Featured Product

    EBA Assesses Risks in Banking Sector in European Economic Area

    December 03, 2021

    The European Banking Authority (EBA) published its annual risk assessment of the European banking system. The report is accompanied by the publication of the 2021 EU-wide transparency exercise data, in a comparable and accessible format, for 120 banks across the 25 European Economic Area/European Union (EEA/EU) countries. The report notes that banks as well as micro- and macro-prudential authorities need to be prepared in case of a deterioration in the economic outlook or in case inflationary pressure translates into further rising rates. Uncertainty on the economic outlook could trigger repricing of risks and increasing operational risks, mainly due to information technology and cyber risks, require banks to further priorities information technology and cyber-security.

    Overall, the risk assessment shows improvements in EU banks' solvency, profitability, and liquidity, but asset price corrections remain a key threat. In the report, EBA notes that fiscal and regulatory support measures have not only prevented asset quality deterioration but have also made it more difficult for banks to assess borrower creditworthiness. The following are additional key findings of the risk assessment:

    • Banks’ capital and liquidity positions have further improved. The average Common Equity Tier 1 (CET1) ratio has increased on the back of strong results in the first half of 2021. The positive mood in funding markets and the availability of central bank funding has allowed banks to maintain comfortable liquidity positions. Banks’ net stable funding ratio (NSFR) reached on average of 130%, but analysis in the report shows that it would be significantly lower if central bank funding was excluded from the numerator. Although supervisory recommendations on capital distribution have expired, banks should not pursue overly generous dividend and share buy-back policies. Amidst increasing rate volatility, banks should carefully evaluate the risk profile of their funding plans and ensure they are able to substitute current central bank funding with other sources of funding.
    • Asset quality has improved overall but concerns remain for loans to specific sectors and those that have benefited from support measures. The non-performing loan (NPL) ratio has further decreased to 2.3% this year supported by several large NPL securitizations. However, the NPL ratio of the exposures to the sectors most affected by the pandemic is on an upward trend. The asset quality of loans under public guarantee schemes and under moratoria is a source of concern as an increasing share of these loans are being classified under stage 2 or as NPL. Accelerating house price increases along with banks’ recent focus on mortgage lending may become a source of vulnerability going forward.
    • Operational risk losses have increased during the pandemic. The growing usage of and reliance on technology has been accompanied by a rising number and impact of information and communication technologies and security-related incidents.
    • Lower impairment costs have increased profitability, but structural challenges remain. Banks’ net operating income has not recovered to pre-pandemic levels. The low and negative interest rate environment is still weighing on lending margins. This adds to high competition not only among banks, but also with fintech and bigtech companies. Despite the acceleration in branch closures during the pandemic, operating expenses have stabilized in the past year as pre-existing working arrangements have gradually resumed.
    • Banks have made some progress related to the environmental, social, and governance (ESG) risk considerations. The share of ESG bonds of total bank issuance has increased in recent years, reaching about 20% of banks’ total placements this year. Banks have started integrating ESG risk considerations into their risk management. However, there is significant progress to be made, including in areas such as data, business strategies, governance arrangements, risk assessments, and monitoring.

    EBA also published a factsheet on the European Centralized Infrastructure for Supervisory Data, also known as EUCLID, which is a platform for banking and financial data. Besides regulatory data, EUCLID collects a coherent set of master data information to identify institutions. Users can also find the list of institutions to which authorization has been granted to operate within the EU and EEA. It will increasingly facilitate the sharing and use of banking and financial data to external users, in a wide range of areas. In the factsheet, EBA notes that data on more than 2,500 EEA/EU investment firms and more than 300 EU/EEA investment firms' groups are expected to become available in EUCLID in 2022 while the resolution (planning, MREL decisions, MREL/TLAC) data on more than 2,400 EU/EEA payment institutions are expected to be available at end-2022. 


    Related Links

    Keywords: Europe, EU, Banking, Basel, Regulatory Capital, Reporting, Systemic Risk, Credit Risk, NPLs, Operational Risk, EBA

    Featured Experts
    Related Articles

    EBA Finalizes Templates for One-Off Climate Risk Scenario Analysis

    The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.

    November 28, 2023 WebPage Regulatory News

    EBA Mulls Inclusion of Environmental & Social Risks to Pillar 1 Rules

    The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.

    October 31, 2023 WebPage Regulatory News

    BCBS Consults on Disclosure of Crypto-Asset Exposures of Banks

    As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.

    October 19, 2023 WebPage Regulatory News

    BCBS and EBA Publish Results of Basel III Monitoring Exercise

    The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.

    October 18, 2023 WebPage Regulatory News

    PRA Updates Timeline for Final Basel III Rules, Issues Other Updates

    The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.

    October 18, 2023 WebPage Regulatory News

    US Treasury Sets Out Principles for Net-Zero Financing

    The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.

    October 17, 2023 WebPage Regulatory News

    EC Launches Survey on G7 Principles on Generative AI

    The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.

    October 14, 2023 WebPage Regulatory News

    ISSB Sustainability Standards Expected to Become Global Baseline

    The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.

    September 18, 2023 WebPage Regulatory News

    IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance

    Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.

    September 18, 2023 WebPage Regulatory News

    BCBS Assesses NSFR and Large Exposures Rules in US

    The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.

    September 14, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8938