ECB sees European banking sector lack of profitability rather than of stability

European banks had become much more resilient since the financial crisis of 2008 whereas they were lack of profitability at the current stage, said Sabine Lautenschlaeger, Member of the Executive Board of the ECB, on Tuesday here.

Lautenschlaeger who also takes the Vice-Chair of the Supervisory Board of the ECB delivered a keynote speech to a conference themed by banking supervision, resolution and risk management in Europe amid the annual Euro Finance Week Frankfurt starting on Monday.

She said that the recent stress test had confirmed the increased resilience of European banks whose capital buffers had been increased so as to withstand even severe shocks.

However, the share prices of European banks have fallen by more than 20 percent on average since the beginning of the year.

"It seems that, in the view of the markets, European banks are not that healthy," said the ECB senior official.

She added that the return on equity of large banks in the euro area was mostly still below the estimated cost of capital.

Against the prevailing viewpoints on financial markets that low interest rates substantially caused by the ECB's monetary policy hampers profitability of European banks, the ECB senior official argued that positive effects of low interest rates such as reducing funding costs for banks, should not be completely ignored.

In addition to low interest rate, other issues including non-performing loans, increasingly difficult fee-generating business, fintech companies as new competitors amid digitalization and overcapacity in banking sector depress the profitability as well.

The ECB has been directly supervising the 129 significant banks which hold almost 82 percent of banking assets in the euro area since 2014.

Lautenschlaeger said, the viability of European banks' business models along with their risk management was currently one of the main points of ECB's attention as supervisor.

"We must warn them against the temptation to prop up their profits by taking on too much risk," she added. Endit