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At present, the weaker cyclical momentum and the low interest rate environment are weighing on bank profitability. These weak profitability prospects represent a significant vulnerability for the euro area banking system, which is operating with significant overcapacity. At the same time, monetary policy accommodation continues to support lending volumes and banks have made significant progress in repairing their balance sheets. Nevertheless, a rebalancing of the current composition of capital requirements towards a more prominent role for the countercyclical capital buffer, keeping the overall level of capital requirements unchanged, could help mitigate costly economic deleveraging during downturns.
Non-bank financial intermediaries in the euro area have grown rapidly over recent years, which is a welcome development. But they are also facing profitability headwinds and are therefore, searching for yield in riskier assets. Their increasing importance in financing the real economy and elevated vulnerabilities highlight the need for the development of a macroprudential framework for this sector.
Finally, he mentions a new dimension of risk that affects both banks and non-banks: the risks related to climate change, which have the potential to become systemic. The ECB monitors the physical and transition risks faced by financial institutions. But improved disclosure is essential to pursue this effort in earnest. Disclosure by firms and financial institutions tends to be incomplete and not always consistent. Mandatory and harmonised firm-level reporting of carbon emissions would be a step in the right direction as it would enable better pricing and monitoring of financial firms' exposures to climate-related risks.
On the analytical front, the ECB is contributing to the development of a framework for climate risk assessment and developing methods to gauge financial institutions' exposures to climate-related risks. The framework aims at integrating climate-related risks into regular financial stability monitoring and assessment, including climate risks stress-test analysis. ECB trusts that banks and non-banks are also doing their part to bridge data gaps and are preparing to address risks in the transition to a low-carbon economy.