The recent report on the future of the European Union' s competitiveness led by Mario Draghi has been widely reported in the European media.

In this article we will focus on his analysis of the European financial sector, especially banking, and his proposals for reform.

report notes a low level of investment financing in Europe. How can this low level be explained? Basically, by very fragmented capital markets in the European Union and, consequently, by an "excessive" role of banks in this financing (in addition to a lower development of pension plans; some limitations on long-term investment by insurance companies; a high cost of investment in financial assets by individuals; etc.).

Comparing North American and European banking, according to report, the former has a larger size, lower costs and higher profitability.

The return on equity (ROE) of North American banks is persistently higher than that of European banks, and the relevance of commissions (especially those linked to financial market operations) in North American banks is the essential explanatory factor.

What problems do banks have as financiers of innovative companies, especially if they are start-ups? Their shareholding is usually relatively risk-averse, which does not favor the financing of such companies, especially in the long term, when they may not record positive cash flows for several years and do not have tangible guarantees to provide in debt financing; banks are not used to identifying start-ups with projection and managing the risk of credit that they entail; this subject of companies require a high proportion of capital; the weight of bank deposits (very volatile in times of uncertainty about the quality of their balance sheet) has led to prudential regulation that significantly limits bank investment in riskier assets; etc.

Other problems, according to report, are the reduced use by European banks of asset securitization and the full implementation of Basel III in the European Union, which may be a source competitive disadvantage vis-à-vis U.S. banks, as the U.S. authorities have decided to postpone its entry into force entrance .

In addition to a greater development of securitization and a necessary evaluation of the regulatory burden on institutions, the report proposes fill in banking union as a way to reduce the fragmentation of European banking and increase its size, efficiency and profitability.

In particular, report proposes the elimination of the powers of national supervisory and resolution authorities over banks with significant cross-border activities (generally the largest ones). This would avoid episodes of ring-fencing, in crisis situations, affecting cross-border subsidiaries of the same bank group .

In this section, the report points out that a separate deposit guarantee scheme (DGS) would have to be set up for this group of centrally managed cross-border banks. For the rest of the institutions, the existing national guarantee systems could be maintained.

In principle, the idea of accelerating elements of the banking union for cross-border groups is interesting. This requires a very clear regulatory change, because we already have a single supervisory authority for most of these banking groups.

It is clear that European banking is basically national, even if it operates in different jurisdictions. This fragmentation prevents the acquisition of scale and risk diversification.

Another aspect highlighted by report is the need to increase the size of European banks. In general, the report is right, especially in view of the digitalization challenges they face. For example, a full adaptation to the Digital Operational Resilience Regulation (DORA) does not seem very feasible without substantial investments in cybersecurity.

The same doubts about the investment capacity of small entities arise with the application of generative artificial intelligence (AI) in banking.

Let's end with a question: can anything be done to get banks to finance innovative companies, especially start-ups, in the medium and long term?