BERLIN (Reuters) - Low profitability at European banks just when they need to invest to stay competitive in the digital era risks triggering a vicious circle of underinvestment and further poor performance, said Germany’s nominee to the board of the European Central Bank.

Slideshow ( 2 images )

Isabel Schnabel, a prominent economist, is set to take Germany’s slot on the board of the euro zone central bank, where she will succeed Sabine Lautenschlaeger, who resigned amid discord over the ECB’s dovish fiscal policy.

Speaking in Berlin on Wednesday, Schnabel warned that low profitability could end up becoming a financial stability issue for the euro zone. Though she has yet to be formally confirmed for the board seat, Schnabel is the only candidate.

“The situation with European banks is very tense,” she told Reuters. “If banks have low profits, then it is hard for them to build up capital, strengthening their resilience. That is a problem for financial stability.”

While her remarks, made after the presentation of a report on the German economy from the panel of economic experts on which she currently sits, related to European banks, they reflect a live debate in Germany over the challenges faced by its big banks.

Since the failure of its planned merger with Commerzbank, Deutsche Bank has been undergoing a painful restructuring, shedding thousands of staff in a bid to regain the initiative from more streamlined, online-led upstarts.

Schnabel, who has yet to be assigned a specific portfolio on the board by new ECB President Christine Lagarde, said she expected consolidation in the German and European banking sectors, with Germany’s state-owned Landesbanken particularly ripe for consolidation.

“We need a completed banking union and we have to develop the capital market union further,” she said, echoing Finance Minister Olaf Scholz’s call earlier on Wednesday for a banking union incorporating a European deposit insurance scheme.

The question of bank resilience was lent particular urgency by the prospect of other tech companies following Facebook’s Libra project in making moves into finance, further straining banks’ competitiveness.

“The big danger I see is that at some point we see a market entry by a big tech company. Libra is just a taster,” she said. “And then banks really could be in a situation where they still have vast balance sheets but are no longer competitive.”