Tuesday, February 24, 2015

Cost containment, deleveraging, restructuring, rationalization, resizing process, and balance sheet repair – The State of the European Banking Sector

In October 2014, the ECB has published a report on the structure of the European banking sector.

In a nutshell: “Cost containment”, “deleveraging”, “restructuring”, “rationalization”, “resizing process”, “balance sheet repair”, and the like all describe the same finding: The sector is shrinking.

For people working in banks, this is certainly less of good news. The cake is actually getting smaller but the number of invitees to the party remains pretty much the same.

But is this all bad? No. As a matter of fact, the ECB says that the overall efficiency of the system continues to increase.

Number of credit institutions

The total number of credit institutions is down 12 % since 2008. Only Estonia (+ 33 %), Latvia (+ 93 %), Luxembourg (+ 1 %), and Malta (+ 17 %) have seen increases. The highest decreases can be found in Cyprus (- 46 %), Greece (- 42 %), Netherlands (- 23 %), and Spain (- 28 %).

Number of foreign branches

Overall, the number of foreign branches in Eurozone countries has, since 2008, been flat. However, this masks huge differences across the continent:

Highest decreases can be observed in Estonia (- 36 %), Greece (- 33 %), and Portugal (- 14 %), while Belgium (+ 14 %), Cyprus (+ 17 %), Latvia (+ 50 %), Netherlands (+ 22 %), and Slovakia (+ 67 %) show the most important increases in foreign branches.

Total assets of domestic banking groups

In aggregate, total assets of domestic banking groups are down 18 % since 2008.

Most remarkably, Belgian banks loose 61 %, Cyprus banks 53 %, Irish banks 49 %, Luxembourg banks 32 %, and Dutch banks 22 %. Only Finland (+ 29 %) and Malta (+ 63 %) have seen growing markets since 2008. Total assets in the Spanish domestic banking sector are flat.

At the end of 2013, total assets amounted to 23 BEUR. This represented roughly twice the 2013 GDP of all Eurozone countries.

Total assets of foreign subsidiaries and branches

Total assets of foreign subsidiaries and branches in the Eurozone shrank even more. Overall, they are down 29 % since 2008.

The most important downward trend could be observed in Estonia (- 46 %), Germany (- 72 %), Greece (- 87 %), and Ireland (- 53 %). Belgium (+ 124 %) and Netherlands (+ 50 %) experienced a much higher influence of foreign financial institutions on their markets.

Looking at the entire Eurozone, the influence of European banks in other European markets remains very moderate: By the end of 2013, total assets of foreign subsidiaries and branches represented only 14 % of aggregate total assets (including domestic banking groups as well as foreign subsidiaries and branches).

Distribution of banking sector assets by type of institution

Large European economies are very much dominated by local financial institutions. This is especially true for France, Germany, Greece, Italy, Netherlands, and Spain, where assets held by domestic credit institutions are around or exceed 90 % of total banking sector assets.

By contrast, Estonia, Finland, Luxembourg, and Slovakia are all heavily dominated by subsidiaries of EU credit institutions.

Malta is, obviously, a hub for branches of non-EU credit institutions.

Market concentration of European credit institutions

Overall, the markets for credit institutions in Europe are not very concentrated. On average, the Herfindahl index stands at 1,202. Given the index ranges from 0 (fully competitive market) to 10,000 (monopoly) and the fact that only values above 1,800 signal high concentration, Europe is a pretty competitive market.

Austria (405), Germany (266), Italy (406), and Luxembourg (357) are at the lower end of the index, whereas Finland (3,080), Greece (2,136), and Netherlands (2,104) can be found at the upper end of the index.

The findings of the Herfindahl index match the statistics of the share of total banking assets held by the five largest credit institutions.