Bank competitiveness and its role for monetary policy

Prepared by Lorenzo Ferrante, Franziska Maruhn and Carla Valero Escribá This box provides evidence on bank competitiveness in the euro area and its relationship with monetary policy transmission.Recently, European institutions have been exploring measures to improve bank competitiveness by reducing cross-border fragmentation and simplifying regulation and reporting requirements (European Commission, 2026). The definition of bank competitiveness is not straightforward. Banks are competitive if they generate profits based on a sustainable business model (rather than by exploiting market power) and are adequately capitalised, with affordable access to market-based funding and liquidity, allowing them to maintain lending during episodes of economic or financial disruption and through policy cycles. Bank competitiveness in turn supports the effective transmission of monetary policy.[1] Euro area banks are more competitive now than they have been for most of the period since the global financial crisis, as intermediation margins have widened and balance sheets have recovered (Chart A).One way to assess bank competitiveness is through valuation-based measures of their performance. These reflect investors’ perceptions of expected future earnings and therefore provide a market view of expected profitability and performance. The price-to-book ratios of euro area banks have substantially improved in recent years, reflecting stronger balance sheets and higher intermediation margins as net interest earnings have recovered, narrowing the gap to their US peers since 2023, although there are still significant differences across euro area countries (Chart A, panel a). Another way to analyse bank competitiveness is by looking at bank profitability, which has also improved relative to peers outside the euro area (Chart A, panel b). While valuation-based measures focus only on listed institutions and bank profitability is backward looking, a broader metric, based on replicating portfolios, also shows a substantial improvement in recent years (see Altavilla et al., 2024).[2] Price-to-book ratio and return on equity for euro area and other banks Sources: LSEG, ECB (supervisory reporting, consolidated banking data), Federal Deposit Insurance Corporation, Moody’s Analytics BankFocus (formerly BvD BankFocus) and ECB calculations.Notes: Panel a): The price-to-book ratio is the ratio of a bank’s share price to its book value per share. Panel b): Return on equity (ROE) is computed on a four-quarter trailing basis. Before 2015, the ROE for the euro area is based on consolidated banking data. The latest observations are for 21 August 2026 for the price-to-book ratio and 2025 for ROE. More competitive banks have demonstrated greater resilience to shocks and transmitted monetary policy more effectively (Chart B).From a monetary policy transmission perspective, bank competitiveness matters, especially if it supports the intermediation capacity of banks over the cycle. During the pandemic shock in 2020 and 2021, more competitive banks were less reliant on lending backed by government guarantees and on the Eurosystem’s targeted longer-term refinancing operations (TLTROs) and were better able to transmit the monetary policy stimulus (Altavilla et al., 2024). More competitive banks also exhibit a higher pass-through to deposit rates, in particular for household deposits (Chart B, panel a). For corporate deposits the differences are less pronounced, with point estimates differing but confidence bands partially overlapping (Chart B, panel b). It is likely that this reflects the fact that more competitive banks are more able to retain deposits by increasing deposit rates during periods of rising rates and more able to lower rates following monetary policy easing without the risk of losing funding. For lending rates, the pass-through is not dependent on bank competitiveness, indicating that more competitive banks are not achieving a higher remuneration of deposits by extracting higher rents from borrowers. The pass-through of monetary policy to deposit rates by bank competitiveness Sources: ECB (iBSI, iMIR, AnaCredit, SHSG, CSDB, supervisory reporting) and ECB calculations.Notes: Banks are categorised as more competitive or less competitive in each quarter based on the 50th percentile of the “edge” as in Altavilla et al. (2024). Charts show the cumulative change in rates on new business deposits following a 1 percentage point increase in the policy rate. The impacts are estimated using local projection regressions of the change in new business interest rates between t-1 and t+h on the change in the policy rate between t-1 and t (explained by high-frequency monetary policy shocks), where h refers to months. The model includes the lag dependent variable, bank controls and country fixed effects. The latest observations are for March 2026. Gains in cost efficiency are emerging as a driver of recent developments (Chart C).Changes in competitiveness may reflect various drivers. First, the estimated effect of lower capital requirements on competitiveness is not statistically significant, likely reflecting offsetting factors (Chart C, panel a). On the one hand, higher capital requirements may increase transition costs for individual banks with specific vulnerabilities, thereby negatively affecting profitability. On the other hand, these requirements support the resilience of the banking system to adverse shocks and help prevent excessive risk-taking. In addition, in an environment of generally solid bank balance sheets, targeted increases in capital requirements for individual banks can be absorbed and are not a hindrance to the competitiveness of the banking system.[3]Second, a less competitive bank may lose market share against other banks, non-banks or financial assets that offer similar services to customers. Indeed, there is an association between an easing of credit standards originating from perceived increases in competition, as reported in the Bank Lending Survey (BLS), and lower bank competitiveness, even after controlling for observed and unobserved characteristics at bank level and country-specific factors (Chart C, panel b). At the same time, overall competition from non-banks has stabilised in recent years, reflecting specialisation in different customer segments and mutually beneficial interaction between banks and non-banks, for instance via securitisations or mutual exposures. Third, improvements in the cost efficiency of banks have significant and persistent positive effects on bank competitiveness (Chart C, panel c). Thus, it is likely that euro area banks can achieve sustained gains in competitiveness through improved cost efficiency. Impact of changes in potential determinants on bank competitiveness (x-axis: quarters ahead; y-axis: percentage points) a) Impact of 1 percentage point lower capital requirements b) Impact of one quarter of BLS-reported competition from non-banks c) Impact of 1 percentage point lower cost-to-income ratio Sources: Altavilla et al. (2024), ECB (iBSI, iMIR, AnaCredit, SHSG, CSDB, supervisory reporting, BLS) and ECB calculations.Notes: Results from panel local projection estimations controlling for liquidity, funding composition, and bank and country-time fixed effects. The dependent variable is the difference between the realised return and the replicating portfolio return measured in percentage points. For details, see Altavilla et al. (2024). Panel b) shows the impact of one quarter in which the bank reports an effect from non-bank competition in the BLS. Shaded areas indicate 90% confidence bands. The sample covers the fourth quarter of 2015 to the first quarter of 2026. Investment in digitalisation and artificial intelligence (AI) technologies is expected to yield efficiency gains, which can also be achieved by streamlining operations and taking a targeted approach to closing local branches (Chart D).The average size of banking groups in the eur