ECB's De Guindos Warns Bank Profitability May Erode Amid Economic Slowdown

Euro area banks could see their profitability prospects weaken as the economic growth slows, making the operating environment more challenging, European Central Bank Vice President Luis de Guindos said Tuesday.

"Recently, profitability concerns have again come to the fore as the operating environment for banks has become more challenging, with economic growth projected to slow down in 2019," de Guindos said in a speech in Rome. "Banks' profitability prospects could thus be dampened by deteriorating growth expectations, adding to structural weaknesses."

The policymaker pointed out that persistently low profitability can limit banks' ability to generate capital organically, thus make it harder for them to build up buffers against unexpected shocks and limit their capacity to fund loan growth.

Banks with limited earning power may be tempted to take high risk, which could lead to financial imbalances, de Guindos said. "The overall effect of our monetary policy on bank profitability has so far been broadly neutral," the policymaker said.

"Nevertheless, the overall effects of negative rates on the banking sector need to be carefully monitored, particularly because the balance of their effects will depend on how long rates remain in negative territory."

Last week, de Guindos said the central bank will react with a combination of measures if it perceives that inflation is set to deviate from its target, and further asset purchases remain a possibility.

Benoit Coeure, a member of the ECB Executive Board, said in an interview published on Monday that the bank would consider the impact of negative interest rates and the tiering system if it had to cut rates in future.

A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB.