A turning point for Europe’s banks
2023 marked a significant turning point for the European banking sector. While earnings and the financial health of European banks have improved considerably, not all institutions are benefiting equally from the shift in interest rate policies, and over time, the negative effects of rising rates have become more evident. Banks also face critical challenges and strategic decisions with new regulatory hurdles on the horizon for 2025 that are already beginning to take shape and will influence their long-term competitiveness.
To combat inflation, Europe’s central banks have rapidly increased deposit and refinancing rates since 2022, bringing an end to the era of zero-interest-rate policies. This shift led to an 82 percent rise in interest income in 2023, along with a 0.15 percentage point improvement in banks’ net interest margins. Additionally, banks continued to boost their cost efficiency, with the cost-income ratio (CIR) reaching a record low of 55.1 percent – the lowest level since data collection began in 2013. These efficiency gains were seen across much of the continent, with the Nordic countries, Spain, and Portugal maintaining their leadership with CIR values of 39.9 percent and 42.5 percent, respectively.
However, rising refinancing costs and increased credit risks, particularly in real estate financing, are putting growing pressure on financial institutions. Additionally, the implementation of the CRR III regulation in 2025, which limits the use of internal risk models, is expected to lead to a significant increase in risk-weighted assets (RWA) for large banks. At the same time, banks are preparing for the implementation deadline of the Digital Operational Resilience Act (DORA), which requires extensive IT adjustments. The upcoming introduction of the “digital euro” is also casting its shadow. In this rapidly changing environment, banks must optimize their finance and risk functions to navigate the challenges of the modern financial landscape successfully.
The key findings of the study include the following:
Digitalization on the rise
In 2023, banks substantially increased their IT investments, resulting in a 4.9 percent rise in IT costs compared to the previous year. This surge in investments highlights the continued momentum of digitalization within the European banking sector.
Performance management as an enabler for efficiency enhancement
To remain competitive in the European banking landscape, where the cost-income ratio (CIR) is decreasing, it is essential to monitor revenue and cost structures closely. Implementing a data-driven, customer-centric performance management approach is key to effective overall bank governance, requiring transparency around cost and value drivers at the individual business level, as well as integrating these insights into a multi-layered performance management framework. A robust system of metrics will help identify and capitalize on efficiency opportunities, leading to cost savings and a stronger cost culture.
Using artificial intelligence in creditworthiness assessments
Banks are increasingly adopting artificial intelligence to develop innovative solutions, including credit assessments, personalized financial advice through chatbots, and automated trading systems. Notably, AI streamlines credit evaluation processes, significantly reducing processing times and enhancing decision-making. The combination of hyperautomation and generative AI (GenAI) further improves efficiency by enabling complex data analyses and facilitating automated decision-making. However, despite these advancements, banks must navigate challenges related to data privacy and ethical considerations. The EU AI Act offers a comprehensive legal framework designed to promote trustworthy and secure AI innovations, particularly in high-risk financial applications.
Business model of the future: Neobanks and decentralized finance
Neobanks are increasingly entering the financial services market, positioning themselves alongside traditional banks and utilizing artificial intelligence to enhance the efficiency of their digital banking offerings. At the same time, the trend of decentralized finance (DeFi) is on the rise, allowing financial services to be delivered through blockchain technology without the need for traditional intermediaries. However, despite the promising potential of DeFi, significant security and regulatory challenges persist. Regulators are closely monitoring these issues, backed by the Digital Operational Resilience Act (DORA).
DORA implementation date approaching
In 2024, BaFin and the ECB are intensifying their focus on cyber risks, a shift driven by the increasing frequency of cyberattacks and the introduction of the new European regulation, the Digital Operational Resilience Act (DORA). As of January 17, 2025, regulatory authorities will be empowered to assess the implementation of DORA, which extends beyond banks to encompass insurance companies, asset managers, and ICT third-party service providers. Key challenges in implementing DORA include closing the gap between documentation and practical application, as well as ensuring effective coordination across various functions.
Sustainability: A challenging must-have
European banks have made significant progress in integrating ESG criteria, yet they encounter several challenges, including ambiguous regulations, inconsistent standards, and the necessity of assessing reliable ESG data. Achieving a balance between short-term financial goals and long-term ESG objectives is particularly challenging due to the risks associated with greenwashing and the substantial initial costs of sustainable investments. Moreover, successfully incorporating ESG criteria requires investment in new technologies and systems.
The digital euro: Findings from the BearingPoint survey on the preparation phase
Since November 2023, the European Central Bank (ECB) has been in the preparation phase for the digital euro, having successfully completed the two-year initiation phase. A BearingPoint survey conducted in June 2024, involving experts from 25 banks and payment service providers, indicates that most respondents believe the introduction of the digital euro is likely, and they anticipate changes in the competitive dynamics of existing payment methods. Some institutions regard the digital euro as a complementary solution rather than a threat. The ECB also regularly releases progress reports highlighting the critical importance of data privacy and fraud protection.
NEW Banking as a path to success
Tighter regulatory requirements, such as DORA, BCBS 239, and BIRD, along with technological innovations like AI and DeFi, are intensifying competition and presenting new challenges for European banks. BearingPoint’s NEW Banking – focusing on sustainability, efficiency, and growth – supports banks, particularly in CFO and CRO functions, in implementing the right measures and shaping long-term competitive strategies.
N – SustaiNability
Sustainability is gaining significance across various sectors. Banks must develop and integrate credible ESG strategies to identify efficiency potentials and enhance their competitiveness.
E – Efficiency
Effective performance management and new digital tools are essential for robust bank governance. Excellent data management plays a crucial role in this process and supports compliance with regulatory requirements such as BCBS 239 and DORA.
W – GroWth
The future relies on digital tools and artificial intelligence to enhance decision-making, efficiency, and customer experience. However, human judgment and ethical considerations remain essential in this process.
About the study
The BearingPoint Banking Study 2024 is based on an analysis of the annual financial statements of 118 European banks for the last five years (period 2019 to 2023). The study includes monetary financial institutions in the eurozone, the other member states of the European Union (Denmark and Sweden), and the non-EU member states (United Kingdom, Switzerland, and Norway). All institutions are supervised by the European Central Bank (ECB) or a national supervisory authority. The aggregated balance sheet total of the banks analyzed amounted to approximately €39.6 trillion in 2023.
