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Growth in Europe: the role of banks

  • Rome
  • 14 November 2023

        The economy is suffering the effects of the uncertainty generated by international events. The Ukraine has been joined by the Israeli-Palestinian conflict, whose eventual expansion could trigger an explosion in energy prices, first and foremost that of oil. Economic scenarios are being differentiated on the basis of evolutions in the international panorama, most notably in the Mideast quadrant. If, instead of the conflict spreading, however, a balance were to be struck, there could be a rebound if not an outright robust recovery. The situation has important implications for Italy; institutional efforts are underway on the diversification of energy sources, but it is equally true that new suppliers in the southern Mediterranean basin are potentially vulnerable to the most acute conflict-related problems. 

        Given the uncertainty of the scenario, banks are being reaffirmed as drivers of growth, although they cannot replace national and international institutions. Finance must serve as a support for businesses and families, notwithstanding the limitations of the European banking system, especially compared with the Chinese and American giants. Indeed, there are no European banks ranked among the world’s top eight, and the Old Continent’s financial institutions are not prepared to confront the major challenges coming with a digital paradigm shift that calls for massive investments, which creates a barrier to entry for many continental banks. All this falls within an uncertain legislative context that does not facilitate businesses’ collection, management and monetization of data. 

        Another challenge for European banks lies in the rise of “shadow banking”; i.e., the proliferation of actors located outside the confines of the banking world and therefore not subject to the same rigid sector rules. The most glaring example of which are crypto assets, which as opposed to fiat money, are not backed by the central bank; a non-regulated instrument that can vanish without warning and is having deep repercussions on traditional finance. Cognizant of the risks, the central banks of developed nations should take it upon themselves to regulate the use of this instrument.

        Finally, with a view to facilitating European banks’ useful contribution to economic growth, today’s regulatory framework, excessively focused on financial stability, needs to be redesigned. Needed also are more efficient rules aimed at the creation of a European banking union under a single jurisdiction. The goal is to establish a single capital market and give European banks a chance to concentrate on developing businesses, thereby rendering them capable of keeping pace with the major international banking groups.

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