In a recent speech by Andrea Enria, chair of the ECB’s supervisory board, he remarked that the sustainability of banks’ business models continues to be one of the central bank’s supervisory priorities. In early 2021 a campaign of inspections was initiated on business models and profitability, covering 11 institutions and various business models and business lines.
The campaign will continue throughout 2022 and extend to other banks. It covers four dimensions of profit sustainability: profitability analysis, financial projections, strategy review process and loan pricing.
The ECB is assessing a number of aspects, ranging from the management board’s ability to set up a strategy to the institution’s ability to analyze the drivers of profitability, including the detailed allocation of cost and income sources, the components of the bank’s loan pricing framework and the assumptions and scenarios used in the bank’s business plan.
Further engagement with banks and supervisory activities are also expected in the area of digitalization, including the launch of pilot inspections.
Enria also noted that European banks have had to face forms of competition other than those stemming from an overly crowded market of traditional banks. The steady increase in the population’s access to internet services and use of electronic money since the early 2000s has significantly changed the banking environment. Digital banks and fintech companies have been entering the traditional banking arena as well as other new markets for digital financial products and services.