Digitalisation and banking: new risks and three scenarios for the European banking system of the future

This article discusses the impact of digitalisation on the structure of the European banking system. The recent wave of financial innovation, based on the opportunities created by digitalisation in terms of new products or new services, has come mostly from outside the incumbent banking system. How new financial service providers (fintechs and big techs) compete or cooperate with incumbent banks has the potential for substantial disruption in the provision of financial intermediation. As a result, financial risks may be partially shifted away from the banking sector, while non-financial risks increase their relevance. In order to better frame a policy response, we consider three scenarios for the future European banking system: (i) incumbent banks continue their dominance; (ii) incumbent banks retrench; and (iii) retail central bank digital currencies are introduced under certain specifications.