Competition and Profitability in European Banking: Why Are British Banks So Profitable?

Substantial differences remain between the profitability of banks in different European countries. This article considers the relationship between competition and profitability in European banking focussing on the experience of the UK where two issues are considered: why British banks have been earning excess returns for more than a decade and why British banks seem to be more profitable than their Continental counterparts. A paradigm is offered to explain this. A distinction is made between shareholder value (SHV) and stakeholder value (STV) banks whose business objectives are often different. Significant differences exist between European countries in the balance of SHV and STV banks. The UK is almost unique in Europe in having almost exclusively SHV-based banks. Pressures will intensify for all European banks to adopt SHV strategies, which will imply substantial changes in bank strategies and business operations.