By Dhara Ranasinghe and Huw Jones
LONDON (Reuters) - European Central Bank interest rates are likely to stay low for a long time and banks in the euro area should consolidate and step up efforts to improve profitability, ECB Vice-President Luis de Guindos said on Wednesday.
"The low interest rate environment is with us for the foreseeable future and is caused in large part by durable structural factors," de Guindos told an event in London.
"Even once monetary policy normalizes, interest rates are likely to remain below levels that were common in previous decades."
The ECB's key deposit rate is at minus 0.40 percent and expected to remain at that level for some time given weak economic growth.
De Guindos said that while mergers in the banking sector both at a national and cross border level were viable, it was essential that any combined entity can sustain profitability in the long-run.
Deutsche Bank (DE:DBKGn) and Commerzbank (DE:CBKG) said this month that their talks on an all-German merger had ended.
"I do not like national champions," de Guindos added.
While the ECB is encouraging more consolidation in the "crowded" banking sector, de Guindos said that price stability remains the central bank's core objective.
"We do not have any sort of bank profitability mandate," de Guindos said, stressing that banks were impacted by structural factors and struggling before the ECB introduced unconventional monetary policies.
De Guindos also noted that the "doom loop" link between banks and government debt was not as relevant as in the past, and the focus was now on banks' non-performing loans.
HOPEFUL ON BREXIT TALKS
De Guindos said that he believed the extra time awarded to Britain to secure an orderly exit from the European Union would prove fruitful.
"I hope we will be able to take advantage of the new period of time that British government, parliament have at its disposable to reach an orderly Brexit," he said.
On Italy, de Guindos stressed the need for reforms that would boost the country's economic performance and help reduce debt levels.
"The main recommendation is to pursue reforms that improve the effectiveness of the economy," he said.