Report: European banks to struggle, may need to cut costs

AP News
Posted: May 24, 2016 8:06 AM

FRANKFURT, Germany (AP) — European banks are likely to struggle to make profits in months ahead and may need to cut costs, merge or change their business strategies to return to solid health, a report said Tuesday.

In its review of financial stability in the 19-country eurozone, the European Central Bank said the region's banking system had weathered volatility in markets at the start of the year. But it said "euro area banks continue to be confronted with an outlook of low profitability," weighed down by low interest rates, a tepid recovery in the euro countries, and by large numbers of bad loans in some countries.

The ECB, which is responsible for overseeing banks as well as interest-rate policy in the eurozone, warned that some banks may need to cut costs further or merge with other banks.

Some banks might need to shift their business models to different activities to make money in the current environment.

Bank earnings are under pressure from new regulations forcing them to set aside bigger capital cushions and reduce risky activities to avoid another financial crisis. Many are also paying fines and legal settlements connected to past misconduct over sales of risky financial products or rigging financial benchmarks.

Rock-bottom interest rates imposed by the ECB and other central banks also squeeze bank profits by reducing the gap between the rates that banks can borrow and the rates they can lend at. The low rates are intended to stimulate weak growth and raise inflation from levels considered too low.

The ECB's policies are further putting pressure on financial institutions by charging a fee on deposits they leave with the central bank. The ECB said, however, that this pressure would be offset by cheap loans the ECB will make available to commercial banks. In some cases, those loans would have negative rates, meaning banks would be paid to take them.