10 May 2024

Collaboration for a stronger European banking sector

A Policy Debate in Brussels with practitioners explores strategies to strengthen the resilience of the European banking sector

The Policy Debate on “Strengthening the Resilience of the European Banking Sector,” held in Brussels on April 17, 2024, gathered stakeholders to review the European banking sector’s current state and to discuss how to strengthen its stability. Co-hosted by the Leibniz Institute for Financial Research SAFE, the Solvay Brussels School of Economics & Management at the Université Libre de Bruxelles, and the Hessian Minister for federal, European and international affairs and less Bureaucracy, the event aimed to assess existing regulatory frameworks’ adequacy and explore ways to further improve it.

Throughout the discussion, the participants, Andrea Enria, Martin Hellwig, and Elke König, offered valuable insights into the sector’s challenges and potential improvements. Considering recent debates on extending banking regulations, SAFE Senior Fellow Elke König emphasized the need to prioritize existing proposals. “Let’s get Basel III right before we introduce new regulations,” she said. This sentiment was in line with the discussion on regulatory prudence and the importance of trust in supervisory authorities.

Strengthening supranational entities

Andrea Enria underlined the importance of cooperation between national authorities and advocated the strengthening of supranational entities like the European Securities and Markets Authority ESMA. “We have a lot of national authorities to collaborate with, but we need to work together to tackle the issues,” Enria remarked.

Martin Hellwig highlighted the challenges of bank resolution, in particular the difficulty of identifying “hidden” risks and enforcing compliance. Hellwig stated that “there is a significant risk that ‘hidden’ banks, so those that are not closely monitored by regulators until they encounter financial distress, will fall like the Silicon Valley Bank,” underscoring the need for proactive measures. During the debate, he accentuated the dynamics of regional banking, emphasizing the resilience of local savings banks despite market challenges.

SAFE Senior Fellow Elke König speaking at the panel discussion.
SAFE Senior Fellow Elke König speaking at the panel discussion.

Elke König added that differences between the European and US resolution frameworks make it uneasy for people of both continents to talk about the same things since they both have different tools and measures that cannot be compared. “Comparing bank resolution in the US and Europe is like comparing apples to pears. When a US bank is getting resolved, it is done forever. However, this does not have to be the case with a European bank,” she added. Once a European bank enters resolution, it will be restructured by a resolution authority, such as the Single Resolution Board. This restructuring will involve the use of resolution tools to protect the public interest, as well as the continuation of its critical functions and the restoration of the bank as a whole or at least its viable parts.

Enria, Hellwig, and König underscored the need for proactive measures to strengthen the resilience and stability of the European banking sector. Collaborative efforts between policymakers, regulators, and industry stakeholders were seen as essential to address emerging risks and foster a robust banking environment in Europe.

Making Europe competitive

Moving forward, König argued that policymakers and regulators must remain vigilant and responsive to emerging threats. Enhancing transparency, fostering risk management practices, and promoting a culture of accountability would be important steps towards bolstering the resilience of the European banking sector. Stimulating innovation and embracing digital transformation can facilitate greater efficiency and competitiveness, ensuring that European banks remain at the forefront of global finance.

All panelists agreed that now is the time to strike a delicate balance between promoting financial stability and facilitating growth. By cultivating a supportive regulatory environment that encourages innovation while safeguarding against systemic risk, Europe can maintain a competitive position vis-à-vis China and the US.