Low Rates Are Creeping Risk to European Banks, Says SRB Chair

By Viktoria Dendrinou and Madeleine Nissen 

        BRUSSELS--Low interest rates threaten European banks' profitability, posing a challenge to such firms and a source of concern for regulators, according to the head of the European Union's new agency for winding down failing lenders.
        In an interview with The Wall Street Journal, Elke Konig, the chairwoman of the Single Resolution Board, the Brussels-based entity tasked with handling troubled banks, said that current low rates represent a "creeping risk" for the industry, and that lenders are likely to address low profitability through mergers and branch closures.
        "If you cannot do a lot about the income you have to review your costs," Ms. Konig said.
        Central banks around the world have pushed interest rates to historic lows in a response to the global financial crisis and in an effort to boost weak economic growth. But those low rates have been squeezing interest margins--the difference between what banks earn on loans and what they pay on deposits--thereby reducing bank revenues.
        German banks, for example, earn about 70% of their income from their interest margins, according to figures from the Bundesbank, the German central bank.
        Meanwhile, lenders are now facing new competition by the increasing number of financial technology startups--so-called fintechs--that offer classical banking products such as credit, as well as crowdfunding and asset management.
        "We have heavy competition", Ms. Konig said. "Profitability of banks is a concern."
        Ms. Konig, who until recently headed Germany's financial watchdog, was in March put in charge of the Single Resolution Board, the entity tasked with preparing recommendations on whether to wind up a struggling bank and how to share costs among creditors.
        The board is part of the Single Resolution Mechanism, which will be responsible for shuttering or restructuring the 130 biggest eurozone banks if they run into trouble, starting in 2016. It will also have the right to intervene in any of the 6,000 or so eurozone lenders if it sees the need.
        The mechanism is also aimed at making sure that national resolution authorities are cleaning up bad assets properly, rather than allowing problems to go unaddressed. These national authorities will also be expected to impose losses on investors and creditors under planned EU rules, rather than using taxpayer money for rescues as was common during the financial crisis.
        Although the financial system is still vulnerable, Ms. Konig sees one significant improvement in comparison to precrisis conditions: the growing power of regulators.
        "What helps: When a resolution authority sees a bank in its current structure has nearly insurmountable obstacles to resolution or even to recovery, it can mandate changes to the structure," she said. "Management can, and most likely will, take action to change that structure."
        Banks are already working hard on structural changes. Big players are focusing now more strongly on digitization, investing hundreds of millions of euros in their online and mobile platforms. Many are under strong pressure to catch up with rivals who addressed the need for mobile banking years ago.
        Ms. Konig is also keeping an eye on whether countries have adopted a key new law that sets out rules for imposing losses on a failing bank's shareholders and creditors that come into force in 2016. EU countries had to convert the regulation into national law by the end of 2014, but many have yet to do so.
        Whether countries have adopted this law--the so-called Bank Recovery and Resolution Directive--is a major concern, Ms. Konig, said, adding that it would be a critical tool for the Resolution Board when it winds down troubled banks.
        Drafting of resolution and recovery plans by individual banks is also key, according to Ms. Konig. "Not all banks have worked on that yet, " she said. "We know that Germany has been one of the front runners."
        She didn't identify any laggards.
        Another problem is outdated information technology. "[The] problem: Banks have grown through mergers. In the front of the shop it looks nice", Ms. Konig said. But that masks shortcomings, requiring large investments to update technology, some of which is still at the level of the 1980s.
        Write to Viktoria Dendrinou at viktoria.dendrinou@wsj.com and Madeleine Nissen at Madeleine.Nissen@wsj.com
        (END) Dow Jones Newswires

        July 22, 2015 14:51 ET (18:51 GMT)

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