More Action Needed on European Bank Profitability

By John Caparusso, Rohit Goel and Will Kerry

August 30, 2017

Versions in Español (Spanish), Deutsche (German), Français (French)

A woman withdraws money from an automated teller machine in Italy: Some European banks have too many branches relative to assets (photo: Martin Moxter imageBROKER/Newscom)

European banking has made considerable progress in the past few years: Banks have built up capital, regulation is stronger and supervision has been enhanced. But profitability remains weak, posing risks for financial stability.

In a sample of more than 170 large European lenders with combined assets of $35 trillion, roughly half generated a weak return on equity in 2016, and banks representing only 15 percent of assets generated a healthy return on equity, defined as more than 10 percent. Weak profitability is also shown in a low return on assets for domestic banks in many European countries. The drivers of these weak returns reflect varying combinations of low income, high costs, or provisions needed to build buffers against non-performing assets.

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Why Talk of Bank Capital ‘Floors’ Is Raising the Roof

By Tobias Adrian and Aditya Narain

June 8, 2017

The headquarters of the Bank for International Settlements in Basel, Switzerland, which houses the Basel Committee on Banking Supervision (photo: Christian Hartmann/Reuters/Newscom)

Calculating how much capital banks should have is often a bone of contention between regulators and banks. While there has been considerable progress on reaching consensus on an international standard, one key issue remains unresolved. This is a proposal to establish a “floor,” or minimum, for the level of capital the largest banks must maintain.

Some financial institutions and national authorities question the need for a “floor,’’ arguing either that differences in business models or other elements of the global regulatory framework—notably limits on the amount of leverage banks may take on—make them redundant. We disagree. The floor reduces the chances that banks can game the system to reduce their capital buffers to levels that aren’t aligned with their risks. It is an essential element of global efforts to create a level playing field for banks operating across countries by strengthening common standards for regulation, supervision and risk management.

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Global Financial Stability: What’s Still To Be Done?

The quest for lasting financial stability is still fraught with risks. The latest Global Financial Stability Report has two key messages: policy actions have brought gains to global financial stability since our September report; but current policy efforts are not enough to achieve lasting stability, both in Europe and some other advanced economies, in particular the United States and Japan.

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