Such consolidation would permit small and medium-sized banks to attain sufficient scale to undertake the IT investment necessary to meet the challenges of the digital era. 4/5  BIS central bankers' speeches  While both national and cross-border consolidation options are potentially viable, the key consideration for financial stability is that the combined entity should be able to successfully execute the merger, resulting in a bank that can sustain profitability in the long run. 1 See European Banking Authority (2018), Risk Assessment Questionnaire – Summary of Results, December. 70% of banks view their cost of equity in this range, with a further 15% of banks estimating that it lies in the range of 10–12%. 2 See, for example, Babihuga, R. and Spaltro, M. (2014), “Bank Funding Costs for International Banks,” IMF  Working Papers 14/71, International Monetary Fund; Keeley, M. (1990), “Deposit Insurance, Risk, and Market Power in Banking,” American Economic Review, 80(5): 1183–1200. 3 See Andrews, D. and Petroulakis, F. (2019), “Breaking the shackles: Zombie firms, weak banks and depressed  restructuring in Europe,” Working Paper Series, No. 2240, ECB, Frankfurt am Main. 4 See Gopinath, G., Kalemli-Ozcan, S., Karabarbounis, L. and Villegas-Sanchez, C. (2017), “Capital Allocationand  Productivity in South Europe”, Quarterly Journal of Economics, 132(4): 1915–1967. 5 See Adalet McGowan, M., Andrews D. and Millot, V. (2018), “The walking dead? Zombie firms and productivity  performance in OECD countries,” Economic Policy, 33(96): 685–736.

As a result, euro area cross-border banking groups potentially face higher costs than interstate banking groups in the United States. 3/5  BIS central bankers' speeches  This recourse to ring fencing takes a narrow national perspective. At present, national deposit insurance schemes will be drawn upon should depositors need to be compensated during bank resolution. Hence the desire of national authorities to ensure that each national subsidiary is sufficiently capitalised and has adequate liquidity. Completing banking union, including the introduction of a European deposit insurance scheme and the removal of the remaining national options and discretions, would help ensure that the costs of resolution are equitably shared. Meanwhile, it would enable banks to use liquidity and capital efficiently at the euro area level. Competition from outside the sector The final challenge for bank profitability comes from increasing competition from outside the sector, in particular from financial technology companies (fintech) and non-bank financial companies. Lightly regulated fintech companies have begun to encroach into the realm of payment and settlement systems. More than 60% of incumbents view fintechs as a threat to their income from these activities.13 Given the greater desire by consumers for instant payments and the use of mobile payments, investment in IT is vital to secure future revenue streams. Banks also face increasing competition in the provision of credit. Total assets of non-bank financial intermediaries doubled in the euro area between 2008 and 2017, whereas total banking sector assets remained broadly unchanged. The growth is particularly marked in the investment fund sector.