EBA published the risk dashboard for the third quarter of 2019 and the results of the semi-annual Risk Assessment Questionnaire for Autumn 2019. The dashboard summarizes the key risks and vulnerabilities in the EU banking sector. EBA also published the results of its Risk Assessment Questionnaire. The risk dashboard shows that the capital ratios of banks in EU have remained stable for the third consecutive quarter and the asset quality of banks continued to improve, while analysts expect increased issuance of bail in-able debt.
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 following are the key results of the risk assessment:
- The capital ratios of banks in EU remained stable for the third quarter in a row. The common equity tier 1 ratio remained at 14.4% on a fully loaded basis, with the increase in capital compensated by a parallel expansion of risk exposure amounts.
- Asset quality kept on improving, though at a slower pace. The ratio of nonperforming loans also declined from 3.0% to 2.9%. Looking forward, the percentage of banks expecting a deterioration in asset quality further increased, particularly for lending to small and medium enterprises (SME) and commercial real estate financing. Notwithstanding this outlook, banks still plan to increase their SME financing as well as consumer lending.
- On the liability side, banks mainly intend to attain more bail in-able instruments (senior non-preferred and Holding Company bonds) as well as retail deposits. Analysts also expect increased issuance of bail in-able debt. However, contrary to banks, the percentage of analysts expecting more preferred senior unsecured funding strongly increased. Positive expectations about the placement of minimum requirement for own funds and Eligible Liabilities (MREL) instruments come in parallel to decreasing concerns about the issuance of MREL-eligible instruments. The banks pointing to pricing and uncertainty on required MREL amount as constraints for MREL-eligible issuance fell to 50% and 30%, respectively.
The results of the Risk Assessment Questionnaire cover bank and market analyst expectations on future trends and developments, with 65 banks and 13 market analysts submitting their answers. The results of the Risk Assessment Questionnaire survey indicate that, in response to a bleak outlook for bank profitability, banks are targeting operating expenses and fee and commission income. On a positive note, the low interest rate environment reduced concerns about pricing obstacles to MREL issuance. Similarly, the recent approval of the Banking Package seems to have reduced the percentage of banks citing regulatory uncertainty about MREL requirements as a concern. However, banks and analysts appear increasingly pessimistic about asset quality developments, especially for commercial real estate and SME exposures. Additionally, the percentage of banks and analysts expecting an increase in operational risk remained roughly unchanged (55% in both cases). Banks point to cyber risk and data security as the key drivers of operational risk while analysts identify money laundering and terrorist financing risks as well as conduct and legal risks as the main drivers of operational risk.
- Press Release
- Risk Dashboard (PDF)
- Risk Dashboard Interactive Tool (XLSX)
- Risk Assessment Questionnaire, Autumn 2019 (PDF)
Keywords: Europe, EU, Banking, Risk Dashboard, Risk Assessment Questionnaire, CET 1, Basel III, NPLs, Credit Risk, MREL, Operational Risk, EBA
Previous ArticleCFTC Consults on Cross-Border Application of Certain Swap Provisions
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.
The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.
The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.
US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.