In mid-April, the European Commission and the European Central Bank published a joint statement in which they assessed very positively the recent performance of Spanish banks and the degree of fulfillment of their mission to finance the economy. Specifically, they emphasized the reduction in non-performing loans, which has already fallen to European levels, in parallel with the continuous balance sheet cleanup through the reduction of foreclosed assets during the crisis. The latter has become a priority for European banks driven by the authorities. The objective is to further strengthen the sector and pave the way to complete the banking union.
European banks face significant challenges when designing their future strategy, ranging from improving margins in their traditional business in an exceptional scenario of zero interest rates to the digital transformation demanded by their customers. Strict regulation of the sector focused on customer protection and financial stability also poses high costs, without underestimating the uncertainty generated by the fact that it is under constant review. The emergence of new banking competition from entities that are not banks and are not subject to such strict regulation and supervision entails risks—for banks and, more importantly, for the rest of society—risks that cannot be overlooked. In this scenario full of challenges, banks are redoubling their efforts to strengthen and improve their profitability. Overcoming the legacy of the past crisis on bank balance sheets is essential to continue advancing in both objectives and improve future prospects.
Capital is a precious and very expensive asset for banks at this time. Despite the improvement observed in the profitability of European banks, including Spanish ones, their level remains below the cost of capital. This is an exceptional situation, incompatible with the desired stability of the sector in the medium and long term. The amortization and sale of non-performing assets (loans and foreclosed properties) frees up capital that can be allocated to productive purposes and also to continue strengthening efficiency in customer service and in the banks’ own internal management. The cost savings this entails in the current environment, marked by digital transformation and growing competition in the provision of financial services, is not negligible.
The reduction of non-performing assets inherited from the crisis may be the definitive boost our authorities need to complete the banking union. During the crisis, significant progress has been made to finalize it, an essential step to make the monetary union itself viable. Under common banking supervision and following the creation of a single resolution mechanism, the only remaining step is to establish a common deposit guarantee that truly enables risk-sharing in the eurozone and clears the way for a genuine European capital and financial services market. However, there is no unanimity among European authorities on how to proceed, and it does not appear there will be until the accumulated risk on bank balance sheets is further reduced.
Economic prosperity relies on well-functioning financial systems, which necessarily requires good regulation and supervision and a clear strategy by banks to increase their profitability and solvency. It is important that the burdens of the past do not interfere with the strategy for the future. For the benefit of banks, but especially of their customers, who are their reason for being.
