Europe must overcome banking fragmentation, says Eurogroup president
Europe's fragmented banking market has become a strategic vulnerability that could undermine the continent's ability to finance its own future, according to Eurogroup President Kyriakos Pierrakakis. “Fragmentation is no longer only a financial inefficiency; it is a strategic vulnerability,” Pierrakakis said in an interview with the European Central Bank's (ECB)…
Europe’s fragmented banking markethas become astrategic vulnerabilitythat could undermine the continent’s ability tofinance its own future, according toEurogroup President Kyriakos Pierrakakis. “Fragmentation is no longer only a financial inefficiency; it is a strategic vulnerability,” Pierrakakis said in an interview with the European Central Bank’s (ECB) Supervision Newsletter. His comments come as European policymakers seek tostrengthen the banking unionandsavings and investments unionwhile also improving thecompetitiveness of European banksin the face of rising investment needs, global competition and geopolitical pressures. Pierrakakis said Europe had succeeded in building a banking system that was “strong, stable and resilient”, but argued that the challenge had now shifted towards making finance adriver of competitiveness and long-term growth. Europe needs toinvest more heavily in innovation, thegreen and digital transitions,defence,infrastructureand the companies expected to shape its future, he said. Thesavings and investments unionand acompetitive banking sectorshould therefore be viewed as closely connected, with banks continuing to provide thebackbone of financingfor the European economy. “If we want the savings and investments union to succeed, we needbanks that can operate on a truly European scale, support businesses wherever they are in theSingle Marketandchannel capital efficientlytowards Europe’s strategic priorities,” Pierrakakis said. He identifiedgreater cross-border banking,appropriate regulationandsimplificationas three priorities for creating a more integrated market. Capital and liquidityshould be allowed tomove more freely within the banking union, supported bystronger common safeguardsandgreater trust between supervisors. Anintegrated banking market, he said, would allow capital to reachmore productive investment opportunities, provide businesses withmore financing optionsand makebetter use of European savings. At the same time, Pierrakakis rejected the idea thatimproving competitivenessshould meanweakening regulation. “Adapting regulation is not about lowering standards; it is about making our frameworkmore predictableand better able to support investment, innovation and sustainable growth,” he said. He also called forunnecessary administrative burdens to be removedandprudential and resolution frameworksto become more coherent, arguing that banks should spend less time dealing withavoidable complexityand more timefinancing households and businesses. The same approach, he said, should apply to the long-running debate over aEuropean deposit insurance scheme, or EDIS. Pierrakakis argued thatcommon depositor protectionandmarket integrationmust move forward together, building on the sequence agreed by the Eurogroup in 2022. The first stage involvedstrengthening the common frameworkfor bank crisis management and national deposit guarantee schemes, followed by anassessment by consensusof the remaining elements of banking union. The recently adoptedreform of the crisis management and deposit insurance frameworkcompletes that first stage byimproving the handling of bank failures,strengthening depositor protectionandlimiting the potential burden on taxpayers. The next priority should beeffective implementation, while Pierrakakis also welcomed the European Commission’s intention to replace its 2015 EDIS proposal with asimpler frameworkcovering responsibilities and financing at national and central levels,potential liquidity shortagesandequal protection for covered depositsacross the banking union. TheEurogroup’s July work programmeprovides a route towards assessing progress since 2022 and identifying further measures toremove barriers to completing banking unionahead of Commission legislative proposals expected in 2027. Pierrakakis saidbanking unionand thesavings and investments unionwould be among his key priorities as Eurogroup president, describing them as central toEurope’s competitivenessand ability to finance its strategic ambitions. “The stronger Europe wants to be, themore important economic coordination becomes,” he said, pointing toweaker productivity,intensifying global competition,geopolitical fragmentation, higher investment needs and a changing security environment. He said the Eurogroup’s value lay partly in bringing finance ministers together forfrank strategic discussionsand helping them develop acommon understanding of economic challenges. “I often say that the Eurogroup’s greatest contribution is helping Europedevelop a shared vocabulary,” Pierrakakis said. As president, he wants the forum to becomemore dynamic and forward-looking, with greater attention toartificial intelligence,demographic change,Europe’s investment gap,geopolitical fragmentationandeconomic sovereignty. He also backed the Eurogroup’squality of public finances exercise, saying that examining theeffectiveness, efficiency and governance of public spendingcould help governments learn from one another and makebetter use of increasingly limited fiscal resources. Onbanking competitiveness, Pierrakakis saidresilience remained the foundationof the sector but was no longer sufficient. Europe also needed banks capable offinancing a new growth model, particularly as innovators often struggle to find thefinancial depth and scalerequired to become globally competitive businesses. Banks still provide around70 per cent of financingto the European economy, he said, and would remain particularly important forsmall and medium-sized enterprises. He identifiedcompletion of the financial integration architecture,greater cross-border banking and consolidation, andregulatory simplificationas priorities. On supervision, Pierrakakis argued thatstrong regulation should not be confused with excessive complexity. “Strong regulation does not have to mean unnecessary complexity,” he said, calling for rules that arerigorous but coherent, proportionate and predictable. He also called forgreater supervisory coordination,clearer expectationsandmore consistent application of the Single Rulebook, whilebetter data sharing and harmonised reportingcould reduce the administrative burden on banks. Pierrakakis drew on his previous experience leadingGreece’s digital transformation in government, arguing that digitalisation should involverethinking institutional processesrather than simply putting existing procedures online. “Digitalisation is not about putting existing processes online; it is about rethinking how institutions work,” he said. He advocatedcollecting information once, usingcommon standardsandsecurely reusing itwhere necessary, allowing supervisors to spend more timeanalysing risksrather than reconciling duplicated data. He also seesartificial intelligence and advanced analyticsas tools that could help supervisorsidentify emerging risks earlierand focus attention where it is most needed. “The value of AI is not that it replaces human judgement; it is that itenables supervisors to ask better questions soonerand make more informed decisions,” Pierrakakis said. The rapid development of powerful AI tools also createsoperational and cyber risks, makingstrong governance,human oversight,cyber security, timely security updates andcontinuous resilience testingessential. Pierrakakis linkedresilience to banking scale, arguing that European banks remainrelatively small compared with major international competitors. Thefive largest euro area banksare broadly comparable in size with those in the United Kingdom and Japan, despite serving a much larger market, while remainingconsiderably smaller than the biggest banksin the United States and China. Limited cross-border consolidationis one reason for this gap, he said, adding thatinvestment in technologyby Europe’s largest banks as a share of assets has beensignificantly lower than among US peers. “Amore integrated banking sectorwould give European banksgreater capacity to invest in innovationandstrengthen their operational resiliencein order to remain globally competitive,” Pierrakakis said. He also pointed toGreece’s experience in dealing with non-performing loansas an example of the importance of prevention. “Thebest way to deal with bad loans is to prevent them from accumulatingin the first place,” Pierrakakis said, arguing thatprudent lendingandstrong underwriting standardswere the first line of defence against future asset-quality problems. TheGreek banking sector, he said, hadsubstantially repaired its balance sheetsandimproved asset qualityover the past decade, demonstrating thatdetermined reformsand cooperation between banks, supervisors and public authorities could deliver lasting results. “Resilience begins with prudent lending,” Pierrakakis said, stressing thatcredit disciplinewas particularly important during periods of strong growth, whenlending standards could come under pressure. His broader message was thatresilience should serve as a foundationrather than an end in itself, allowing Europe’s banks tofinance growth and entrepreneurshipwhileprotecting financial stabilitythroughout the credit cycle.