Mario Draghi, the European Central Bank’s (ECB) president has opined that euro zone retail banks face a period of "creative destruction" that would be healthy for the economy.
He praised the banks that were moving more aggressively to deal with their problems.
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"Just the prospect" of ECB scrutiny, Mr. Draghi said "has already caused banks to raise new capital and to shed noncore or nonprofitable exposures.
"This is very welcome: Corrective action does not need to wait until the end of our comprehensive assessment. It is to everybody’s benefit that it takes place preemptively."
The remarks comes just two days after Italy’s largest lender, UniCredit reported a fourth quarter loss of 15bn ($21bn), admitting the sliding value of its holdings and need to set aside more money to cover bad loans.
The revelations about UniCredit are widely believed to have been released in response to European Central Bank’s intention to review banks’ books to uncover problems lenders may have tried to hide.
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By GlobalDataContinued pressure from the central bank is expected to result in other banks following UniCredit’s lead.
"By ‘cleaning up’ and repairing bank balance sheets, we are creating the conditions necessary for resources to flow once more to the firms that use them most productively," Mr. Draghi said.
"And in this sense, by encouraging creative destruction in the banking sector, we can facilitate creative destruction in the wider economy and support the recovery."
