Danièle Nouy, has assured that there are several banks in the euro zone that still do not cover their cost of capital, a situation that, he warns, is “unsustainable” in the long term.
This has been confirmed by Nouy in an interview included in the annual report on the ECB’s supervisory activities, which concludes that profitability is the main challenge for banks in the euro zone and that, in fact, there are several entities in those whose current cost relationship is not viable in the future.
“There are several entities that still do not cover their cost of capital and this situation is unsustainable in the long term, although this is a problem for the banks themselves, we are also worried about the supervisors,” said the French economist.
In addition, he explained that if the banking sector is not profitable, it can not support economic growth or accumulate capital cushions, which could lead entities to embark on a search for profitability that translates into an increase in risks. “For all this, the lack of profitability in the banking industry of the eurozone is cause for concern,” he stressed.
In this way, the ECB advises that banks consider diversifying their sources of income, for example, through new technologies. The intermediation margin represents more than half of its operating results.
Taking into account the historically low level of interest rates, this is an aspect in which the central bank considers that it is necessary to work, trying to increase its income through commissions or through a greater degree of banking concentration.
The prolonged period of low interest rates represents a challenge, since, although these reduced rates lower financing costs and support the economy, they also compress intermediation margins and, therefore, weigh on bank profitability.
It also aims to cut costs, although being cautious to avoid applying it in the wrong areas, such as a specialized staff in risk management or in Information Technology (IT) systems. “Banks should not save on crucial elements for their success or future profitability,” he added.
Some 12 banks of significant importance continue to have negative results in terms of the average profitability of own resources, while around 24 entities have placed it at around 8% or higher in the last three years.
THE BALLAST OF DOUBTFUL LOANS
On the other hand, Nouy has highlighted the burden for the banking benefits of doubtful loans (NPL, for its acronym in English), which require diverting resources that could be used more efficiently. “With a volume close to 800 million euros in the euro zone, these loans represent an important problem that must be solved,” he said.
“The good times are not going to last forever, so banks should make the most of them as long as they can.When a downturn comes, it will be much harder to reduce NPLs.” Sound balance sheets will be key to profitability in the short and medium term. The endurance test of the European Banking Authority (ABE) 2018 will be the moment of truth, “added Nouy.
There are many banks in the euro zone that still have an excessive volume of doubtful loans in their balance sheets, so the ECB sees it as essential for credit institutions to redouble their efforts to design and implement “ambitious and credible” NPL strategies. He also believes that additional reforms are needed to eliminate structural obstacles to its management.
However, in addition to low profitability and doubtful loans, the European supervisory authority is concerned about the internal models used by credit institutions to determine the risk weighting of their assets, an extremely important aspect for the calculation of their credit requirements. capital and, therefore, for its capacity for resistance.
THE UNCERTAINTY OF THE BREXIT
Also, President Nouy has warned of her concern about the departure of the United Kingdom from the European Union (EU), whose biggest problem is to maintain access to the respective markets, as the European banking landscape will be transformed and this will affect the entities on both sides of the English Channel.
“Without prejudice to the political agreement on the negotiation of a possible transitional period, there is still uncertainty about the results of this negotiation.The ECB recommends that entities act proactively and in a timely manner in their preparations for the Brexit in order to to ensure that, in due course, they have all the necessary authorizations to carry out activities in the EU, “he argued.
However, Nouy has indicated that, depending on how the political debates on a transition period are developed, the entities could discuss with the supervisors the possibility of extending the deadline to implement certain aspects of their respective relocation plans.
The supervisory authority will pay special attention to meeting the expectations of the Single Supervisory Mechanism (MUS) itself, especially in order to avoid the creation of empty content societies, known as ’empty shells,’ in the euro zone, that is, entities that only have minimal resources in the area and outsource a large part of their activities in the EU to entities in third countries.