EuroFinance

European banks are not fragile. They are well-funded, profitable and resilient. But Europe still lacks a truly integrated banking and capital markets system—and this structural fragmentation is now weighing on competitiveness, according to Karel Lannoo, CEO of the Centre for European Policy Studies (CEPS), a think tank in Brussels.

At the 34th EuroFinance International Treasury Management in Budapest, Lannoo said, “the key focus at the moment is competitiveness and there is a strong awareness that Europe needs to do more to strengthen the competitiveness of both industry and finance.”

Lannoo noted, this concern has been sharpened by many influential policy reports. The Enrico Letta report, by Enrico Letta, former Prime Minister of Italy, states clearly that Europe does not yet have a single market. “This message is repeated constantly by senior policymakers.”

Despite decades of effort, progress remains limited. “The single market project began in the early 1990s,” he noted. “More than 30 years later, we are still discussing how to complete it.”

Stability without competition

Lannoo added, “from a financial stability perspective, European banks are not the issue,” he said. “They have solid returns, strong capital positions and are far better capitalised than before the financial crisis.”

Recent market stress has reinforced that point. “During the turbulence of 2023, European banks remained broadly resilient,” he said. “There were moments of tension, but the system held.”

The deeper problem lies elsewhere. “The real issue is not competitiveness, but competition,” Lannoo said. “In many European countries, banking markets are highly concentrated.”

Drawing on his own experience in Belgium, he described a lack of genuine choice. “In practice, we have access to only a small number of banks,” he said. “That is not a competitive market.”

This pattern, he argued, is widespread across Europe. “In many member states, two or three banks dominate the market,” he said. “This is fundamentally at odds with the idea of a single banking market.”

Capital markets lag far behind

The same fragmentation is evident in Europe’s capital markets. “European banks have lost ground to US banks in capital markets-related activities,” Lannoo said. “This part of the market is now dominated by a small number of large US institutions.”

Post-trade services such as settlement and custody remain highly localised, he added. “These are effectively local monopolies,” he said.

The consequences are structural. “Europe remains overwhelmingly dependent on bank financing,” Lannoo said. “In contrast, the US relies primarily on market-based financing.”

This imbalance has barely shifted over time. “Despite years of discussion, the financing structure of the European economy has remained largely unchanged,” he said.

For growing companies, the implications are stark. “Pre-IPO financing in Europe is extremely limited,” Lannoo said. “Venture capital, private equity and other forms of risk capital remain underdeveloped.”

As a result, European firms often look abroad. “Companies that want to scale-up frequently find financing outside Europe,” he said, citing Spotify as a prominent example.

Regulation overload, enforcement deficit

Europe’s response has often been to introduce additional regulation. Lannoo believes this approach has reached its limits. “We do not need new rules,” he said. “We already have more than enough.”

Over the past five years, banks and corporates have had to adapt to a growing volume of banking, digital, sustainability and operational resilience regulation. “The cumulative burden has become extremely difficult to manage,” he said.

The core problem, he argued, lies in inconsistent implementation. “Member states frequently add national requirements on top of EU rules,” Lannoo said. “This practice—often referred to as gold plating—undermines the single market.”

As a result, firms face higher costs and fragmented requirements. “The same European rule is applied differently across jurisdictions,” he said. “That fragmentation has a direct financial impact.”

Payments show what is possible

Payments are one of the few areas where Europe has seen meaningful progress. “Payments is the clearest example of increased competition,” Lannoo said.

Regulatory changes have allowed non-bank providers to enter the market. “New payment providers have been able to compete directly with banks,” he said, pointing to firms such as PayPal, Klarna and Revolut.

For corporate treasurers, this has tangible benefits. “These providers often offer services at significantly lower cost,” he said.

Yet even in payments, structural weaknesses persist. “Cross-border payments in Europe remain dominated by US providers,” Lannoo said. “National payment systems are not interoperable, and access across borders is limited in practice.”

A role for corporate treasurers

Lannoo argued that corporate treasurers are uniquely positioned to push for change. “European institutions consistently ask for evidence,” he said. “Users of financial services are best placed to demonstrate where the single market is not functioning.”

His message was clear. “Treasurers should insist on consistent enforcement of existing rules,” he said. “They should challenge fragmentation, demand genuine cross-border access, and raise these issues at European level.”

Without that pressure, Europe risks remaining structurally constrained. “European banks are stable,” Lannoo concluded. “But without competition, scale and effective enforcement, Europe will continue to fall behind.”