decade after the financial crisis began, euro zone lenders remain a
dampener on the sector’s recovery, the Bank for International
Settlements said on Sunday.
“The financial sector faces an improving but still
challenging environment,” the BIS, a forum for central bankers, said in
its annual report.
“The near term economic outlook has brightened
substantially and financial headwinds have turned into tailwinds in many
Banks should use the “growth dividend” to increase
their resilience to market shocks and reshape business models, it added.
An improved economy will stop the rise in non-performing loans (NPLs)
whose repayments have fallen behind.
“That said, the banking systems in some jurisdictions
still look vulnerable to a further deterioration in credit quality. In a
number of euro area countries, for example, the share of NPLs remains
Euro zone authorities had to intervene in struggling
Spanish bank Banco Popular earlier this month, and face pressure to sort
out some of Italy’s problem lenders as well.
But economists say that Europe was hit by two crises –
one financial, the other related to euro zone countries’ debt. In the
meantime, U.S. banks have benefited from their main market being in a
stronger phase of the economic cycle – though the euro zone economy is
Europe, however, is widely seen as being slower and
less aggressive in tackling struggling banks compared with the United
States, and the region is still “overbanked”.
The BIS said banks globally have made progress in
cutting leverage and diversifying income, but market valuations for many
lenders still point to investor scepticism, the BIS said.
The price to book ratio of euro area lenders remains
below 1, meaning a bank’s market value is less than its balance sheet,
The gap between observed and required returns-on-equity
has narrowed, but in Europe the gap widened most recently, highlighting
persistent pressure to further improve profitability, the BIS said.
BIS economic adviser and head of research, Hyun Song
Shin, said European banks were also helping to give the impression that
finance globally, as measured by cross-border lending, was in headlong
“The consolidated perspective makes clear that the
shrinkage of international banking is largely confined to
European-headquartered banks,” Shin said.
“The other banking systems actually increased foreign claims in relation to world GDP.”