of german banks earned their cost of capital last year. what can explain these weak earnings? well, the main culprit in germany seems to be a business model that is relatively dependent on interest income. such a business model poses a major challenge in the current environment of low interest rates. consequently, in the first six months of this year, the operative results of the large german banks were about 8 % below their 2013 levels – a result which was largely driven by a contracting interest margin. nonetheless, banks are also faced with a structural problem in this context : the interest margin has been declining constantly since the mid - 1980s. the banks should therefore reconsider their business models and gear them towards sustainable profitability. to be sure, the need to adapt business models is not only relevant for german banks. however, in its recent financial stability report, the imf finds that german banks are again below average in terms of reforming their business models. again, there is room to catch up with international peers. bis central bankers ’ speeches an obvious strategy for the german banks would be to diversify their sources of income away from interest income. looking at the cost - side, german banks fare rather well compared to other countries. that is the good news. but there are still options to reduce costs. in this regard, mergers may well be a potential strategy. the german banking market still offers scope for further consolidation – the focus here should, of course, always remain on arriving at a sustainable business model. as a side note : in future, european banking supervision will also keep a close watch on the business models of banks. however, we should not expect supervisors to be the better bankers. at the end of the day, management decisions have to be taken by those who bear the risks and reap the rewards. what the supervisors could do is impose additional capital or liquidity requirements whenever they have doubts about the sustainability of a bank ’ s business model. 5. conclusion ladies and gentlemen there is no doubt : european banking supervision is an important step forward in ensuring financial stability in the euro area. nevertheless, as i said earlier, unrealistic expectations are the roots of complacency and, consequently, of disappointment. european banking supervision is just the first pillar of the envisaged banking union. it has to be supplemented with the european resolution mechanism for banks. this second pillar of the banking union will be erected in 2016. eventually, the banking union will provide a stable framework for the banking system

andreas dombret : big bang banking union – what can we expect? speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the euro finance week, frankfurt am main, 18 november 2014. * 1. * * introduction ladies and gentlemen thank you for the invitation and the opportunity to speak again at the euro finance week. it is a pleasure to be here today. let us briefly discuss physics before we turn to a topic that is more related to the euro finance week. the british astronomer martin rees once said : “ we can trace things back to the earlier stages of the big bang, but we still don ’ t know what banged and why it banged. that ’ s a challenge for 21st century science. ” well, the euro area had its own “ big bang ” two weeks ago, and in this case we know pretty well what banged – and why. on 4 november, the ecb became the direct supervisor for the 120 largest banks in the euro area which, in terms of assets, represent more than 80 % of the euro area ’ s banking system. thus, with a big bang, the ecb became one of the largest banking supervisors in the world. taking banking supervision from the national to the european level has been the biggest step of financial integration in europe since the introduction of the euro in 1999. this big bang created a new universe for the banks and the financial markets. but what exactly can we expect from the new european banking supervision? and probably even more importantly : what is it that we cannot expect from it? in the following i would like to discuss both questions. 2. the single supervisory mechanism – just the first step taking banking supervision from the national level to the european level addresses three problems that became apparent during the recent crisis. first, european banking supervision will allow banks in the entire euro area to be supervised according to the same high standards. these standards will emerge from sharing experience across borders and taking the best parts from every national approach towards banking supervision. germany, for instance, could benefit from a more quantitative - oriented approach towards banking supervision which other countries already follow. second, european banking supervision will make it possible to effectively identify and manage cross - border problems. this is essential because today, large banks are usually active in more than one country. the failure of the franco - belgian bank dexia in 2011 is a classic example in which banking supervision with a cross - border focus could have improved crisis management. another example