These weak profitability prospects represent a significant vulnerability for the euro area banking system, which is operating with significant overcapacity. At the same time, monetary policy accommodation continues to support lending volumes and banks have made significant progress in repairing their balance sheets.
Nevertheless, a rebalancing of the current composition of capital requirements towards a more prominent role for the countercyclical capital buffer, keeping the overall level of capital requirements unchanged, could help mitigate costly economic deleveraging during downturns. Non-bank financial intermediaries in the euro area have grown rapidly over recent years, which is a welcome development.