EBA Publishes Risk Assessment Report on Banking Sector in EU
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

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Metin Epözdemir
Metin Epözdemir helps European and African banks with design and implementation of credit risk, stress testing, capital management, and credit loss accounting solutions.
Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.