ECB published results of the financial stability review in November 2018. The financial stability review assesses developments relevant for financial stability, including identifying and prioritizing the main sources of systemic risk and vulnerabilities for the euro area financial system. This review plays an important role in relation to the micro-prudential and macro-prudential competences of ECB. By providing a financial system-wide assessment of risks and vulnerabilities, the review provides key input to the macro-prudential policy analysis of ECB.
In addition to the usual overview of the current developments relevant for euro area financial stability, the review includes eight boxes and three special features aimed at deepening the financial stability analysis of ECB and broadening the basis for macro-prudential policy making. The first special feature examines how banks can reach sustainable levels of profitability. The second feature examines the financial stability implications stemming from a resurgence of trade tariffs while the third one discusses the rapid growth in exchange-traded funds and their potential for transmitting and amplifying risks in the financial system.
The review highlights that the profitability of euro area significant banks remained broadly stable in the first half of 2018. Structural vulnerabilities, including overcapacity in certain domestic banking markets and high operating costs, continue to dampen bank profitability. Reductions in non-performing loans (NPLs) continued, with the NPL ratios of banks having nearly halved since 2014. Moreover, banks’ solvency positions remain solid. The recent EBA stress test confirmed that the capitalization of euro area banks is sufficient to weather a severe adverse scenario. Additional sensitivity analyses to account for the recent developments, not specifically catered for in the test, lead to an additional capital depletion of about 30 to 70 basis points, on top of the overall common equity tier 1 ratio depletion of 380 basis points in the adverse scenario of the EBA stress test.
The assessment shows that, looking ahead, four key risks to euro area financial stability could materialize over the next two years. First, the most prominent risk stems from the possibility of a disorderly increase in global risk premia. Second, the risk of renewed debt sustainability concerns has increased over the last six months. Third, legacy issues from the financial crisis continue to dampen bank profitability and could hamper banks’ intermediation capacity. Fourth, possible liquidity strains in the investment fund sector constitute a growing risk.
Keywords: Europe, EU, Financial Stability Review, Stress Testing, NPLs, Systemic Risk, Macro-prudential Policy, ECB
Previous ArticleBCBS Publishes an Outline of Discussion at its Meeting in Basel
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.
In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.
EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).
ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).
EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.