FRANKFURT, Nov. 18 (Xinhua) -- Structural factors, such as overcapacity, are at the heart of the low profitability challenge of euro area commercial banks, European Central Bank (ECB) Vice President Luis de Guindos said on Monday.
Euro area banks have reported persistently low profitability in recent years, and are facing a challenging environment at the moment, de Guindos said at the opening ceremony of the 22nd Euro Finance Week.
"The recent softening of the macroeconomic growth outlook and the associated low-for-longer interest rate environment are likely to weigh further on their profitability prospects," de Guindos said.
However, de Guindos dismissed concerns as "misleading" that it is the monetary policy to blame in worsening bank profitability.
De Guindos stressed the monetary policy's role in supporting economic activity, which could in turn generate higher lending volumes, as well as the design of a two-tier system for reserve remuneration to mitigate the effect of negative interest rates on banks.
He said that "structural factors are at the heart of weak bank profitability." There are too many banks that have low market shares and are under competitive pressures and endure cost inefficiencies, he said.
De Guindos suggested ways to increase profitability, such as to adjust business models to diversify income sources and invest more in digital technologies, or to achieve economies of scale and scope via mergers and acquisitions.
In particular, he said cross-border mergers "would have an additional benefit of improved risk diversification and would thus result in more resilient profitability."
On the other hand, according to the ECB vice president, the non-bank financial sector has grown rapidly over the past decade, with its total assets worth about 46 trillion euros (51 trillion U.S. dollars) in June 2019.
Hurt by low profitability similar to banks, many non-banks tend to compensate this by searching for yield in riskier, more illiquid and higher duration assets, he said.
This being a "welcome and intended" outcome of monetary policy accommodation, it can nevertheless give rise to risks and vulnerabilities in non-banks' balance sheets, de Guindos said, noting the need for the development of a macro-prudential framework for this sector.
Opening Monday, the five-day Euro Finance Week consists of more than 20 conferences and events on topics such as euro area financial integration, governance and risk management, green finance, block chain and fintech, including a full-day program on topics related to China. Enditem