(Reuters) - The European Central Bank identified how banks make money and their poor earnings as 2016’s main sources of risk in the sector, signalling that capital robustness is no longer a main concern for the eurozone’s top banking supervisor.
Banks have long complained that ever-rising capital demands from the European Central Bank’s Single Supervisory Mechanism (SSM) were constraining their ability to lend, while margins were depressed by the ECB’s low interest rates.
Outlining its priorities for the year, the ECB put banks’ business models and low profits at the top of the list, pushing back concerns over capital adequacy which have preoccupied supervisors since the global financial crisis last decade.
“Among the key risks identified, business model and profitability risk is ranked the highest, followed by other key risks, the importance of which varies across SSM countries,” it said in a document published on its website.
Dangers include credit risk and heightened levels of non-performing loans, a risk that stock and bond markets crash after a multi-year rally, and conduct and governance risk.
The ECB, which has supervised the eurozone’s largest banks since late 2014, slightly increased capital demands for 2016 compared to the year before. But most lenders on its watch already have more capital than needed after years of rights issues and stockpiling.
While capital remains “a high priority”, the ECB said it was now concerned about stubbornly low profits at some banks and whether some lenders are taking excessive risks to make money.
“The analysis of profitability drivers will facilitate the identification of banks with structurally low profitability,” it said.
“In this context, an area of supervisory focus will be examining whether profitability is achieved through, among other things, a weakening of credit standards, greater reliance on short-term funding, or an increase in risk exposures not commensurate with the bank’s stated risk appetite.”
Reporting by Francesco Canepa
