ECB Reviews Profitability and Business Models of Banks in Euro Area
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.
Related Links
Keywords: Europe, EU, Banking, Thematic Review, FAQ, SREP, SSM, Risk Management, Business Models, ECB
Previous Article
IOSCO Guidance to Address Misconduct Risk in Equity Capital RaisingRelated Articles
PRA Consults on Implementation of Certain Provisions of CRD5
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA Report Identifies Key Financial Stability Risks for Insurers
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA Publishes Risk Dashboard for First Quarter of 2020
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA Issues Updates on Stress Test Exercise for Banks in EU
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA Proposes Guidance Related to Matching Adjustment under Solvency II
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS Issues Guidance on Dividend Distributions by Banks
MAS published a statement guidance on dividend distribution by banks.
APRA Updates Guidance on Capital Management for Banks
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB Report Reviews Macro-Prudential Framework and Tools in Germany
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA Urges Firms to Finalize Preparations for End of Brexit Transition
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB on Operational Continuity in Resolution and FMI Contingency Plans
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.
