ECB WARNING: Failing banks and weak economies could wreck Eurozone recovery
THE European Central Bank has issued stern warnings regarding the health of eurozone banks, insisting these failing financial institutions poses a threat to the economic recovery of the area.
The ECB published its latest edition of its twice yearly Financial Stability Review which showed banks' solvency and profitability had improved but still showed a "wide gap" with global peers.
It also warned that banks were taking on more financial risk especially in the bond markets arena. Vitor Constancio, ECB vice-president, said: "Markets are pricing to perfection, as though things will remain rosy."
He added a large geopolitical shock could lead to a bout of volatility for investors.
Whilst the eurozone's economic performance in 2017 has outperformed its forecasts, banks in weaker economies have almost €1trillion of bad loans. Out of the eurozone's largest economies Italian banks has the biggest problems with bad loans.
ECB vice-president on slack in the eurozone
Bad or non-performing loans are lending on which interest is overdue and full collection of principal is uncertain.
The ECB has also announced a protest to force banks to deal with the problem of non-performing loans but has faced opposition from lawmakers in Brussels who say the central bank has overplayed its position within the EU.
Germany, which has recently faced numerous financial and political instability, is also ranked as an EU country with sufficient problems and facing weak returns.
The central bank went on to say that more banks need to aspire to be like their Scandinavian rivals by cutting costs and embracing digitalisation.
The big difference between Scandinavian banks and those in the rest of Europe is low costs. What is important [for eurozone financial stability] is for banks to change their business model to increase their cost efficiency.
Mr Constancio said: "The big difference between Scandinavian banks and those in the rest of Europe is low costs.
"What is important [for eurozone financial stability] is for banks to change their business model to increase their cost efficiency."
These instructions from the ECB are unlikely to be met with positivity from european banks as many of them blame the body for its aggressive monetary easing for their falling profits.
The ECB has imposed negative interest rates on lenders as part of its aim to increase inflation and growth.
Banks are paying a levy of 0.4 per cent on a part of their deposits.
Still, Mr Constancio said ECB supervisors had to be given the "power to issue guidance" and "define aims that put pressure on banks" to tackle the problem of non-performing loans head on.