December 14, 2018

EBA published its annual report on risks and vulnerabilities in the banking sector in EU. The report is accompanied by the results of the 2018 EU-wide transparency exercise, which provide detailed information, in a comparable and accessible format, for 130 banks across the EU. The report highlights further improvements in resilience of EU banks but highlights challenges related to profitability, funding, and operational risk.

The banking sector in EU has continued to benefit from the positive macroeconomic developments in most European countries, which contributed to the increase in lending, further strengthening of banks' capital ratios, and improvements in asset quality. Profitability remains low on average and has not yet reached sustainable levels. The asset quality has further improved. The average nonperforming loan (NPL) ratio of EU banks has decreased from 4.4% in June 2017 to 3.6% in June 2018. It has reached its lowest level since the NPL definition was harmonized across the EU in 2014, when it stood at 6.5%. NPL sales have contributed significantly to these reductions. However, vulnerabilities from downside risks to economic growth, revival of protectionism, and elevated political risk remain high, which might jeopardize efforts by banks to reduce legacy assets. Operational risks in EU banks have again been on the rise. Information and communications technology (ICT)-related risks are one of the main challenges for EU banks, with cyber risks and data security being the main drivers. Meanwhile, conduct and legal risks, including breach of anti-money laundering regulations, have been on the rise in 2018. Overall, banks need to be prepared for adverse scenarios, which might impact funding, asset quality, and profitability. 

The EU-wide transparency exercise is published along with the Risk Assessment Report (RAR), which is based on the full EBA's reporting sample, made up of 187 banks, of which 37 EU foreign subsidiaries of other EU banks (sample as of June 2018).  The 2018 EU-wide transparency exercise provides detailed bank-by-bank data on capital positions, risk exposure amounts, leverage exposures, and asset quality for 130 banks across 25 countries of EU and the European Economic Area. The data, which is exclusively based on supervisory reporting, is published at the highest level of consolidation for the reference dates of December 31, 2017 and June 30, 2018. The risk assessment report, however, is based on qualitative and quantitative information collected by EBA. The report uses data from EU supervisory reporting, the EBA risk assessment questionnaire (RAQ) (addressed to banks and market analysts), and market data as well as micro-prudential qualitative information and supervisory college information.

 

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Keywords: Europe, EU, Banking, Transparency Exercise, Risks and Vulnerabilities, Operational Risk, NPLs, EBA

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