In response to European bank complaints about negative interest rates squeezing profitability, a senior official at the European Central Bank has responded that banks should look to adapt by adopting a more efficient business model.

Danièle Nouy, President of the Supervisory Council at the European Central Bank, said that while negative interests rates were a challenge for banks on the continent, there was still ample room for manoeuvre. “The banks could be more efficient”, she was quoted as saying by the Financial Times. “Digitalisation is a new possibility.”

As of March 2016, the ECB’s deposit rate – the amount it charges banks to hold deposits in the ECB – is in the negative, at -0.4 percent. This amounts to banks paying the ECB for the ability to hold deposits with it. This cost, however, has not yet been passed by banks onto consumers, due to a fear of pushing them away. This – alongside other factors – has contributed to a squeeze on bank profits in the euro area.

As of March 2016, the ECB’s deposit rate – the amount it charges banks to hold deposits in the ECB – is in the negative, at -0.4 percent

The profitability of European banks has been the cause of growing concern of late. Weak profitability among lenders has been cited a number of times as a cause of growing concern and a “key risk for euro area financial stability” by numerous ECB financial stability reviews.

Alongside this, banks in Europe took a hit from investors, also stemming from profitability fears. Banks have seen their equity values fall numerous times in 2016. Alongside this bearish outlook from investors for European bank stocks, investors have grown increasingly concerned that banks will not be able to honour their coupons on their convertible contingent bonds – which saw a decline in value alongside a rise in value of credit default swaps.