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Euro area banks are still adjusting after the crisis. High impairments, legacy issues and pressure on revenues from the economic environment, low interest rates and high competition continue to challenge the profitability of many significant banks in the euro area. However, the profitability situation differs widely across institutions and banks that have outperformed others over the last years are geographically spread out, have different sizes and have differing business models. ECB‘s analysis also confirms that banks strategic steering capabilities are an important factor influencing the profitability of institutions.
The thematic review investigated the strategic steering capabilities of the significant banks directly supervised by the ECB. Strategic steering capabilities refer to the management’s ability to set a course towards the bank’s long-term objectives. The review identified differences in the quality of banks’ internal set-up to steer profitability. In general, banks with better steering capabilities have generated higher relative returns over the last three years.
ECB Banking Supervision expects banks to have strong strategic steering and risk management capabilities. Bank-specific recommendations were issued regarding the necessary improvements to strategic steering or risk management capabilities. The recommendations related to understanding income and expense drivers, cost management and allocation, loan pricing and strategy-setting processes. ECB Banking Supervision will monitor implementation of the expected improvements in strategic steering capabilities as part of the ongoing supervision.