Luis de Guindos, Vice-President of the European Central Bank (ECB), delivered a speech titled ‘The euro area financial sector: opportunities and challenges” at the XXVI Santander Iberian Conference on Thursday.
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.
Side effects of policy are being monitored carefully.
Euro area banks’ market valuations remain depressed.
EUR/USD: Back to square one
EUR/USD has pared back gains and trades in the familiar range around the 1.10 handle. The spot jumped to fresh session highs of 1.1014, in a knee-jerk reaction to the comments by the ECB President Lagarde delivered in the last hour.