24 February 2003

ECB report on EU banking sector stability

The European Central Bank (ECB) released a report on the stability of the EU banking sector. The deterioration in the operating environment of EU banks resulted in a weakening of profitability in 2001 and 2002. So far, the European banking sector has been able to withstand the strain rather well.

Main findings of the report are that bank profitability has been declining significantly. The deterioration of global economic conditions and the difficulties faced by some industries have affected the quality of EU banks' international and domestic assets. Bank profitability has also been affected by the weakened conditions in equity and other financial markets. Banks that focus on retail banking and have a strong competitive position in domestic markets have fared best in this environment.

On average, profitability is still at satisfactory levels, capital buffers remain broadly intact, and the banking sector has remained stable. EU bank solvency levels remained strong in 2001, allowing them to withstand the shocks in their operating environment. This stability is partly due to the fact that the sector as a whole had relatively good profitability at the end of 2001 and into 2002 and to active capital management by the banks. There are reportedly no strong credit availability constraints in any Member State. EU banks seem to have appropriately tightened credit standards in line with increased risks, rather than become restrictive in lending because of capital shortages.

Potential threats are stemming from domestic EU economic developments. A possible deterioration in the labour market, further turbulence in financial markets, or increased vulnerability of the EU corporate sector due to rather high corporate indebtedness, could affect economic growth in the EU over the short term.

Global economic recovery might be delayed. Military action against Iraq could be the triggering factor, especially if it is coupled with significant increases in the price of oil and negative reactions in financial markets. New difficulties in emerging markets could also directly affect the financial conditions of banks that have diversified their activities in those areas.

Full report

© Graham Bishop