ECB admits negative effect of monetary stimulus on German and Spanish banks   

On average, the ECB said that the negative aspects of its monetary measures have been generally offset by the positive effects of the economy expansion that its stimulus supported. [European Central Bank / Flickr]

Amid growing concerns about the profitability of eurozone banks, the ECB said that the monetary decisions adopted after the financial crisis had a neutral effect on the money houses of the single currency area, except for German and Spanish lenders.

In its annual report for 2017, published on Monday (9 April), the European Central Bank admitted the negative impact of its extraordinary measures adopted since 2014, including low interest rate, negative rates and the bond-buying programme.

But “the negative aspects have, to date, been generally offset by the positive effects that a solid and broad-based economic expansion has on banks profitability”, the report insisted.

Although the document stressed that the net impact of the monetary policy measures on profitability has been “limited”, the ECB pointed out differences across the euro area.

In the case of Italian banks, the return on assets slightly increased mainly thanks to the improvement of credit quality.

But the effect was negative for German and Spanish banks.

In the case of France, the impact was broadly neutral.

Better conditions

The ECB noted that the low-interest rate environment reduced the banks’ margins, while the negative rate on ECB ’s deposit facility penalised the excess liquidity in the region.

But these effects were broadly neutralised by the fall of banks’ provisioning costs, given that borrowers improved their conditions as a result of the recovery.

In addition, the improved economic situation also fuelled lending volumes and capital gains from rising asset prices and thus improving the lenders’ benefits.

This conclusion slightly differed from the ECB’s view included in the report of its supervisory activities published in late March.

Banks should charge customers higher fees, says ECB

Banks should increase fees and commissions to customers to survive in the low interest rate environment, the ECB has argued in a new report.

The ECB admitted then that the main risk for eurozone banks was the low interest rate environment and its adverse effects on banks’ profitability.

Profitability is “the number one challenge for banks in the euro area”, the chair of ECB’s supervisory board, Danièle Nouy, said back then.

Various reasons 

In a hearing with MEPs on Monday to present the latest report, ECB vice-president Vítor Constâncio argued that the low interest rate environment alone does not explain the differences in profitability.

Looking outside the euro area, he mentioned Sweden as a country with negative rates whose banks’ return on equity (12%) has been above the eurozone average (7%)

Constâncio explained that in some countries non-performing loans also played an important role, while in other member states, including Germany, cost-efficiency was a key factor.

Despite the positive effects of its monetary stimulus, the ECB admitted that the eurozone banks’ outlook looks gloomy as it is reflected in their market value.

The main reasons are the structural challenges the financial sector faces, including the arrival of startups offering financial services (fintech) or the excess of branches, and the level of NPLs, still high, especially in some countries.

The ECB recommended that the banking groups continue with the consolidation, more digitalisation of their activities and cross-border mergers and acquisitions.

As for the NPLs, the Frankfurt-based institution recommended a “transaction platform” to accelerate the cleaning up of these loans still present in the banks’ balance sheets.

EU requests more capital to banks to cover for ‘bad loans’

The European Commission on Wednesday (14 March) proposed new measures requesting banks to raise more capital against loans turning ‘toxic’ and to develop a European market to sell ‘bad loans’ weighing down their books.

The European Commission recently proposed creating a secondary market to trade banks’ bad loans.

Despite the concerns emerging from the Italian banking sector or big players like Deutsche Bank, Constancio remained broadly positive about the current situation.

He told MEPs that eurozone banks’ resilience had improved on average over the past years. Banks increased their solvency position to reach 14.5% of common equity ratio (Tier 1) in the third quarter of 2017, compared with 7% in 2007.

Subscribe to our newsletters