Economic stimulus is putting profits of Europe's banks at risk, warns ECB

ECB
Investors are concerned about the profitability of the banking sector

Economic stimulus in the eurozone may soon risk undermining the profits of the continent’s banks, the European Central Bank’s chief economist has warned.

Peter Praet said that “the profitability of the sector will be a key consideration” in assessing how the central bank can help to stimulate the euro area economy.

The ECB board member said that banks had been passing on lower interest rates to their customers because of competition. “In a relatively narrow market where there is still overbanking, you compete for the few customers that you have,” he said.

But Mr Praet warned that “at some point banks may start to not pass on these conditions”. He added that he believed “this time is coming closer”.

Economists believe that as central bank interest rates decline, and commercial lenders attempt to pass them on to savers, there will come a point when consumers cease to make deposits at high street banks.

If rates of return fall too low, it is believed that these depositors will start to withdraw their money from the banking system altogether. In this case, interest rate cuts would cease to stimulate the economy, and could instead cause activity to decline.

Banks
Bank stocks have been hit since the EU referendum

The chief economist said that he believed the sell-off in European banking stocks since the UK’s referendum on EU membership revealed that investors were concerned about the profitability of the sector.

He pointed out that the largest movements had been in the shares of lenders, rather than in the bonds they have issued, which Mr Praet concluded “reflected earnings”, which it is believed could fall after the Brexit vote.

Mr Praet, who was speaking at a conference organised by the Financial Times in London, also hinted that completing banking union within the eurozone had become more important after the UK’s referendum result. He said that completing the work would rely on other authorities than just the ECB.

“I don’t know how the political debate will end,” he said, highlighting upcoming elections in both Germany and France next year. Mr Praet added that banks are uncertain “about the environment they are going to operate in in the next year - there is a question mark over that, and that’s not good”.

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