Amidst the risks that are faced by many European banks and indeed the entire sector faces, banks need to boost their profitability and business models, waned the European Central Bank on Thursday.
In its annual report on supervisory activities, the ECB said that “major risks” to the banking sector are the geopolitical uncertainty, including the British departure from the European Union, and the high level of non-performing loans across the euro area tat the banks now possess.
“(Banks) have become much more resilient over the past few years; their capital buffers have increased significantly,” Danièle Nouy, chair of the Supervisory Board at the ECB, said in the report, adding however, they still face risks and challenges.
“Besides having to work out how they can raise profits in a challenging environment, how they can dispose of legacy assets and how they should deal with cybercrime and other IT risks, they currently face a number of other questions. Will competition from non-banks intensify? Where is the euro area economy headed? How will Brexit affect banks in the euro area? How will other geopolitical issues play out?,” she added.
The ways and means that the most exposed banks to Brexit are monitoring the risks is being closely watched and followed by ECB officials. The central bank said in the report that but the political uncertainty could harm investments, even though they have not identified significant funding or operational risks at least until now.
The ECB is considering ways to ease regulation to allow that move of the British-based banks to be faster in order to support those banks that are planning to move to the euro area due to the Brexit decision.
An ECB official has said on Wednesday that if the pre-approve the risk models had already been approved by British authorities, the central bank could temporarily lift its requirement to those models of U.K. banks that decide to move to the euro area.
This measure, in case they opt to reduce their staff in the U.K. during the Brexit process, would allow British-based banks to move their operations quicker.
It was going to move “hundreds of people” from London to the European Union, Goldman Sachs said on Tuesday.
“There will be a transitional period in which new euro area entities might use internal models that have not yet been approved by the ECB,” said Sabine Lautenschlaeger, an ECB board member, to bank executives.
“The transitional period will cease as soon as we have approved or rejected the bank’s model application,” she added.
To pursue them to opt for their capitals to substitute London, a number of euro zone countries have been offering incentives to companies. It is being undercut by other countries looking to become the next financial services hub, the Irish authorities have even complained to the European Commission last week.
(Adapted from CNBC)