Featured Product

    EBA Publishes Risk Assessment Report on Banking Sector in EU

    December 11, 2020

    EBA published the risk assessment report on the European banking system, in conjunction with data from the 2020 EU-wide transparency exercise. The risk assessment finds that, despite the COVID-19 shock, banks have maintained solid capital and liquidity ratios and have increased their lending to the real economy. However, economic uncertainty persists, profitability is at record low levels, and there are several early signs for a deterioration in asset quality. EBA highlights that COVID-19 has aggravated the need for measures to reduce operating costs and that the nonperforming loan ratios are stable, but the proportion of Stage 2 and forborne loans is increasing.

    The data show that capital and liquidity ratios of well above the regulatory minimum allowed banks to provide necessary financing to non-financial corporations at the beginning of the crisis. Public guarantees and regulatory relief measures helped the common equity tier 1 capital levels to recover from the initial hit after the outbreak of the pandemic, while extraordinary central bank facilities helped banks to maintain ample liquidity buffers despite tensions in wholesale funding markets. However, the leverage ratio fell slightly as total assets grew more than capital. However, asset quality is expected to deteriorate materially over the next quarters. Banks have booked significant provisions on performing loans that have resulted in a material increase in cost of risk. Although nonperforming loan ratios have continued to decline, other asset quality metrics already show signs of deterioration. Loans classified under IFRS 9 stage 2 and forborne exposures have increased markedly. The phasing out of COVID-19-related measures, such as moratoria on loan repayments and public guarantees, will also likely affect asset quality. In the long term, it is noteworthy that, according to an EBA preliminary analysis, more than 50% of exposures to large corporates are to sectors potentially vulnerable to climate risk.

    Additionally, operational resilience of banks has been broadly unaffected, despite the challenges posed by COVID-19. Nonetheless, the usage of information and communication technology (ICT) has grown further, increasing technology-related risks. Money laundering cases still pose important legal and reputational risks. The data also show that banks’ structural profitability challenges remain. Low interest rates, which may stay lower for longer than expected prior to the pandemic, and strong competition from both banks and non-banks, like fintech firms, are adding pressure to the core revenues of banks. The recent fall in operating expenses has somewhat offset the pressure on pre-provision profits, yet these costs might bounce back once the pandemic is over. COVID-19 might be the catalyst for many clients to become digital customers, thus increasing branch overcapacity. Banks might opt for merger and acquisition deals to exploit potential cost synergies. In terms of policy implications, the assessment highlights that banks should brace themselves for deterioration in asset quality; banks should take advantage of favorable liquidity windows to advance in their Minimum Requirement for Own Funds and Eligible Liabilities (MREL) build-up; prudent capital distribution policies are still required as bank capital remains under pressure; and COVID-19 crisis has aggravated the need for cost-reduction measures by banks.

    The risk assessment report is based on qualitative and quantitative information collected from the EU supervisory reporting, the EBA risk assessment questionnaire (RAQ), market intelligence, and micro-prudential qualitative information. The supervisory reporting data that competent authorities submit to the EBA on a quarterly basis for a sample of 162 banks from 29 European Economic Area countries have been utilized. Based on total assets, this sample covers about 80% of the banking sector in EU. 

     

    Related Links

    Keywords: Europe, EU, Banking, COVID-19, Transparency Exercise, Risk Assessment Report, Regulatory Capital, Credit Risk, NPLs, IFRS 9, Basel, Operational Resilience, EBA 

    Featured Experts
    Related Articles
    News

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821