However, this explanation overlooks regional disparities in economic growth, monetary policy, and market fragmentation. US banks benefit from a more dynamic and integrated economic environment, allowing greater economies of scale, whereas euro area banks face fragmented markets.

Higher interest rates temporarily improved euro area banks' profitability but are insufficient to reduce the valuation gap sustainably. Completing banking union and capital markets union will help remedy this disadvantage: it will create an environment that incentives the removal of remaining obstacles to cross-border consolidation, thus allowing banks to modernise their business models. This evolution would make euro area banks more efficient and sustainably profitable while maintaining the standards set within the rigorous regulatory framework. Ultimately, these changes could boost investor appeal in euro area banks and thereby reduce the valuation gap.