The European Banking Authority (EBA) published its annual risk assessment of the European banking system. The report is accompanied by the publication of the 2021 EU-wide transparency exercise data, in a comparable and accessible format, for 120 banks across the 25 European Economic Area/European Union (EEA/EU) countries. The report notes that banks as well as micro- and macro-prudential authorities need to be prepared in case of a deterioration in the economic outlook or in case inflationary pressure translates into further rising rates. Uncertainty on the economic outlook could trigger repricing of risks and increasing operational risks, mainly due to information technology and cyber risks, require banks to further priorities information technology and cyber-security.
Overall, the risk assessment shows improvements in EU banks' solvency, profitability, and liquidity, but asset price corrections remain a key threat. In the report, EBA notes that fiscal and regulatory support measures have not only prevented asset quality deterioration but have also made it more difficult for banks to assess borrower creditworthiness. The following are additional key findings of the risk assessment:
- Banks’ capital and liquidity positions have further improved. The average Common Equity Tier 1 (CET1) ratio has increased on the back of strong results in the first half of 2021. The positive mood in funding markets and the availability of central bank funding has allowed banks to maintain comfortable liquidity positions. Banks’ net stable funding ratio (NSFR) reached on average of 130%, but analysis in the report shows that it would be significantly lower if central bank funding was excluded from the numerator. Although supervisory recommendations on capital distribution have expired, banks should not pursue overly generous dividend and share buy-back policies. Amidst increasing rate volatility, banks should carefully evaluate the risk profile of their funding plans and ensure they are able to substitute current central bank funding with other sources of funding.
- Asset quality has improved overall but concerns remain for loans to specific sectors and those that have benefited from support measures. The non-performing loan (NPL) ratio has further decreased to 2.3% this year supported by several large NPL securitizations. However, the NPL ratio of the exposures to the sectors most affected by the pandemic is on an upward trend. The asset quality of loans under public guarantee schemes and under moratoria is a source of concern as an increasing share of these loans are being classified under stage 2 or as NPL. Accelerating house price increases along with banks’ recent focus on mortgage lending may become a source of vulnerability going forward.
- Operational risk losses have increased during the pandemic. The growing usage of and reliance on technology has been accompanied by a rising number and impact of information and communication technologies and security-related incidents.
- Lower impairment costs have increased profitability, but structural challenges remain. Banks’ net operating income has not recovered to pre-pandemic levels. The low and negative interest rate environment is still weighing on lending margins. This adds to high competition not only among banks, but also with fintech and bigtech companies. Despite the acceleration in branch closures during the pandemic, operating expenses have stabilized in the past year as pre-existing working arrangements have gradually resumed.
- Banks have made some progress related to the environmental, social, and governance (ESG) risk considerations. The share of ESG bonds of total bank issuance has increased in recent years, reaching about 20% of banks’ total placements this year. Banks have started integrating ESG risk considerations into their risk management. However, there is significant progress to be made, including in areas such as data, business strategies, governance arrangements, risk assessments, and monitoring.
EBA also published a factsheet on the European Centralized Infrastructure for Supervisory Data, also known as EUCLID, which is a platform for banking and financial data. Besides regulatory data, EUCLID collects a coherent set of master data information to identify institutions. Users can also find the list of institutions to which authorization has been granted to operate within the EU and EEA. It will increasingly facilitate the sharing and use of banking and financial data to external users, in a wide range of areas. In the factsheet, EBA notes that data on more than 2,500 EEA/EU investment firms and more than 300 EU/EEA investment firms' groups are expected to become available in EUCLID in 2022 while the resolution (planning, MREL decisions, MREL/TLAC) data on more than 2,400 EU/EEA payment institutions are expected to be available at end-2022.
Keywords: Europe, EU, Banking, Basel, Regulatory Capital, Reporting, Systemic Risk, Credit Risk, NPLs, Operational Risk, EBA
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