EU Influence in Strategic Decisions in the Banking Sector

EU Influence in Strategic Decisions in the Banking Sector

The banking sector is a regulated industry in the globe. Major governments encourage the deregulation and liberation of the banking industry at Euro and global levels (Caporale, Rault & Sova 2015). The EU instituted the European Central Bank (ECB), and the European Banking Authority (EBA) tasked to establish a single supervisory framework for the banking industry. According to Balcerzak, Kliestik, Streimikiene, and Smrcka (2017), the EBA implements a standard set of rules to create a transparent, efficient, and stable market for EU financial products. The establishment of the EBA and ECB influences the organizational management, structure, and strategic decisions made by financial institutions across the EU. According to Chortareas, Girardone, and Ventouri (2012), regulatory agencies develop and implement rules for all banking organizations. The core strategies influenced by the EU include company reporting and auditing, payment services, and risk management (De Grauwe 2013). Additionally, EBA and ECB oversee the banking unions, insurance, pensions, and consumer financial services.

The EU maintains key banking services legislation that guides and regulates the banking sector in the region. According to Rughoo and Sarantis (2014), the EU has a capital requirements directive and regulation that govern the activity of investment, credit, and financial firms. The legislations establish the minimum levels of calculating the leverage ratios and liquidity buffers. Chortareas, Girardone, and Ventouri (2013) posit the EU institutes a bank recovery and resolution directive that prevents bailouts of failing financial institutions using taxpayers’ money. The regulation ensures that the bank’s creditors and shareholders lead in covering any losses.

In 2014, the EU implemented the single resolution mechanism regulation that guides financial institutions participating in a banking union. According to Rughoo and Sarantis (2014), the directive compels banks in creating a class of senior debt securities, to ensure an orderly resolution in frustrating times. Notably, the EU established the payment services regulation that describes strict security requirements for protecting consumer data and electronic payments. Gabor (2014) states how the EU’s directives eliminate remuneration practices that conflict the interest between banks and consumers. The ECB and EBA hinder the liquidity of banking groups and free flow of capacity, which adversely affects their productivity. The EU may improve the organizational management of banks by harmonization of prudential regulations that influence the stability of the sector.

SWOT Analysis

Strengths

• The banking industry is among the oldest surviving sectors. Even with the growth of new technologies, banking institutions have transformed to meet the recent needs
• The industry is a crucial source of employment and GDP growth in the respective economies. Market analysts and governments use the banking industry to verify budgetary strength, diminish neediness, and encourage universal exchange
• The banking industry is the sole provider of vital financial instruments such as bonds, insurance, stocks, and saving accounts
• The advent of new technology allows banking institutions to offer digital banking services which provide convenience to customers

Weaknesses

• The EU banking industry lacks regional coordination. The EBA faces significant challenges in managing the sector, mainly due to fluctuating exchange rates and currencies.
• Most banking institutions still use outdated technology and IT infrastructure to conduct online services, which leads to vulnerabilities such as hacking.
• The European banking sector covers about 50 percent of the global market. Small changes in the industry, such as changes in borrowing habits in one major country, may adversely affect the entire region.

Opportunities

• The continued advancements in technology present the industry to adopt the latest innovations, thus creating newer products and services.
• Human society seems to be in the process of continuous evolution, both culturally and economically. The EU banking industry can solidify its place in the future by incorporating this social evolution.
• Keeping up with the demographic changes and consumer demands

Threats

• Global economic instability. The EU region is going through tough economic times where trade wars, global downturns, and protectionist policies affect the banking system.
• Stiff competition from banking institutions in the Americas and Asia
• Lack of proper cybersecurity