May 5, 2015 / 2:40 PM / 4 years ago

EU regulators put pressure on banks to revamp business models

* Regulators say some bank business models not sustainable

* Rising misconduct costs also a concern for regulators

* Regulators want stress tests to include misconduct costs

By Huw Jones

LONDON, May 5 (Reuters) - Some banks must change their business models to make themselves more sustainably profitable in a era of low interest rates and tougher regulation, European Union regulators said on Tuesday.

The bloc’s banking, insurance and markets watchdogs published a joint update on risks to financial stability that supervisors across the 28-country EU will be required to monitor.

The report said changes to banks’ business models should be assessed to make sure they don’t stop the provision of financial services to the economy, such as making markets in stocks and bonds that help companies raise funds.

“Fundamental questions remain about the sustainability of some banks’ business models in search for sustained and solid profitability, especially for those which still have not yet adapted to an environment of prolonged low interest rates,” the report said.

“Expectations are that some banks will need to further change their business models towards those which have proved successful, once the regulatory framework has been implemented.”

The report did not give examples of successful and unsuccessful business models, nor name specific banks.

The promotion of sounder and more innovative business models could deliver extra stimulus to the economy, it said.

Some banks are struggling to raise their return on equity back above their cost of capital and are cutting activities such as investment banking or making markets in commodities to reduce overheads, blaming tougher rules in part for having to do this.

The three watchdogs, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the European Banking Authority, also warned about the rising costs of misconduct at lenders.

Banks have been fined billions of euros for trying to rig currency markets and interest rate benchmarks.

The size of fines has risen sharply, especially in the United States, making it harder for supervisors to calculcate how much capital banks should hold.

Penalties that include curbs on some activities have also raised concerns at some regulators.

“Despite numerous actions already taken by regulators and supervisors, both from prudential and consumer protection perspectives, recent misconduct incidents indicated that additional measures are needed to address and prevent conduct of business risks properly,” the report said.

Adequate inclusion of misconduct costs in future EU stress tests of the sector would be desirable, it said.

The report said supervisors should take extra measures when needed, such as forcing banks to hold more capital to cover potential fallout from big fines.

The report called for better cooperation among regulators across the world to “ensure that any spillovers from enforcement action are well managed”. (Editing by Mark Potter)

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