European banks have been hit hard by stock sell-offs in markets. Germany’s largest bank, Deutsche Bank, saw its stock price decline by almost 10 percent on February 8, while Barclays, BNP Paribas and UniCredit all tumbled by five percent. The Euro Stoxx 600 fell by six percent, closing at 5.6 percent, levels not seen since the peak of the eurozone financial crisis in August 2012. Banks’ contingent convertible bonds also saw declines. Deutsche Bank’s traded at 75 cents on the euro, while Santander’s was at around 85 and UniCredit’s at 76.3.

One reason for a lack of confidence in European banks is the fear that they are facing a chronic crisis of profitability

As of February 9, European bank stocks seem to have stabilised slightly after Monday’s panic selling, for now at least. However, despite this brief recovery, the sharp sell-off of European bank shares in recent days is part of a wider decline in European bank stock value. So far in 2016, European bank stock has dived by 18 percent, in contrast to the broader market’s 10-percent dip. The continent’s lenders have now lost 17.3 percent of their value in the last 30 days.

One reason for a lack of confidence in European banks is the fear that they are facing a chronic crisis of profitability. A problem of bank profitability has been recognised by the eurozone as the biggest systemic risk to the financial system. This stems from Europe’s seemingly endless loose monetary policy. Low interest rates set by the ECB have reduced loan profitability. The spread between the cost at which banks borrow in the short term and lend in the long term has narrowed in both Europe and the US.

Added to this is the fact that ECB deposit rates for banks are in the negative. This means that banks are charged for deposits they leave with the ECB. Banks, as of yet, have been mostly unwilling to pass the cost of negative rates on to customers, for fear of pushing them towards withdrawing their deposits. As a result, the costs have been taken up by banks, eating into their profits. However, an attempt to offset this by charging higher rates for loans would hamper efforts for a general European economic recovery. Such a tightening of monetary policy could then put further at risk the €1tn worth of bad loans upon which banks are sitting – again, threatening their profits.

With no prospect of central bank rate raises on the horizon – amid increasing fears around global economic growth, burdensome bank-restructuring costs and new capital requirements coming in in 2019 – many investors seem to have concluded that the profitability outlook for European banks is less than stellar.