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Euro zone banks are still not profitable enough; Brexit is a ‘major risk’: ECB warns

Ralph Orlowski | Bloomberg via Getty Images

The European Central Bank warned on Thursday that banks need to boost their profitability and business models amid the risks that the sector faces.

The high level of non-performing loans across the euro area and geopolitical uncertainty, including the British departure from the European Union are "major risks" to the banking sector, the ECB said in its annual report on supervisory activities.

"(Banks) have become much more resilient over the past few years; their capital buffers have increased significantly," Danièle Nouy, chair of the Supervisory Board at the ECB, said in the report, adding however, they still face risks and challenges.

"Besides having to work out how they can raise profits in a challenging environment, how they can dispose of legacy assets and how they should deal with cybercrime and other IT risks, they currently face a number of other questions. Will competition from non-banks intensify? Where is the euro area economy headed? How will Brexit affect banks in the euro area? How will other geopolitical issues play out?," she added.

ECB officials are closely following how the most exposed banks to Brexit are monitoring the risks. Until now they have not identified significant funding or operational risks, but the political uncertainty could harm investments, the central bank said in the report.

To support British-based banks that are planning to move to the euro area due to the Brexit decision, the ECB is considering ways to ease regulation to allow that move to be faster.

The central bank could temporarily lift its requirement to pre-approve the risk models of U.K. banks that decide to move to the euro area, if these models had already been approved by British authorities, an ECB official said Wednesday.

This would allow British-based banks to move their operations quicker in case they opt to reduce their staff in the U.K. during the Brexit process.

Goldman Sachs told CNBC on Tuesday that it was going to move "hundreds of people" from London to the European Union.

Sabine Lautenschlaeger, an ECB board member, told bank executives that "there will be a transitional period in which new euro area entities might use internal models that have not yet been approved by the ECB."

"The transitional period will cease as soon as we have approved or rejected the bank's model application," she added.

A number of euro zone countries have been offering incentives to companies so they opt for their capitals to substitute London. The Irish authorities have even complained to the European Commission last week saying it is being undercut by other countries looking to become the next financial services hub.

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