ECB's De Guindos Warns Bank Profitability May Erode Amid Economic Slowdown
June 25 2019 - 4:41AM
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Euro area banks could see their profitability prospects weaken
as the economic growth slows, making the operating environment more
challenging, European Central Bank Vice President Luis de Guindos
said Tuesday.
"Recently, profitability concerns have again come to the fore as
the operating environment for banks has become more challenging,
with economic growth projected to slow down in 2019," de Guindos
said in a speech in Rome. "Banks' profitability prospects could
thus be dampened by deteriorating growth expectations, adding to
structural weaknesses."
The policymaker pointed out that persistently low profitability
can limit banks' ability to generate capital organically, thus make
it harder for them to build up buffers against unexpected shocks
and limit their capacity to fund loan growth.
Banks with limited earning power may be tempted to take high
risk, which could lead to financial imbalances, de Guindos said.
"The overall effect of our monetary policy on bank profitability
has so far been broadly neutral," the policymaker said.
"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."
Last week, de Guindos said the central bank will react with a
combination of measures if it perceives that inflation is set to
deviate from its target, and further asset purchases remain a
possibility.
Benoit Coeure, a member of the ECB Executive Board, said in an
interview published on Monday that the bank would consider the
impact of negative interest rates and the tiering system if it had
to cut rates in future.
A tiered deposit rate can partly reduce the burden of the cost
banks pay on the cash they park at the ECB.
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