Stop Moaning About Rates and Consolidate, Draghi Tells Banks

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

European banks should focus on consolidation, cost-cutting and improving technology to boost profitability rather than complaining about the effects of negative interest rates, according to European Central Bank President Mario Draghi.

With Germany’s Deutsche Bank AG and Commerzbank AG discussing a possible merger, Draghi told a news conference in Frankfurt that the “banking system in Europe is overcrowded” and the “need for consolidation is very, very significant.” The ECB chief said he didn’t have a “clear preference” on whether it would be more beneficial for lenders to pursue cross-border combinations or domestic ones.

“Part of the structural weakness is caused by this overcapacity in banking, which is not overcapacity in the production of credit, it’s overcapacity in terms of the number of people, the number of branches, costs,” Draghi said, noting that some banks have a cost-income ratio as high as 90 percent.

“They even quarrel about negative deposit rates as being one of the causes of their lack of profitability,” he added. “There is a relationship between scale and the capacity to undertake the investments that are needed to improve technology and be competitive, especially in certain business models.”

Draghi said bank profitability in the euro area is about the same as Japan, better than the U.K. but lower than the U.S. The ECB is looking at ways of mitigating the effects of negative rates on banks, though officials have insisted that there would need to be a clear monetary-policy case to act.

To contact the reporter on this story: Iain Rogers in Berlin at irogers11@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Fergal O'Brien, Paul Gordon

©2019 Bloomberg L.P.