Claudia Buch: Bank profitability - a mirror of the past, creating a vision for the future

Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at Bocconi UniversityMilan, 16 October 2024. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
29 October 2024

The history of banking contains many examples of institutions that reported high profitability before failing. This profitability concealed underlying risks and, over time, proved to be illusory. In the run-up to the global financial crisis, bank profitability was relatively high, but, as the crisis unfolded, these profits declined sharply and turned into losses.

Banking regulation and supervision have significantly improved since then. Regulation has been reformed at the global level, requiring banks to be better capitalised and more liquid, while the Single Supervisory Mechanism, underpinned by the Single Rulebook, has been established.

Bank profitability in Europe has increased in recent years. In some ways, the current levels of bank profitability mirror the past – structurally, by reflecting differences in markets and banks' business models, and more cyclically, by reflecting the changing macroeconomic environment and higher interest rates. This raises the question as to whether profitability is a good metric for assessing bank resilience or if there are other indicators we should consider.

In a market economy, profitability is a key performance indicator. It is highly correlated with business models, productivity and, in this sense, the contribution that firms make to economic welfare. Banks are no exception here.

At the same time, profitability does not measure firms' contribution to welfare more broadly. Generally, a high degree of profitability can signal excessive market power. In the financial sector, it can be difficult for outsiders to verify the quality of services provided and the underlying risks. High profitability can therefore also signal excessive risk taking or even fraudulent behaviour. Banks and their shareholders may take on more risk than is socially acceptable if there are potentially great rewards to be had and only limited downsides. Seeking to maximise profits in the short term can be detrimental to the longer-term sustainability of a business model. In addition, the public cares a great deal about banks' stability and resilience since banking crises can come at a significant cost to the taxpayer.