According to their top regulator, European banks have taken advantage of the pandemic to begin addressing long-standing issues that have been weighing on their profitability in comparison to their US counterparts. 

"European banks appeared to be waiting for the Godot of interest rates rising and rebuilding their margins for a long time," Andrea Enria, chair of the European Central Bank's Supervisory Board, said. "When the pandemic hit, they realised they needed to act."

Because it took them longer to build up financial strength and clean up heaps of bad loans, European banks did not recover as quickly as their US counterparts after the 2008 financial crisis. While Enria has already acknowledged the need to reform Europe's broken banking sector, he also believes that rather than blaming regulation, lenders should help themselves.

ECB's Enria warns eurozone banks over risk-taking - Central Banking

According to Enria, the lagging profitability is due to "structural vulnerabilities" such as cost inefficiency, a lack of focus in business models, and insufficient investments in digital technologies.

The ECB's chief banking watchdog also stated that he's "pleased" that European banks have outperformed profitability forecasts for six consecutive quarters and are generating profits at pre-pandemic levels two years ahead of their own projections. 

“The low-interest-rate environment was beneficial to banks until mid-2020, but negative impacts have since prevailed and are expected to persist for some time."

Enria also said that there is "froth in some areas of the financial markets," and banks must focus on risk management in case of a sudden change in interest rates or credit spreads.