Is Europe Unified in its Banking System? The Key Questions and Challenges

We're referring, of course, to the so-called 'banking union', which saw the creation of the European Central Bank (ECB) to supervise national financial institutions and optimise their levels of resilience. This has definitely led to a marked improvement in the resilience of the banking sector across Europe, although the inherent fragmentation in this space continues to create issues for institutions and the Euro.

We'll explore this in the post below, while appraising the key challenges facing the banking union in the EU and how this may impact on European Economic Area (EEA) members like Norway.

Just How Unified is Banking in the EU?

It's more than a decade now since the great financial crash, which devastated the world's fiscal markets and created a sovereign debt crisis in Europe.

While the idea of a banking union was introduced to boost the subsequent recovery and help avoid the same scenario from playing out again in the future, however, the last 10 years has seen Europe's economic growth pale in comparison to countries such as the U.S..

For example, Europe has registered growth above 2.0% for 34 months or 28.3% of the time since 2009. Conversely, the U.S. has hit this growth rate for 75 months in total, or an impressive 62.5% of the decade as a whole.

Some may argue that the main reason for this is that the banking sector in the EU remains far too fragmented, suggesting that the supposed union and the powers of the ECB have not stretched far enough.

Make no mistake; the financial landscape in the EU is incredibly diverse and sees each member state apply its own separate framework to manage the relationship between their financial system and the corporeal economy.

Of course, the EU is limited in terms of the economic controls that it can effectively impose on member states, but there's no doubt that there remains scope for the remit of the ECB to be extended in the future.

The Challenges Facing Banking Union in the EU and EEA Members Such as Norway

Aside from the surprising and fundamental lack of harmonisation between some member states, there are other challenges facing banking union and unification in the single bloc.

Despite the incremental improvements that have been displayed by Europe's banking sector during the last five years (including enhanced resilience), for example, the industry's profitability has remained surprisingly low.

At just over 6% in Q4 2018, Euro area banks' return on equity (RoE) flatlined in relation to the previous years' figures and remained lower than the level required for profits to outweigh the cost of equity.

This is diametrically opposed to the entire concept of banking, with most independent Euro banks trading at price-to-book ratios that are lower than their international peers.

This is also raises issues for EEA members like Norway, who play a key role in supporting governance in a unified European banking sector while also adhering to the same rights and obligations as EU-based institutions.

This also means that Norway has limited powers to influence and dictate EU policy, and in instances where banking profits are in decline this may encourage lobbyists to challenge the European Commission on their continued harmonisation plans.

So, in addition to liaising with international transaction support solution providers such as RSM, financial institutions in Norway may also want to consider seeking out legal and risk-management advice as they consider their long-term futures.

This is particularly true given the UK's potential arrival as a third country and an EEA member (following its exit from the EU), as this will dramatically impact on the balance of power and the short-term union within the banking sector.