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Public hearing with Andrea Enria, Chair of the ECB Supervisory Board

10-12-2019

This note is prepared in view of a regular public hearing with the Chair of the Supervisory Board of the European Central Bank (ECB), Andrea Enria, which will take place on 12 December 2019. The briefing addresses (i) Single Supervisory Mechanism (SSM) priorities for 2020, (ii) Banks’ profitability issues; (iii) Stress testing developments; (iv) some individual bank cases; (v) supervisory issues and policies (anti-money laundering, Brexit, and impact of Basel III and IFRS9), and (vi) the completion ...

This note is prepared in view of a regular public hearing with the Chair of the Supervisory Board of the European Central Bank (ECB), Andrea Enria, which will take place on 12 December 2019. The briefing addresses (i) Single Supervisory Mechanism (SSM) priorities for 2020, (ii) Banks’ profitability issues; (iii) Stress testing developments; (iv) some individual bank cases; (v) supervisory issues and policies (anti-money laundering, Brexit, and impact of Basel III and IFRS9), and (vi) the completion of the Banking Union.

The main factors for the subdued profitability of significant banks in the Banking Union

09-12-2019

Most significant institutions in the euro area generate returns below the risk-adjusted rate required by investors. This paper surveys some recent studies on the causes of this low profitability, and then discusses several actions that the SSM may want to undertake, to support banks in their quest for higher returns.

Most significant institutions in the euro area generate returns below the risk-adjusted rate required by investors. This paper surveys some recent studies on the causes of this low profitability, and then discusses several actions that the SSM may want to undertake, to support banks in their quest for higher returns.

Externý autor

A. Resti

Main factors for the subdued profitability of significant banks in the Banking Union

09-12-2019

There is no “one-size-fits-all” strategy to achieve viable profitability, but all banks need good strategic steering and risk management capabilities to adjust their business mix to changes in the operating environment. Banks have already taken actions to enhance profitability and the room of manoeuvre for the future is not that ample. Policy makers can take further initiatives to fix structural inefficiencies and provide better conditions for banks to enhance profitability. These concerted actions ...

There is no “one-size-fits-all” strategy to achieve viable profitability, but all banks need good strategic steering and risk management capabilities to adjust their business mix to changes in the operating environment. Banks have already taken actions to enhance profitability and the room of manoeuvre for the future is not that ample. Policy makers can take further initiatives to fix structural inefficiencies and provide better conditions for banks to enhance profitability. These concerted actions would help reduce the gap between banks’ RoE and cost-of-equity.

Externý autor

B.Bruno, E.Carletti, EUI

Main factors for the subdued profitability of significant banks in the Banking Union

09-12-2019

In this paper we argue that the own findings of the SSM THEMATIC REVIEW ON PROFITABILITY AND BUSINESS MODEL and the academic literature on bank profitability do not provide support for the business model approach of supervisory guidance. We discuss in the paper several reasons why the regulator should stay away from intervening in management practices. We conclude that by taking the role of a coach instead of a referee, the supervisor generates a hazard for financial stability.

In this paper we argue that the own findings of the SSM THEMATIC REVIEW ON PROFITABILITY AND BUSINESS MODEL and the academic literature on bank profitability do not provide support for the business model approach of supervisory guidance. We discuss in the paper several reasons why the regulator should stay away from intervening in management practices. We conclude that by taking the role of a coach instead of a referee, the supervisor generates a hazard for financial stability.

Externý autor

T.Farina, J-P.Krahnen, L.Pelizzon, M.Wahrenburg

Main factors for the subdued profitability of significant banks in the Banking Union

05-12-2019

This paper examines how the ECB should respond to the currently low profitability of significant banks in the Banking Union. The subdued profitability appears to be a structural problem caused by overbanking, with too many bank assets chasing too few profitable banking sector opportunities. To address the root problem of overbanking, the ECB should use its existing supervisory powers to require significant banks with unsustainably low profitability to restructure reducing their overall size. This ...

This paper examines how the ECB should respond to the currently low profitability of significant banks in the Banking Union. The subdued profitability appears to be a structural problem caused by overbanking, with too many bank assets chasing too few profitable banking sector opportunities. To address the root problem of overbanking, the ECB should use its existing supervisory powers to require significant banks with unsustainably low profitability to restructure reducing their overall size. This document was provided by the Economic Governance Support Unit at the request of the ECON Committee.

Externý autor

Ata Can Bertay, Harry Huizinga

Monetary Policy in an Era of Low Average Growth Rates

29-11-2018

Economic growth in the euro area has been sluggish since the onset of the global financial crisis of 2008. While some of this sluggishness reflected cyclical patterns, ongoing weak productivity growth and demographic factors point to slow average growth rates for the euro area in the coming decades. This will most likely translate into a lower equilibrium real interest rate. The ECB should follow the Federal Reserve in providing estimates to the public of average nominal interest rate it expects ...

Economic growth in the euro area has been sluggish since the onset of the global financial crisis of 2008. While some of this sluggishness reflected cyclical patterns, ongoing weak productivity growth and demographic factors point to slow average growth rates for the euro area in the coming decades. This will most likely translate into a lower equilibrium real interest rate. The ECB should follow the Federal Reserve in providing estimates to the public of average nominal interest rate it expects to set over the long term and that this is likely lower than average rates during the pre-crisis era. The ECB should continue advocating for growth-boosting structural reforms but should also consider advocating for higher immigration levels to improve Europe’s demographic profile and growth potential.

Externý autor

Professor Karl Whelan

Negative Interest Rates and the Signalling Channel

14-09-2018

While negative interest rates stimulate the real economy by enhancing credit supply and improving the wealth situation of firms and households, they might come with side effects with regard to banking and financial stability. In an assessment of the trade-off between the ability of a central bank to use negative policy rates to signal lower future deposits rates, against the potential costs on bank profitability, we find that the signalling effect dominates. Thus, a negative interest rate policy ...

While negative interest rates stimulate the real economy by enhancing credit supply and improving the wealth situation of firms and households, they might come with side effects with regard to banking and financial stability. In an assessment of the trade-off between the ability of a central bank to use negative policy rates to signal lower future deposits rates, against the potential costs on bank profitability, we find that the signalling effect dominates. Thus, a negative interest rate policy is an effective monetary policy tool, even when deposit rates are bound by zero. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.

Externý autor

Kerstin Bernoth, Alexander Haas

Research for AGRI Committee - The EU Cattle Sector: Challenges and Opportunities - Milk and Meat

15-02-2017

The cattle sector is of great economic importance within the EU agricultural sector. Productivity of the sector is very heterogeneous. In the near future, a further increase in milk and bovine meat supply can be expected. To avoid a decline in farm gate prices, further product differentiation at the EU level, an increase in export opportunities as well as compensation for environmental services to support extensification will be needed.

The cattle sector is of great economic importance within the EU agricultural sector. Productivity of the sector is very heterogeneous. In the near future, a further increase in milk and bovine meat supply can be expected. To avoid a decline in farm gate prices, further product differentiation at the EU level, an increase in export opportunities as well as compensation for environmental services to support extensification will be needed.

Externý autor

Rico Ihle, Liesbeth Dries, Roel Jongeneel, Thomas Venus and Justus Wesseler (Wageningen University, The Netherlands)

How do low and negative interest rates affect banks’ activity and profitability in the euro area?

15-11-2016

Critics of ECB loose monetary policy warn against the risk that this policy squeezes banks’ profits, which could ultimately lead to higher lending rates and lower credit supply. This discussion has arisen in the euro area in particular, as banks’ profitability is low on average and some banks are burdened by a huge amount of non-performing loans. By extension, it is argued, low or negative interest rates impair the transmission mechanism of monetary policy. At the same time, however, the demand for ...

Critics of ECB loose monetary policy warn against the risk that this policy squeezes banks’ profits, which could ultimately lead to higher lending rates and lower credit supply. This discussion has arisen in the euro area in particular, as banks’ profitability is low on average and some banks are burdened by a huge amount of non-performing loans. By extension, it is argued, low or negative interest rates impair the transmission mechanism of monetary policy. At the same time, however, the demand for loans increases at low interest rates, which can lead to larger lending volumes and thus improve earnings. Obviously, there is no unequivocal effect on banks’ profitability ability from low/negative interest rates per se. Other problems such as a large proportion of bad loans, high operational/management costs and low productivity may play an important role in explaining the weak profitability of euro area banks. The notes in this compilation provide an assessment of these different effects. The notes have been requested by the Committee on Economic and Monetary Affairs as an input for the November 2016 session of the Monetary Dialogue.

Externý autor

Daniel GROS (CEPS, Centre for European Policy Studies), Christophe BLOT, Paul HUBERT (OFCE, Observatoire Français des Conjonctures Économiques), Maria DEMERTZIS and Guntram B. WOLFF (Bruegel)

The Future of the Almadraba Sector – Traditional Tuna Fishing Methods in the EU

15-04-2015

Bluefin tuna is one of the most important fish species in terms of value and source of employment in the EU. Eastern Bluefin Tuna trap set (“Almadraba”) harvesting is currently only practiced in Italy, Morocco, Portugal and Spain, though such fishing method was widely used throughout the Mediterranean Sea, and is of socio-economic and cultural relevance. Almadraba are more labour-intensive than any other fishing method and their production is increasingly appreciated by a high-end consumer market ...

Bluefin tuna is one of the most important fish species in terms of value and source of employment in the EU. Eastern Bluefin Tuna trap set (“Almadraba”) harvesting is currently only practiced in Italy, Morocco, Portugal and Spain, though such fishing method was widely used throughout the Mediterranean Sea, and is of socio-economic and cultural relevance. Almadraba are more labour-intensive than any other fishing method and their production is increasingly appreciated by a high-end consumer market, either internal or international. Almadrabas must be considered as one key-tool of the EBFT stock management because of their available historic biometric datasets.

Externý autor

Luis Ambrosio and Pablo XandriI

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