ECB's De Guindos calls on lenders to consolidate

A top European Central Bank official renewed his calls for sector consolidation among lenders on the Continent, telling an audience that bank profits below some lenders' cost of capital was "unsustainable".

"The structurally low profitability of the euro area banking sector remains a concern for financial stability and for monetary policy," he said.

In remarks prepared for a speech in London, ECB vice-president, Luis de Guindos, explained softer growth prospects meant that financial stability risks were now higher than a year ago.

Among those he cited the risk of a possible disorderly increase in risk premia, debt sustainability concerns, low bank profitability and imbalances in the non-bank financial sector.

He also highlighted the risks from the negative feedback loop which might exist between concerns about the sustainability of country's sovereign debt loads and lender's profitability, given the exposure of the latter to higher bond yields and wider interest spreads via their fixed income portfolios and funding costs.

Against that backdrop, at just 6% on average, euro area banks' return on equity remained below their long-run cost of capital, which most banks put at between 8-10%.

In turn, prospects for low profitability lay behind lenders' shares trading below their so-called book value and limited their ability to raise capital where needed, De Guindos said.

That situation, he went on to explain, preceded the ECB's recourse to so-called 'unconventional' monetary policy.

But De Guindos wasn't only talking about cross-border mergers, calling on smaller lenders even within the same country to look at potential tie-ups that might allow to free up capital to invest in the IT they needed to meet the challenges of the digital era.

And in any case, when considering a merger, lenders needed to ensure that they were capable of successfully executing it and that it will be profitable on a sustained basis, stretching out into the long run.

Also in London, the ECB chief economist designate, Philip Lane, told academics and diplomats at his country's embassy that the central bank's arsenal had not yet been depleted and that increased fiscal spending might help buoy investment.

"The idea that the ECB lacks potency is very far from where we are."