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September 18, 2018

ECB published findings of the thematic review of banks’ profitability and business models; the review was conducted from 2016 to the end of the first quarter of 2018. The review shows that, although the economic situation of banks in the euro area has generally improved, profitability and business models remain under pressure. ECB also published frequently asked questions (FAQs) on the thematic review.

The analysis shows that euro area banks are still adjusting after the crisis. High impairments, legacy issues, and pressure on revenues from the economic environment, along with low interest rates and high competition continue to challenge the profitability of many significant banks in the euro area. However, the profitability situation differs widely across institutions. Banks that have outperformed others over the last years are geographically spread out, have different sizes, and have differing business models. The analysis also confirms that banks' strategic steering capabilities are an important factor influencing the profitability of institutions.

The thematic review investigated the strategic steering capabilities of the significant banks directly supervised by the ECB. Strategic steering capabilities refer to the management’s ability to set a course towards the bank’s long-term objectives. The review identified differences in the quality of banks’ internal setup to steer profitability. In general, banks with better steering capabilities have generated higher relative returns over the last three years. ECB Banking Supervision expects banks to have strong strategic steering and risk management capabilities.

Bank-specific recommendations were issued regarding the necessary improvements to strategic steering or risk management capabilities. The recommendations involve understanding income and expense drivers, cost management and allocation, and loan pricing and strategy-setting processes. ECB Banking Supervision will monitor implementation of the expected improvements in strategic steering capabilities as part of the ongoing supervision. The results of the thematic review feed into the 2018 Supervisory Review and Evaluation Process (SREP) and may trigger on-site inspections and deep dives where further analysis is required.


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Keywords: Europe, EU, Banking, Thematic Review, FAQ, SREP, SSM, Risk Management, Business Models, ECB

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