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European Banking’s Moment of Merger Truth

Like the 2008-09 financial crisis, which left European Banks saddled with excess capacity, diminished profitability, and tarnished reputations, the COVID-19 pandemic is forcing another sweeping change in the industry. This time, however, the industry's biggest problem is not "too big to fail," but rather "too slow to adapt."

BARCELONA – The days when bankers could pay 3% interest on their customers’ deposits, lend at 6%, and make it to the golf course by 3 p.m. (the “3-6-3 rule”) are long gone. While some bankers remain oblivious to the looming threats to their business, the fact is that banks are now in dire straits, judging by their dismal valuations (in terms of price-to-book ratios) and low current and expected future profitability.

In the pre-pandemic world, low interest rates, fintech competitors, and rising regulatory compliance costs were among the greatest threats to the industry. Since the 2008-09 financial crisis, Europe’s banking industry, in particular, has been saddled with excess capacity and low profitability. And now, COVID-19 has made matters worse, eliminating any hope that interest rates will rise anytime soon.

According to Andrea Enria, the chair of the European Central Bank’s Supervisory Board, non-performing loans could reach €1.4 trillion ($1.7 trillion) in the eurozone as a result of the current crisis. Moreover, COVID-19 has accelerated the process of digitalization, which has put even more pressure on traditional banking. Customers and banks have discovered that they can operate remotely with ease, and this has made European bank branch networks appear even more overextended than they already did. They will need to be cut to size much sooner than anticipated.

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