Investing.com – European Central Bank (ECB) president Mario Draghi focused his speech on Thursday on the need for providing more than one channel through which to finance the real economy and noted that an overabundance of banks was partly responsible for their low profit levels.
In a speech delivered at the first annual conference of the European Systemic Risk Board (ESRB) in Frankfurt, Draghi focused on the importance of financial institutions.
“Banks play a vital role in financing small and medium sized enterprises, which are a key part of the European economy,” he said.
The ECB chief insisted that lending must continue if Europe is to prosper but warned that bank lending has a tendency to be procyclical.
“The clear policy message is that it is better to finance the real economy through several channels rather than to rely on just one,” he said.
“Capital markets in particular can act as a useful ‘spare tire,” Draghi suggested, explaining that as the essential reason why the ESRB supports the capital markets union whose goal is to remove barriers to the development of capital markets.
Further on, Draghi admitted that low interest rates were partly responsible for the low levels of bank profitability, but also placed the blame on “overbanking”.
“Over-capacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins,” Draghi explained.
“Such over-capacity also means the sector does not operate at the efficient frontier, which is one reason why cost-to-income ratios remain high in some countries,” he concluded.
Draghi did not comment on monetary policy in his speech.