BNP PARIBAS Daniele Nouy, who heads the ECB's banking supervisory arm, told Reuters on Friday that simply finding more capital to plug shortfalls uncovered by the stress test may not be enough.
"Partly because of the financial situation in Europe and partly because of the structure of the banking systems in Europe ... the sustainable profitability is probably the main challenge and the main risk for banks in the coming years," Nouy told Reuters.
"They have to establish sustainable profitability."
She added: "There are a number of banks that went through the comprehensive assessment, but might not go through next time."
From this month, the ECB became the direct supervisor for the single currency area's top 120 banks like Santander (>> Banco Santander, S.A.), BNP Paribas (>> BNP PARIBAS) and Deutsche Bank (>> Deutsche Bank AG) with powers to force them to top up their capital buffers or make other changes to keep them safe and sound.
Nouy has already asked some of the banks who struggled in the stress test to resubmit their plans for reinforcing their capital buffers.
"When we review the capital plans of the banks with a shortfall now it's totally about business model, it's the most important dilemma," she said.
"We are not considering that one category of business model is better than another," she said.
"A lot of bankers are not in denial. They may not be rushing to take measures, but they know this is something they will have to address."
Jose Vinals, director of monetary and capital markets at the IMF, last month said an IMF study showed only about 30 percent of eurozone banks had a structure able to deliver a reasonable rate of return over time to build capital and support new lending, compared to about 80 percent of banks in the United States.
CATASTROPHE CAPITAL
Nouy, a former Bank of France senior official, warned struggling banks resorting to hybrid debt or contingent capital, which she dubbed "catastrophe capital" because it is written down or converts into equity when a bank is near collapse, to bolster their safety buffers.
"If the bank is not profitable, do we want the bank to use contingent capital with a costly coupon? We are not sure."
The ECB will launch a "supervisory campaign" next year that will scrutinise profitability of lenders, and home in on any concentration of risks or dangers from poor quality loans on their books, and risks from misconduct.
Banks will have to consider whether they should be holding on to loss-making or problematic branches and subsidiaries that are not core to the business.
"Sell your branch or sell your subsidiary if you believe you are not able to control the culture or have proper internal control or put adequate people to manage the bank," Nouy said.
"A lot of significant losses were taken in places that were of small importance vis-a-vis the rest of the group."
Nouy said the ECB will check the models each bank uses to tot up risk-weightings assigned to their loans, a core calculation for determining how much capital they should be holding.
These calculations vary so much some regulators have looked for simpler ways such as emphasizing the leverage ratio, a broader measure of capital to assets on a non-risk weighted basis.
She said it was unclear whether the next stress test of major lenders in the wider European Union will take place in 2015 as the "post mortem" of this year's health check was still under way.
(Additional reporting by Steve Slater)
By Huw Jones and Eva Taylor
