German banks are in a better position than others in the euro area, but they should not be complacent as intense competition could reduce earnings significantly in the future, European Central Bank Executive Board Member Yves Mersch said Wednesday.
“On the one hand, excessive costs have until now prevented the building up of additional equity. And, on the other hand, competition in the German banking sector is likely to intensify noticeably,” Mersch said in a speech in Munich.
Some big German banks have already changed tack due to the financial crisis and have scaled back their investment banking business, the policymaker noted. Further, technological advancements have allowed foreign bank to gain access to the German market, he added.
German savings banks should also feel the pressure to adjust, Mersch said, adding that the sector’s “stability is not set in stone”.
“Intensified competition within an environment of low interest rates over a longer time period could markedly reduce earnings in the future.”
Under such circumstances, the traditional business models should be put under scrutiny, the policymaker said.
Mersch also pointed out that large German banks are hardly recording any profit growth despite the healthier economic situation in the country vis-a-vis other European countries.
“Given the large capital buffer, even if earnings decline significantly, depending on future interest rate developments and German banks’ willingness to adjust, I presume that there are no noteworthy risks to financial stability in this country right now,” Mersch said.
Further, the policymaker said European banks are significantly more resilient than they were five years ago as they strengthened their capital base and reduced their debts.
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