European Central Bank President Mario Draghi said Thursday that overcrowding in Europe’s banking sector is hurting profitability, pushing back somewhat against critics who blame the central bank for putting pressure on Europe’s banks.
“A number of reasons have been mooted as the causes of this low profitability, including low interest rates,” said the ECB president. He said that long-term real rates have been falling for two decades and he listed technological changes, demographics and inequality as “just a few of the factors exerting downward pressure” on long-term rates.
Mr. Draghi said that accommodative policy from his and other major central banks have helped push down rates, which, in turn, squeezes net interest income. “But over-banking is also a factor in the current low level of bank profitability,” he said. “Overcapacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins.”
Europe’s banks have complained for quite some time that the ECB’s very accommodative monetary policy, which includes making banks pay to leave deposits at the central bank overnight, weighs on their earnings.
Mr. Draghi noted, however, that ECB policy in other areas is helping banks.
“Profitability is boosted by a greater flow of lending and lower loan loss provisions than would have occurred in the absence of accommodative monetary policy,” he said.
“Analysis by the ECB suggests that these effects tend to outweigh the impact on net interest income over the short term, but the picture varies depending on banks’ business models,” he said. “In the broader context of generalized overcapacity and technological innovation, some banks will need to review their business models to bolster profitability.”
The president’s comments opened a conference of the European Systemic Risk Board, a body which examines risks to financial stability in Europe. Mr. Draghi serves as the chairman of this board.
Source: Dow Jones
