management. although much was expected from this diversification strategy, the market correction was a reminder that fee income generated by these businesses also carries risks. looking back, i think we can also say that some banks entered the businesses too late and at too high a price. the corporate scandals that coincided with the market downturn raised further questions about certain bank practices and chinese walls did not always prove to be as impermeable as might have been expected. in my list of stressful events, i should also mention the re - emergence of country risk problems and the fall - out from the terrorist attacks in the united states. country risk re - emerged as turkey and argentina were caught up in currency and banking crises. although the crises had only limited economic effects on the eu banking sector as a whole, some banks incurred substantial losses. as to the tragic events in the united states, they had an immediate effect on the working of financial infrastructures and markets, but this was tackled quickly and efficiently by the competent authorities, including those here in europe. in the medium term, however, the attacks shook investor and consumer confidence further. the third challenge, to conclude my brief overview, is that this extraordinary set of events took place at the same time that the economy was starting to slow down from the second half of 2000 onwards. as debt ratios in the corporate sector had risen significantly through the years of the stock market boom, signs of financial distress quickly surfaced as firms found that profits were not matching earlier expectations. overall resilience despite isolated weaknesses but in spite of the circumstances that i describe here, the eu banking sector ’ s financial health remained overall robust. the return on equity of eu banks peaked at 12 % in 2000. the sector's profitability subsequently declined for two consecutive years, reaching 8. 6 % in 2002. increased loan - loss provisions for corporate loans, reduced commissions and trading income from capital market - related business were mainly behind this fall. although the decline was substantial, overall profitability levels continued to be well above those recorded in the second half of the 1990s. in the course of 2003 profitability picked up again. banks ’ solvency levels remained relatively unaffected by the adverse events. thanks to these adequate financial buffers, banks were able to withstand the shocks in their operating environment. the aggregated total regulatory capital ratio continued to hover around 12 % throughout the period after 2000, which is well above the required minimum ratio of 8 % for individual institutions. although the overall picture was rather

jean - claude trichet : the current state of the eu banking sector speech by mr jean - claude trichet, president of the european central bank, at the annual congress of german savings banks, frankfurt, 5 may 2004. * * * ladies and gentlemen, it is both a pleasure and an honour to be invited to speak here today at the annual congress of german savings banks. being in front of such a distinguished audience of representatives of the financial community, i would like to present some views on the current state of play in the european banking sector. i will in particular analyse the factors that have contributed to its resilience over recent years. since 2000, eu banks have been confronted by an extraordinary combination of adverse financial market shocks against the backdrop of a slow - down in the economy. some commentators have even been surprised by the few banking problems in the euro area during this period, given that earlier episodes of slow growth often went hand in hand with severe problems in the sector. for central banks and banking supervisors, the resilience of the eu banking sector is, of course, very good news. at the same time, it raises a number of questions. what is now so different compared with the stressful periods that banks experienced in the past and what factors have contributed to this resilience? a turbulent period for eu banks but before addressing these issues, let me start by briefly recalling how challenging the environment has actually been for eu banks over recent years. without a doubt, the most momentous technical and strategic challenge was the introduction of the single currency, now more than five years ago. the very smooth transition that followed the adoption of the euro almost makes us forget the uncertainties, and sometimes even concerns, expressed before 1999 about the structural implications the euro might have on the euro area banking sector. the second challenge faced by banks in recent years was that not long after the banking sector had begun to adjust to operating with a new currency - including all of the efforts that this entailed - an exceptional series of adverse events followed in quick succession. after an almost uninterrupted stock market boom since 1995, a severe stock market correction set in in march 2000 and investors faced three consecutive years of negative returns. investor confidence was also badly shaken by unprecedented episodes of serious corporate malfeasance. although most of the main abuses took place abroad, europe also had its fair share. over time, we have observed that banks have increasingly diversified into securities trading, investment banking and asset