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ECB warns crowded banking sector is squashing profits

23 September 2016 11:00 (UTC +04:00)

Baku - APA-Economics. European Central Bank President Mario Draghi is warning the region’s banking sector is getting too crowded, with overcapacity eroding profits and ultimately forcing some lenders to shake up their business, Market Watch reported.

In his welcome address to the European Systemic Risk Board’s annual conference, the central bank boss acknowledged that the squeeze on eurozone banks partly is due to low interest rates, but just as much because of “overbanking.”

“A number of reasons have been mooted as the causes of this low profitability, including low interest rates,” he said Thursday.

“But overbanking is also a factor in the current low level of bank profitability. Overcapacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins,” he added.

Such capacity means the financial sector isn’t working efficiently enough, according to Draghi.

“In the broader context of generalized over-capacity and technological innovation, some banks will need to review their business models to bolster profitability,” he said.

Banks in Europe have had a rough year. Their earnings have been hit by increased regulations, negative interest rates and uncertainty after the U.K.’s Brexit vote to leave the European Union. In particular, the ECB’s negative interest rate policy has been blamed for adding unnecessary pressure on the region’s struggling banking sector.

The share prices of banks in negative-interest rate countries have fallen significantly more this year than those of lenders in regions with rates above zero, Citigroup noted in a report out this week.