|
|
Currently, one of the most significant vulnerabilities of euro area banks relates to their weak profitability prospects. The lacklustre outlook reflects both structural and cyclical factors. The banking system is operating with significant overcapacity resulting in persistent cost inefficiencies and competitive pressures.
At the same time, the weaker cyclical momentum and associated low interest rates are weighing on bank profitability, although monetary policy accommodation has supported lending volumes. However, there is need to acknowledge that banks have made significant progress in repairing balance sheets since the outbreak of the financial crisis. Nevertheless, a rebalancing of the current composition of capital requirements towards a more prominent role for the countercyclical capital buffer (CCyB)could help mitigate costly economic deleveraging in downturns.
Non-bank financial intermediaries have grown rapidly over recent years in the euro area, which is a welcome development. But similar to banks, they are also facing profitability headwinds in the current environment. As a consequence, they are searching for yield in riskier assets. Given their increasing importance in financing the real economy, their increased risks and vulnerabilities highlight the need for the development of a macroprudential framework for this sector.