Bank profitability is set to suffer in the short term. This is inevitable given the severity of the health crisis, its economic impact, and how institutions have responded to protect their clients and guarantee the functioning of the financial system. Priorities are clear, and banks are reflecting this through their decisions.
The pandemic increases the risk to financial stability. Authorities now cite the value of financial assets, market behavior, and public debt as vulnerabilities in the banking sector. And, naturally, profitability, as could not be otherwise in a context of economic paralysis. These are the main ingredients of uncertainty regarding the future. European banks have significantly strengthened their capital over the last decade in anticipation of an adverse economic and financial scenario that is now materializing. We are witnessing a shock that everyone—governments, authorities, and companies—intends to be short-term due to the exceptional measures adopted in the face of an equally exceptional economic and social situation. All these measures are also mitigating short-term risks to financial stability.
What will happen in the medium term? Profitability and solvency are the necessary conditions to guarantee financial stability. The sufficient condition is that banks can implement their business strategies in a predictable context without interference. Crises occur because they cannot be anticipated. However, changes in banking regulation, its complexity, or any other official decision that limits the room for maneuver for entities to develop their strategy can also jeopardize their stability and thus reduce shareholder confidence in the sector. The imbalance of recent years between profitability and the cost of capital in a context of negative official interest rates and the revaluation of financial assets is a good example. Perhaps it was not so much a question of low profitability as it was a cost of capital that was too high.
The objective of banks goes beyond profitability itself. Their purpose is not only to obtain economic profit metrics, but to contribute to the progress of the economy and society through their decisions. Banks are accountable to savers and shareholders, and also to society. This double responsibility is not a limitation, but a reflection of the role they play through their daily operations for the benefit of current and future citizens. A favorable scenario for banks has a clearly positive impact on society by facilitating the financing of growth and driving prosperity. Similarly, we are all negatively affected when financial stability is in question. We must be aware of this.
José Luis Martínez, Spokesperson for the Spanish Banking Association
