EBA Publishes Risk Dashboard for Fourth Quarter of 2019
EBA published risk dashboard for the fourth quarter of 2019. The risk dashboard summarizes the main risks and vulnerabilities in the banking sector in EU. Ahead of the COVID-19 crisis, capital ratios and asset quality of banks in EU had improved while the return on equity had further worsened. Looking forward, it is expected that asset quality will deteriorate in the quarters to come, even though extensive monetary and fiscal stimulus programs as well as policy responses such as guidance on debt moratoria might provide some relief to banks and their customers.
The risk dashboard is based on a sample of 147 banks, covering more than 80% of the banking sector (by total assets) in EU, at the highest level of consolidation. The level of risk and short-term outlook presented in the dashboard summarize the probability of the materialization of the risk factors and the likely impact on banks. The assessment takes into consideration the evolution of market and prudential indicators, own assessments of the national supervisory authorities and banks, and analyst views. The short-term outlook presented the dashboard indicates the following with respect to:
- Asset quality. the COVID-19 pandemic has led to sudden supply and demand shocks and deteriorating economic prospects, with the expectation of rising default rates and higher provisioning needs. Banks might focus on managing existing credit lines of potentially distressed borrowers rather than extending new lending.
- Market risk. Further market price corrections and bouts of volatility might follow as the progression of the COVID-19 pandemic and its economic impact are highly uncertain. More volatile financial market can be expected to be susceptible to further underlying geopolitical risks and commodity price corrections. Beyond Europe and the COVID-19 pandemic, interventions of the US-Fed to mitigate bouts of volatility in USD repo and financial markets point to additional persisting underlying risks, and the potential for sudden volatility and illiquidity.
- Liquidity and funding. Favorable funding conditions in the fourth quarter of 2019 further improved until February and led to historically high issuance volumes of unsecured instruments, particularly of MREL/TLAC-eligible bonds. Banks made use of these conditions to pre-fund some of their 2020 funding needs at the lowest pricing levels recorded and amid very strong investor demand. Yet conditions suddenly changed fundamentally with the COVID-19 outbreak in Europe. Ample central bank liquidity facilities, including additional longer-term funding programs and extended USD swap lines central banks launched in Europe and beyond in response to the COVID-19 outbreak, can act as strong backstops. Some challenges for banks to attain longer-term market funding at reasonable costs can be expected while high uncertainties surrounding the COVID-19 pandemic persist and markets stay volatile. Vulnerabilities for liquidity positions and potentially the deposit base of banks particularly affected by deteriorating market- and economic conditions may also arise.
- Profitability. The COVID-19 pandemic has led to supply and demand shocks that are expected to further add to substantial bank profitability challenges. Loan growth might stall and thus affect interest income, while additional monetary stimulus might add further pressure on margins. Fee income might be affected while the prospect of higher provisioning and impairment needs may further affect profitability. The fiscal response of governments, but also supervisory measures to mitigate the impact of the Covid-19 pandemic and pragmatism in the application of the prudential framework, may offer some relief to the challenges banks are facing.
- Operational resilience. The COVID-19 pandemic, with its challenges for business continuity and operational resilience, including susceptibility to cyber-attacks, adds to previously existing operational challenges. Measures to constrain the pandemic may further increase the reliance on and vulnerabilities of Information and Communications Technology, or ICT, systems. They add to challenges of the previously existing risks of cyber security, data breaches, and reliance on third-party providers. Potential challenges to governance structures stemming from AML/CFT risks also remain relevant.
Keywords: Europe, EU, Banking, COVID-19, Risk Dashboard, Credit Risk, IFRS 9, Liquidity Risk, Business Continuity, Cyber Risk, Operational Risk, Profitability, Market Risk, EBA
Skilled market researcher; growth strategist; successful go-to-market campaign developer
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Dieter Van der Stock
IFRS subject matter expert; LDTI subject matter expert; accounting authority; risk management specialist
Previous ArticleCFTC Consults on Issues and Topics to Address Climate-Related Risks
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.