The financial crisis has had dire consequences on the banking sector’s landscape. Of the 8,600 entities that operated in Europe in 2008, only 6,500 remained at the beginning of this year. In addition, these banks now have to operate under a regulatory framework that’s much stricter than the one that existed before the crisis, in a market that has also changed. All this is leading European banks to shift their business models. Do they now have a more retail-minded profile than before the crisis? That’s what it looks like.
Let’s see why. In November 2016, the European Commission announced a package of legislative measures. A profound regulatory reform that touched all the bases: capital, liquidity, leverage and capacity to absorb losses. This package came on top of the more than 40 legislative initiatives agreed since 2007 in the financial regulation framework.
This resulted in the need to increase regulatory buffers. In addition, banks have been operating in an environment where capital markets continue failing to function properly. In fact, the ECB has kept its asset purchase program unchanged. These factors have resulted in an additional consequence: A shift by financial entities towards a business model, lending greater weight to retail, in contrast to the investment banking model.
According to a report published by BBVA Research, in recent years, European banks have been turning, more and more, to retail deposits as a source of funding for their activities. This has happened in virtually all countries, albeit to a greater extent in those with a clear retail profile (Eastern Europe).
Retail deposits have increased substantially since the outbreak of the crisis by over 30% (e.g. from €6,900 billion to €9,100 billion in the euro area). As a consequence, retail deposits, which represented only 22% of total assets in 2008, now account for almost 30% of the funding sources used by euro area banks.
Regarding loans, their evolution has been somewhat different. A slowdown in economic activity and the excessive leverage in some systems limited the demand for new loans. And this was more pronounced in countries where the retail component was larger. On the other hand, in banking systems with the smallest proportion of loans to businesses and households, retail loans tended to expand over the crisis.
At country level, there is a clear divide between emerging and developing European countries. In the former, loans and retail deposits represented more than 50% of total assets. By contrast, in Western European countries, they make up less than 30%. Spain is in an intermediate situation, with a much smaller investment banking business than large French, English or German banks.