Europe's banks need to scale up their investments in technology and contemplate further consolidation if they are to withstand negative shocks to the economy and fend off competition from non-banks and Big tech interlopers, according to ECB board member Kerstin af Jochnick.
In a speech at a conference in Brussels, af Jochnick says that digitalisation provides opportunities for efficiency gains and new business. "However, it also poses significant challenges for banks, as it may disrupt their value chains."
The European Central Bank has identified IT and cyber risks as one of its main supervisory priorities for 2020, and has been conducting IT-targeted on-site reviews for a large number of systemic banks.
The results have not been promising: "Our investigations have shown that some banks are still failing to include IT risk in their general risk management frameworks, and that many banks are reliant on outdated systems to perform some of their most critical activities. And, in general, banks have been rather slow to implement our supervisory recommendations in the area of IT and cyber security."
Acknowledging the cost implications and the potential short term hits on profitability that can accrue from IT investments, af Jochnick suggests that it would be beneficial for the European banking sector to consolidate further and reap the benefits of economies of scale and improved risk-sharing.
"There appears to be general agreement that there are too many banks in Europe," he says. "Yet the current institutional and legislative set-up does not seem particularly conducive to any of the common forms of consolidation, be they mergers, acquisitions or market exits.
"For our part, we intend to favour market integration whenever possible within the current legislation. We are working to clarify our policy on mergers and acquisitions, and we are considering what more could be done within the bounds of the current legislation to foster banking integration in the euro area."