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 ArticleHKMA Highlights Technology Initiatives at the Hong Kong FinTech Week
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.