By European Central Bank
ECB Banking Supervision aims to keep banks sound and healthy. This requires ongoing supervision of their activities today, as well as making sure they are fit for tomorrow. Especially in uncertain times, effectively adapting business models to changes in the macroeconomic environment is crucial for managing risk. This is why banks’ business models and profitability have ranked high on supervisory agendas for several years in a row and supervisors regularly assess how banks fare in day-to-day supervision. This attention is clearly needed: one in four banks was not able to benefit from rising interest rates due to their business mix and internal steering. On a more positive note, the ECB found that banks with stronger strategic steering capabilities typically generate higher returns. This might incentivise all banks to proactively improve their processes and procedures, where relevant.
In this article, we explain how banks’ profitability responded to the challenging economic situation and why we would caution against overly optimistic forecasts. Finally, we share the key lessons from our 2022 on-site inspection campaign on banks’ business models and profitability.