Daniele Nouy, who heads the ECB's banking supervisory arm, told Reuters on Friday that simply finding more capital to plug shortfalls uncovered by the stress test may not be enough.

"Partly because of the financial situation in Europe and partly because of the structure of the banking systems in Europe ... the sustainable profitability is probably the main challenge and the main risk for banks in the coming years," Nouy said.

Nouy has already asked some of the banks who struggled in the stress test to resubmit their plans for reinforcing their capital buffers. The supervisor is now also taking into account a broader consideration of banks' business models, which marks a departure from their earlier narrow focus on capital levels.

"When we review the capital plans of the banks with a shortfall now it's totally about business model, it's the most important dilemma," she said.

Nouy, a former Bank of France senior official, warned struggling banks resorting to hybrid debt or contingent capital, which she dubbed "catastrophe capital" because it is written down or converts into equity when a bank is near collapse, to bolster their safety buffers.

"If the bank is not profitable, do we want the bank to use contingent capital with a costly coupon? We are not sure."

One of the key markets the ECB is trying to push as part of its efforts to revive lending in Europe is the securitisation market, which collapsed during the financial crisis. The ECB is pushing for lighter capital charges on top quality securitised debt but Nouy made clear that she would not be in favour of laxer capital rules.

The ECB will launch a "supervisory campaign" next year that will scrutinise profitability of lenders, and home in on any concentration of risks or dangers from poor quality loans on their books, and risks from misconduct.

 

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