But even when fully provisioned, NPLs hamper profitability by tying up scarce capital without providing returns, absorbing operational capacity and incurring legal and administrative costs. While NPL ratios have improved over the course of the expansion, overall revenue growth remains subdued across the banking sector. Aggregate net interest income as a share of equity fell marginally between 2015 and 2018, although it is still higher than in countries such as the United Kingdom that have not had negative policy rates. Yet a number of euro area banks have successfully delivered robust earnings in recent years. A recent study by the ECB highlighted the differences between this group and the remainder of significant euro area banks.9 The median of these best performers managed to lift its return on 2/5  BIS central bankers' speeches  equity by 3.6 percentage points in 2014–17 relative to 2009–13. By contrast, the median profitability for other significant banks was essentially unchanged. Between those periods, the best performers managed to keep net interest income growing roughly in line with costs, whereas the other banks generally witnessed cost growth outpacing growth in net interest income. Moreover, the best performers managed to increase net fee and commission income by more than half between 2009 and 2017, relative to the less than 10% growth managed by the remainder. Developing sustainable revenue streams beyond net interest income – such as fee and commission income – remains vital in order to buttress profitability in the coming years.

As a result, euro area cross-border banking groups potentially face higher costs than interstate banking groups in the United States. 3/5  BIS central bankers' speeches  This recourse to ring fencing takes a narrow national perspective. At present, national deposit insurance schemes will be drawn upon should depositors need to be compensated during bank resolution. Hence the desire of national authorities to ensure that each national subsidiary is sufficiently capitalised and has adequate liquidity. Completing banking union, including the introduction of a European deposit insurance scheme and the removal of the remaining national options and discretions, would help ensure that the costs of resolution are equitably shared. Meanwhile, it would enable banks to use liquidity and capital efficiently at the euro area level. Competition from outside the sector The final challenge for bank profitability comes from increasing competition from outside the sector, in particular from financial technology companies (fintech) and non-bank financial companies. Lightly regulated fintech companies have begun to encroach into the realm of payment and settlement systems. More than 60% of incumbents view fintechs as a threat to their income from these activities.13 Given the greater desire by consumers for instant payments and the use of mobile payments, investment in IT is vital to secure future revenue streams. Banks also face increasing competition in the provision of credit. Total assets of non-bank financial intermediaries doubled in the euro area between 2008 and 2017, whereas total banking sector assets remained broadly unchanged. The growth is particularly marked in the investment fund sector.