Euro area banks have become more competitive than during most years since the global financial crisis, helping monetary policy reach customers more effectively, the European Central Bank said.
Stronger balance sheets and wider lending margins helped banks narrow their valuation gap with US peers since 2023, the central bank said. It published the findings on Nov. 10 in “Bank competitiveness and its role for monetary policy”, by Lorenzo Ferrante, Franziska Maruhn and Carla Valero Escribá.
The authors assessed competitiveness through share valuations, profitability and a broader measure comparing banks’ returns with those of portfolios designed to match their activities. They defined competitive banks as those able to sustain profits and lending through disruptions without relying on market power.
More competitive banks passed interest rate changes through to household deposits more fully, the authors found. Their analysis tracked deposit rates after a one percentage point policy rate increase, using data through March 2026.
The difference for business deposits was less clear because the ranges around the estimates partly overlapped, the paper said. Competitiveness did not affect how lending rates responded, suggesting banks did not finance higher deposit payments by charging borrowers more.
During the pandemic in 2020 and 2021, more competitive banks relied less on government-guaranteed loans and targeted central bank funding, the authors said. They were also better able to pass on monetary stimulus, measures intended to support borrowing and economic activity.
Lower capital requirements had no statistically clear effect on competitiveness, the authors found. Higher requirements can raise costs for vulnerable banks, but they also help banks withstand shocks and limit excessive risk-taking.
Improved cost efficiency produced lasting gains in competitiveness, the paper said. That analysis covered the fourth quarter of 2015 through the first quarter of 2026 and accounted for differences in liquidity, funding and other bank and national characteristics.
Digital technology, simpler operations and selective branch closures could help banks cut costs, the authors said. Banking groups have grown while operating expenses relative to equity have generally fallen, supported by branch closures, staff reductions and online banking.
Almost half of bank executives’ references to artificial intelligence adoption concerned potential future cost savings, the central bank found. Its analysis used a large language model to examine 761 earnings calls from 51 euro area banks, including calls through the second quarter of 2026.
Greater geographic reach was associated with lower costs relative to income in an analysis of 1,034 euro area banks, the central bank said. Cross-border mergers and deeper financial integration could therefore improve efficiency and support lending through interest rate cycles.
Mergers also increase banks’ market shares and could weaken local competition and the transmission of monetary policy, the authors said. They argued that cross-border consolidation in a more integrated lending market could benefit borrowers through greater stability and access to credit.
