EBA Assesses Risks in Banking Sector in European Economic Area
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
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Previous Article
CBIRC Clarifies Derivatives Rules, Notes Progress in Bank GovernanceRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
