Eurozone Banks Profitability Low and May Worsen

Eurozone BanksEchoing previous remarks, the European Central Bank vice president Luis de Guindos said on Tuesday said that the profitability of the Eurozone banks is low and that this together with a slowing down economic growth could affect the sector in the long run.

De Guindos also explained that the Central Bank's easing monetary policy is not the cause of this low profitability, as its effects are neutral, as well as the ECB decision to keep negative rates. Despite this, he highlighted that the effects of negative rates should be monitored.

“Nevertheless, the overall effects of negative rates on the banking sector need to be carefully monitored, particularly because the balance of their effects will depend on how long rates remain in negative territory,” he said on a conference in Rome.

European banks have been facing a profitability problem for some time. De Guindos already highlighted this fact on a speech in May. On that speech, the ECB vice president explained that Bank profitability is strongly related to the economic activity and the macroeconomic outlook (hence many of the factors behind are structural) since a slowing down economy may reduce lending activity and increase credit impairment.

"European bank profitability has been structurally weak since well before unconventional monetary policy measures were introduced," he said on a speech in London.

De Guindos's remarks are concerning since Bank Profitability is important for financial stability, influences monetary policy, and hinders economic growth.

"Banks with poor structural profitability can face higher funding costs and may be tempted to take on more risk," he said, adding that this reduces the flow of lending to profitable firms, misallocating the capital and affecting long-run economic growth.

This low profitability can be attributed to the economic cycle, as well as cost inefficiencies and increasing competition.

"The causes of low profitability are for the most part structural and hence require structural solutions," he said, adding that implementation of long-run profitable business plans is needed to solve the problem.

Sara Patterson
Sara Patterson has a Master’s Degree in political science and enjoys analyzing both current events and the international markets to get a fuller perspective of the currency market. Before turning to financial writing, she taught English writing skills to high-school age students. Sara’s work has been published on various financial and Forex blogs.