European banks are not becoming profitable enough
to be competitive despite increasing equity prices and a steepening yield
curve, says the International Monetary Fund (IMF) in a report released on
Wednesday (19 April).
The annual Global Financial Stability report
highlighted the inability of European banks to generate sustainable profits.
Chronic low margins increase global risk and banks would be unable to cushion
themselves from an economic shock. They would be forced to take unhealthy and
often risky ventures to increase their profitability, the report said.
'Overbanking' in the industry has been faulted as
one of the main reasons for low margins. According to the report overbanking is
"the variety of structural factors that lead to an overly large
banking
sector that affects the profitability of the banks in the system".
European economies exhibit different symptoms of
overbanking, which makes the formulation of a policy prescription more
difficult. For instance, overbanking can be applied to a banking system with
excessive assets, or numerous weak banks with low buffers, or many banks with
low ambitions and a restricted regional focus. Regardless of the nature,
overbanking drastically reduces revenues and affects the industry's cost
structure and operational efficiency.
According to the report, banking regulations may
grow more challenging and complex. However, a possible upside to this is a
reduction in the concentration of banking activities which adds the benefit of
diversification to global financial stability.
A recent IMF report suggested that the persistent global
environment of low growth and low interest rates could fundamentally overhaul
the banking system worldwide.
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