Comparative analysis of bank balance sheets in the context of bank structural reform

Current initiatives to regulate bank's trading activities are aimed at sealing off the banking system from the instability of financial markets, revealed during the recent financial crisis. The main findings of bank balance sheet analysis for 5 000 European Union banks for 2000-2013 are: (1) Today, banks operate at low margins and have experienced a significant drop of return on average equity ROAE after the financial crisis. (2) The risk-return trade-off is negative for banks assuming high risk, calling efficiency of banks' investments into question. (3) The relatively high exposure of systemically important banks to market risk makes these banks a potential source for instability in the EU banking industry. (4) Empirically, trading book exposures below 25% of total assets do not harm a banks' stability. (5) Overall results relating to bank performance and bank size are inconclusive. (6) EU banks' financing activities respond to rather than lead the business cycle. (7) EU banks finance 40% of the capital stock. This study was prepared by Policy Department A at the request of the committee on Economic and Monetary Affairs.