ECB Targets Bank Profitability as European Earnings Disappoint

  • Nouy says banks are taking greater risk in search for yield
  • Supervisors will closerly monitor banks' activities, she says

European banks and the euro area’s top supervisor share the same worry this year: low profits.

Daniele Nouy, head of the European Central Bank’s oversight arm, said in a speech on Tuesday that her chief priority in 2016 is reviewing how lenders are changing their business models and investing in riskier assets to ensure they can remain profitable. The list of priorities comes after earnings announced this month by banks including Societe Generale SA, Credit Suisse AG, HSBC Holdings Plc and Standard Chartered Plc disappointed investors.

“Low profitability is obviously a major concern for the stockholders of banks,” Nouy said in remarks prepared for a conference held by Deutsche Bank AGin London. “And it is also a concern for supervisors.”

Nouy said weak economic growth and a prolonged period of low interest rates are making it more difficult for banks to earn revenue and profits. As a result, Nouy said, the financial industry has “ventured into riskier territories” in an effort to grow, leaving them exposed to higher funding costs and losses if markets turn.

“We will examine whether banks try to increase profitability by leaning too far against the wind,” Nouy said. “European banking supervision will closely follow each step the banks take in their attempt to tackle this challenge.”

The ECB also plans to review lenders’ non-performing loans, board-level governance and the banks’ internal stress-testing capabilities, she said.

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