ECB published the results of an annual assessment on the conditions of less significant institutions in EU. This assessment, which ECB and the national supervisory authorities conduct collaboratively, combines a comprehensive quantitative analysis of the risk profile of the less significant institutions with forward-looking considerations of the main risks and vulnerabilities facing these institutions. The report also contains a thematic analysis of the digital-only less significant institutions, including the innovative banks using primarily digital channels to cater to the existing and new clients.
Following are some of the key trends that this annual assessment highlighted:
- The number of less significant institutions is down by 316 (or 11.4%) compared to end-2017, while the number of such institutions has decreased by more than 600 banks since European banking supervision began. The reform of credit cooperative banks in Italy (Banche di Credito Cooperativo or BCCs) has led to the incorporation of 228 BCCs into two significant institution groups.
- Poor profitability remains a major vulnerability for the less significant institutions, raising questions about the overall sustainability of certain business models. The less significant institutions are gradually moving into digitalization, with this move presenting many opportunities and risks.
- With credit risk being a significant concern, solid lending growth, coupled with more active restructuring of non-performing loans (NPLs), helped to decrease NPL ratios for these institutions to 2.7% in 2018. However, about 300 less significant institutions (accounting for nearly 10% of the total sector assets) still exhibit NPL ratios above 5%. Therefore, as prescribed by the EBA guidelines on management of NPLs, enhanced scrutiny of these banks is advisable, including close monitoring of their adherence to credible NPL-reduction plans.
- Exposures to sovereign counterparties represent a substantial part of balance sheets of the less significant institutions. Thus, developments in sovereign exposures should be closely monitored, including the effects they may have on profitability.
- The liquidity position of the less significant institutions remains solid, with banks in the sector showing, on average, ample liquidity buffers. Despite the positive situation overall, increasing maturity mismatches between assets and liabilities could represent a source of vulnerability going forward.
- Although new risks such as those arising from technological developments are increasing the overall operational risk, the weight of operational risk in terms of risk exposure amount is diminishing across all less significant institutions. Interest rate risks in the banking book (IRRBB) have decreased on a year-by-year basis while market risk requirements for the less significant institution sector remain stable and structurally marginal due to business model specificities.
- Capitalization levels for the less significant institutions remain comfortably above minimum requirements; the average common equity tier 1, or CET1, ratio is 17%, or about 250 basis points, higher than that of the significant institutions sector. The less significant institutions maintain a fully loaded excess CET1 capital (which is above the minimum requirements of between 3% and 6% of their risk exposure amount).
Related Link: Risk Report
Keywords: Europe, EU, Banking, Less Significant Institutions, Credit Risk, NPLs, Market Risk, Operational Risk, IRRBB, Regulatory Capital, Fintech, ECB
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