It is a good thing that European negotiations are back on the table

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The writer is president of BBVA

Mergers and acquisitions are back in the spotlight in Europe, and for good reason. In addition to BBVA’s offer to Banco Sabadell shareholders, Italy’s UniCredit has built a stake in German lender Commerzbank.

This activity comes amid increasing awareness of the urgent challenge highlighted in both Mario Draghi’s landmark report on the future of European competitiveness and Enrico Letta’s on Europe’s single market – that the continent urgently needs companies bigger to compete globally in sectors crucial to sustaining economic growth. and generate jobs and resources to support Europe’s social model.

Few sectors illustrate this imperative more clearly than the financial sector, which has been transformed by a digital revolution. In 2017, BBVA attracted only 7% of new customers through digital channels. Today it’s more than two-thirds, with 80% of sales taking place digitally. Bank growth is no longer based on bricks and mortar, but on the ability to innovate online. The pace of disruption will only accelerate, led by dizzying advances in AI and other technologies.

The implications for my industry are clear. The sector is becoming increasingly competitive with digital competitors attracted by lower barriers to entry and the minimal cost for users to switch accounts. At the same time, banks need to invest more in technology to ensure continuous service and to withstand, respond to and recover from digital disruptions and cyber-attacks – as required by EU regulations from next January. To remain competitive, banks must spread these technology costs across a larger customer base.

However, Europe has lagged behind. Despite the region’s economic size, no EU bank is currently in the top 25 globally by market capitalisation. In contrast, the most valuable banks are based in the US and China (comparable markets in GDP size) and even in smaller economies such as India, Japan, Canada and Australia. In addition, competition is coming from outside the traditional banking industry, including from giant technology players. None of these giant disruptors are European.

As we await the completion of the planned banking union and capital markets union in the EU, Europe needs bigger banks now. Size matters because of the strong relationship between scale, bank profitability, the ability to invest in technology and innovation, and the ability to finance the real economy to support GDP growth. Bigger, stronger and more efficient banks are more likely to provide capital to major companies and projects or invest in managing complex risks in an uncertain, multipolar world. Not only can larger lenders extend bank financing across borders, but they can also contribute more actively to the development of crucial alternative sources of financing, such as markets for securitization, equity and bond financing.

As European Commission President Ursula von der Leyen recently stated, Europe must support companies expanding into global markets to meet ambitious decarbonisation targets. Larger balance sheets are the only way to effectively finance the more than €700 billion the commission estimates will be needed annually for Europe to meet its long-term climate goals. At the same time, companies must also invest in emerging technologies that will determine whether Europe becomes a leader, or lags behind, in the digital revolution.

So what’s in the way? As banks make their M&A moves, authorities need to step up and remove barriers to domestic consolidation and cross-border transactions. This is the only way to increase the pace of the continent’s lenders and their financial power.

To be clear, advocating for easier binding and the removal of national barriers is not a call for loosening competition rules or reducing regulation. Maintaining effective competition is essential. Indeed, strengthening traditional banks should increase competition by strengthening lenders’ ability to compete globally and provide more financing and better customer service.

In the end, it comes down to choices. If we want European companies to generate the jobs and resources needed to support the region’s social model, then Europe needs banks with the scale and capabilities to finance them. The alternative is lower investment, an erosion of productivity and ultimately lower living standards as Europe loses ground to other regions. Therefore, the most pressing regulatory risk is no longer that banks may be ‘too big to fail’, but ‘too small to deliver’ – lacking the scale to compete and fuel Europe’s future. Will we act quickly to take advantage of this opportunity, or will we fall even further behind?