including across borders, which has been particularly limited within the euro area, would offer an alternative way to further enhance bank efficiency. Evidence from past mergers demonstrates that such consolidation can enhance the operating efficiency, balance sheet health and sectoral diversification of banks, thereby helping to strengthen their intermediation capacity, while at the same time mechanically increasing their market shares (Chart E, panel b). This, taken by itself, would reduce competition in local banking markets and could weaken monetary policy transmission. However, in the case of cross-border consolidation in a more integrated euro area loan market, larger, more diversified and more competitive banking groups could benefit borrowers by enhancing stability and access to credit through the policy cycle and ensuring that monetary policy impulses reach them.

Chart E

Geographical reach, consolidation and bank competitiveness

a) Relationship between geographical reach and cost efficiency	b) Impact of mergers on bank efficiency and other characteristics
(x-axis: geographical reach, kilometres, y-axis: cost-to-income ratio, percentages)	(percentages of standard deviation)

References

Altavilla, C., Begenau, J., Burlon, L. and Maruhn, F. (2024), “Determinants of bank performance: evidence from replicating portfolios”, Working Paper Series, No 2937, ECB, revised January 2025.

Behn, M. and Reghezza, A. (2025), “Capital requirements: a pillar or a burden for bank competitiveness?”, Occasional Paper Series, No 376, ECB, October.

Buch, C. (2025), “The evidence is in: resilient banks build Europe’s growth on solid ground”, keynote speech at the 2025 European Banking Authority Policy Research Workshop on “Bridging capital and growth – the role of financial structures and intermediaries”, Paris, 19 November.

Elderson, F. (2026), “Boosting prosperity through deeper integration”, keynote speech at the conference “Financing Europe: a new era of strategic investment”, Brussels, 12 May.

European Commission (2026), “Competitiveness of the Banking Sector and the Single Market in Banking”, Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, COM(2026) 615 final, 17 July.

Machado, P. (2026), “Competitiveness and simplification – a common agenda for European banks”, speech at the Expansión XVII Financial Forum, Madrid, 28 September.

Vujčić, B. (2026), “Resilience, integration and competitiveness: building the future of European banking”, keynote speech at the tenth annual conference of the European Systemic Risk Board, Frankfurt am Main, 2 October.

Legal Disclaimer:

EIN Presswire provides this news content "as is" without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the author above.