EBA published its annual report on risks and vulnerabilities in the EU banking sector. The report is accompanied by the publication of the 2019 EU-wide transparency exercise, which provides detailed information, in a comparable and accessible format, for 131 banks across the EU. This report describes the main developments and trends in the EU banking sector since the end of 2018 and provides EBA outlook on the main risks and vulnerabilities. Overall, EU banks’ solvency ratios remained stable, while the NPL ratio further contracted.
The report shows that asset quality has continued to improve, although at a slower pace. The non-performing loan (NPL) ratio declined from 3.6% in June 2018 to 3% in 2019. However, the focus on riskier exposures over the past few years combined with a weakening macroeconomic outlook might change this trend. Banks should take advantage of the current low interest rate environment to build up their minimum requirement for own funds and eligible liabilities (MREL) buffers. With an increasing number of banks charging or planning to charge negative interest rates to corporate and household deposits, the effects of such measures on the deposit base remain to be seen.
After material progress over the past few years, capital ratios remained broadly unchanged year on year (YoY). As of June 2019, the common equity tier 1 (CET1) ratio stood at 14.4% (14.3% in June 2018) on a fully loaded basis. A parallel increase in risk-weighted assets (RWAs) (2.5% YoY) and CET1 (3% YoY) was observed in the last year. Credit risk, which makes up 80% of total RWA, has increased by roughly 2.5%, which is lower than the growth in total assets (3%) and total loans (3.5%). Such developments indicate that credit RWAs are driven not only by trends in banks’ assets, but also by changes in the composition of banks’ exposures and risk parameters. Assets of EU banks rose by 3% between June 2018 and June 2019. Since 2014, commercial real estate, small and medium-sized enterprise, and consumer credit exposures have been the segments with the highest growth rates.
The report highlights that the deteriorating macroeconomic environment along with low interest rates and intense competition from banks and from financial technology (fintech) firms and other financial players is expected to add further pressure to bank profitability. In this challenging environment, the streamlining of operating expenses is presumably the main area to improve profitability. Technology risks and increasing money laundering and terrorist financing cases are some of the key drivers for constantly elevated operational risk while cyber-attacks and data breaches represent major concerns for banks.
Keywords: Europe, EU, Banking, Transparency Exercise, Risk Assessment Report, Risks and Vulnerabilities, MREL, Credit Risk, Operational Risk, EBA
Previous ArticleCBIRC Issues Measures for Corporate Governance of Banks and Insurers
BoE published a statistical notice (Notice 2020/9) explaining the approach for treatment of payment holidays on the profit and loss return or Form PL.
BoE updated the known issues document for the statistical reporting Forms AS and FV.
FED announced individual capital requirements for 34 large banks and these requirements go into effect on October 01, 2020.
SRB published a set of documents to give operational guidance to banks on implementation of the bail-in tool.
BIS published an update on the G20 TechSprint Initiative, which was launched in April 2020 and aims to highlight the potential for technologies to resolve regulatory compliance (regtech) and supervisory (suptech) challenges.
OSFI published a letter that provides an update on the milestones for the implementation of the IFRS 17 standard on insurance contracts.
EBA updated the report on the implementation of selected COVID-19 policies.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.