Publication of the Report on EU Banking Structures

The European Central Bank (ECB) Monday published its annual report on EU banking structures. The report, which has been published every year since 2002, reviews the main structural developments in the EU banking sector in 2007 and the first half of 2008. It also contains two special features on the incentive structure of the ‘originate and distribute’ model of financial intermediation and the on a survey of EU banks on major risks on the year ahead (covering the period from spring 2008 – spring 2009).

The most important structural developments that took place in the EU banking sector are as follows:

The consolidation process (as indicated by the decreasing number of credit institutions) continued in 2007, although with signs of a moderate slowdown. Overall, the number of credit institutions declined by 162 (from 8,512 to 8,350) while the corresponding figure in 2006 was 179. Market concentration increased, reflecting, on the one hand, the decline in the number of credit institutions and, on the other, the dynamic growth of certain banking groups, partly as a result of mergers and acquisitions (M&A) activity. While the total number of M&A transactions declined in 2007,the total value of M&As, increased with 2007 being the second consecutive year in which the total value of M&A transactions exceeded that of 2000, which marked the previous peak. A further noteworthy trend is the significant increase in the number of acquisitions by EU credit institutions of banks located in third countries, which had been larger than the respective figure for domestic deals over the past three years. Finally, intermediation continued to increase in the EU, with the ratio of banking assets to GDP in the EU as a whole rising from 319 per cent in 2006 to 334 per cent in 2007.

The special feature on the incentive structure of the ‘originate and distribute’ model first presents the main developments in the ‘originate and distribute’ model before and during the financial turmoil. Subsequently, it reviews the possible conflicts of interest, or misaligned incentives, between the key actors involved in this model, namely originators, intermediaries and third parties and discusses the role of investors. Finally, the special feature considers various measures that could mitigate conflicts of interest in the ‘originate and distribute’ model, such as retaining ownership of some risk in structured finance transactions, reviewing remuneration schemes and improving the documentation for securitisation transactions.

The special feature on the survey of EU banks on major risks in the year ahead presents the findings of the fourth survey on banks’ perception of the main risks for the coming year (i.e. the period spring 2008 to spring 2009). The EU banks participating in the 2008 survey identified financial markets as the major source of risks for the period under investigation, followed by macro-economic developments. This contrasts with the results from the three previous surveys (conducted in 2004, 2005 and 2006) where banks consistently ranked macro-economic developments as the most important source of risks. The outcome of the 2008 survey reflects the high degree of uncertainty about the potential impact of current financial market developments on banks’ financial results and capital positions. On the opposite end of the spectrum, the survey showed that risks stemming from regulatory developments or from individual strategic developments were viewed by banks as the least important. This can be attributed to the fact that the uncertainty on some key regulatory initiatives (e.g. the Capital Requirements Directive and the Markets in Financial Instruments Directive) has declined. However, it should be highlighted that the survey only presents a relative ranking of risks and that all risks identified are important and should be managed efficiently.

The report was prepared by the Banking Supervision Committee of the European System of Central Banks (ESCB). The Committee comprises representatives of the national central banks and banking supervisory authorities of the European Union and the ECB.