SUBTITLE: drive private‑sector growth and compete globally.

On a crisp autumn morning across the continent, the banking sector of European Banking Authority and its peers presents a picture of unexpected resilience. However, beneath the surface of stability lies a structural story of caution: while European banks have held up in the face of recent shocks, they are not driving the growth engines of the private economy in the way their global rivals are. A newly published report lays bare the dichotomy facing Europe’s financial system and the broader economy.

Resilience under stress
A recent study found that European banks, having emerged from the post‑crisis era with reinforced buffers and tighter supervision, are today much better positioned to withstand adverse scenarios. Large wholesale banks in the region benefit from comparatively high capital ratios, and regulators are increasingly confident in the sector’s shock absorption capacity.

Moreover, policymakers and supervisors agree that this resilience is foundational to the goal of a stable economy. The report emphasises that “resilience and a robust banking sector … are indispensable to competitiveness of the EU economy.”

But the growth link is weak
Yet when it comes to the banks’ role in supporting the broader private sector — in lending, investment financing, entrepreneurial risk‑bearing — European banks fall short of their global peers. The recent analysis highlights several structural handicaps: weaker equity positions, market fragmentation, and an under‑developed capital markets system. In effect, banks are playing defence rather than offence.

Regulators and analysts point out that despite cost‑efficiency improvements, European banks still trade at lower valuations compared to US banks. The reason: the growth potential of banks in Europe is constrained by national market segmentation and limited room for economies of scale.

Why it matters for private‑sector growth
When banks are structurally hampered, the knock‑on effects ripple through the economy. Lower bank profitability or constrained equity means banks can be more risk‑averse, less inclined to lend for innovation, expansion or transformation. The report warns that “capital that could otherwise be more effectively used to support lending to households and businesses” is being locked out.

This means that even in a period of moderate growth, banks may play only a supporting role. They are not delivering the dynamism needed to propel private‑sector investment into new areas such as green infrastructure, digitalisation or global expansion. This gap in the financing chain may blunt Europe’s capacity to keep pace with global rivals.

The competitiveness divide
In a global banking landscape where scale, cross‑border reach and capital‑markets integration matter ever more, Europe’s banks appear at a disadvantage. The report argues that despite often being subject to comparable prudential rules, European banks are held back by fragmented markets and regulatory landscapes, making cross‑border consolidation slow and politically sensitive.

Regulatory complexity is cited explicitly as a drag on competitiveness. A trade‑body statement from mid‑2025 underscores the need for simplification in order to allow banks to “support households, companies and key investments urgently needed by Europe.”

Political and structural headwinds
Beyond bank business models, the broader political economy of banking in Europe adds to the challenge. Differences in insolvency laws, deposit protections and national supervisory regimes create friction for banks seeking to expand across borders and scale. These barriers impede the creation of pan‑European banking champions able to compete globally.

Additionally, equity in European banks tends to be more conservatively managed, restricting the risk appetite and growth capacity of the sector. This conservative bias, while bolstering stability, constrains competitive posture.

Turning stability into ambition
The central message of the report is clear: Europe’s banks are stable, and that is a real achievement; but stability alone is no longer enough. To deliver stronger growth, banks must become more ambitious. Some of the recommended pillars for change include:

• Scaling up via cross‑border mergers or strategic alliances to gain efficiencies and expand reach.
• Digital transformation and business‑model innovation to move from traditional intermediation toward more customer‑centric, technology‑driven models.
• Capital‑markets integration and reform to unlock complementary sources of financing beyond bank intermediation.
• Regulatory simplification and harmonisation across national borders, so that banks can operate more fluidly and less constrained by national idiosyncrasies.

Outlook and implications
As of mid‑November 2025, the message to policymakers, bankers and investors is compelling: Europe has built a banking sector that can hold the line in turbulent times, but it has not built one that drives frontier growth in the same way emerging global peers do.

For governments and regulators, this means a choice: prioritise maintaining the status‑quo of stability, or pivot toward enabling growth. The report suggests that a balanced path is feasible — but requires will: willingness to reform, to consolidate, to invest. Without it, banks will remain reliable custodians of deposits and risk‑buffers, but weak engines for private‑sector expansion.

For banks themselves, the message is equally clear: you must move from defence to offence. Retaining high capital ratios is necessary but no longer sufficient. To capture value, banks must engage new markets, adopt new models, and find new sources of growth.

For businesses, particularly small and medium enterprises looking to scale, the implications are stark. If banks remain cautious and domestic markets remain segmented, access to growth‑capital may become a limiting factor within Europe. That in turn could tilt investment flows toward non‑bank channels or non‑European lenders.

Conclusion
The story of Europe’s banks is one of mixed success: they have reinforced their foundations, yet they must now build wings. Stability has been earned. Competitiveness must now be grasped. How fast they do so will shape not just bank balance‑sheets, but Europe’s broader economic trajectory in the years to come.