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First, banks have become much more resilient. Higher capital buffers are helping them to withstand even severe shocks. The recent stress test conducted by the European Banking Authority confirmed the increased resilience of European banks.
However, that rather benign finding seems to be contradicted by the collective pulse check that is conducted by the markets. Since the beginning of the year, the share prices of European banks have fallen by more than 20%, on average. It seems that, in the view of the markets, European banks are not that healthy.
The diagnosis is not a lack of stability but a lack of profitability. And indeed, the return on equity of large banks in the euro area is mostly still below the estimated cost of capital.
Attempts to explain this lack of profitability have focused on low interest rates. It is true, of course, that low interest rates are a challenge for banks.
But it is not just low interest rates that pose a challenge to banks. Other issues play a role, too: high costs eat into profits; non-performing loans weigh down balance sheets; and fee-generating business has become more difficult. Digitalisation has introduced fintech companies as new competitors, and the banking landscape in general is still characterised by overcapacities. This increases competition and depresses margins.
Ladies and gentlemen, to sum up: banks are more resilient than they were just a few years ago. However, they still have to improve their fitness. They have to adjust to a new economic environment; they have to adapt to the digital world; and they have to become more efficient and deal with legacy assets. This is no small task, but it has to be done.
Moreover, the banks have to get used to a new regulatory framework. That framework should be finalised by the end of the year, and it should be finalised at the global level. Banking became a global sector years ago, and regulation must follow in order to ensure stability.