ECB says EU banks face more risks

by Richard Kilner

Story link: ECB says EU banks face more risks

The American subprime mortgage crisis means that banks in Europe will have to deal with increased risks in the latter half of this year, the European Central Bank said on Wednesday.

The ECB has warned that the increase in profitability via fee, commission and trading income, (a significant proportion of which may be of a non-recurrent nature), is the reason why market turbulence that began in July and August could affect many of the banks within the EU in the latter half of 2007.

The tightening of lending combined with a rise in funding costs could be additional factors in a medium-term slowing of profit growth, the ECB stated.

Billions have been written off by major banks across the globe to pay the price of the American mortgage market crisis this year.

The ECB was confident that despite this the strong profitability of EU banks over a number of years should have resulted in enough resilience to withstand both expected and unexpected costs of this nature.

Doubts about earnings and short term risks have both risen, the bank has said.

These doubts and risks would be exacerbated by further negative revelations in the American subprime sector, or if the wider credit and capital markets begin to be affected by the difficulties in the structured credit market.