ECB: EU banks are facing growing competition

Banks in the European Union are facing growing competition as a result of deregulation, internationalisation, and the pressure to create shareholder value, which is forcing them to increase income and control costs, the European Central Bank said.

In a report on structural developments in the EU banking sector published today, the ECB said banks are responding to these pressures by enhancing the diversification of their activities, intensifying efforts to reduce costs, streamlining their organisation and taking a more cautious approach to risk.

The report looked at structural developments in the EU banking sector in 2001 and to a certain extent in the first half of 2002.

It said that, due to the volatility and poor performance of financial markets during that period, "legal and reputation risk have become more important for banks".

"Financial innovation and regulatory developments are leading to more sophisticated approaches by banks to their risk management," it said.

"Further improvements in risk management techniques have been observed - especially in the areas of credit risk and operational risk - as banks have started to prepare themselves for the new regulatory framework for capital adequacy ('Basel II')."

The report said that increasing emphasis is being placed by the supervisory authorities on consumer protection issues. As banks increase their investment banking and asset management activities, so their customers become more exposed to market risk, it said.

"Banks therefore find themselves having to cope with new issues relating to the sale of asset management products, the handling of complaints and questions of consumer redress. The fundamental issue is the extent to which individual investors should take responsibility for their decisions, and the role of banks and authorities."

Overall, the ECB said structural trends identified in the report have enhanced the robustness of the EU banking sector, and thus increased its resilience in the face of the sizeable shocks experienced in the recent past.