In 2012, the European Union launched the banking union to prevent devastating upheavals like the euro area sovereign debt crisis. In the background, however, lied a wider aim: helping euro area banks compete on a global scale. This required two steps. First, removing regulatory barriers which made cross-border activities unsafe and unprofitable. Second, setting up a single supervisory and crisis management framework in the currency bloc. The second condition was fulfilled. The first was not.
Eight years on, despite the progress on fixing balance sheets, it has unsurprisingly failed to meet its broader objective. Euro area banks are as national as they were, if not more. Troubled lenders have sought survival by shedding foreign operations. No relevant cross-border combinations have taken place. Banks with global ambitions are turning inwards, to the relief of domestic politicians. Meanwhile, European banks have lost market shares in key areas like investment banking and advisory. All have scaled down or closed their US operations. Their market valuation has fallen relative to competitors, reflecting the fact that the sector remains fragmented and unprofitable.
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