ECB published the results of an annual assessment on the conditions of less significant institutions in EU. This assessment, which ECB and the national supervisory authorities conduct collaboratively, combines a comprehensive quantitative analysis of the risk profile of the less significant institutions with forward-looking considerations of the main risks and vulnerabilities facing these institutions. The report also contains a thematic analysis of the digital-only less significant institutions, including the innovative banks using primarily digital channels to cater to the existing and new clients.
Following are some of the key trends that this annual assessment highlighted:
- The number of less significant institutions is down by 316 (or 11.4%) compared to end-2017, while the number of such institutions has decreased by more than 600 banks since European banking supervision began. The reform of credit cooperative banks in Italy (Banche di Credito Cooperativo or BCCs) has led to the incorporation of 228 BCCs into two significant institution groups.
- Poor profitability remains a major vulnerability for the less significant institutions, raising questions about the overall sustainability of certain business models. The less significant institutions are gradually moving into digitalization, with this move presenting many opportunities and risks.
- With credit risk being a significant concern, solid lending growth, coupled with more active restructuring of non-performing loans (NPLs), helped to decrease NPL ratios for these institutions to 2.7% in 2018. However, about 300 less significant institutions (accounting for nearly 10% of the total sector assets) still exhibit NPL ratios above 5%. Therefore, as prescribed by the EBA guidelines on management of NPLs, enhanced scrutiny of these banks is advisable, including close monitoring of their adherence to credible NPL-reduction plans.
- Exposures to sovereign counterparties represent a substantial part of balance sheets of the less significant institutions. Thus, developments in sovereign exposures should be closely monitored, including the effects they may have on profitability.
- The liquidity position of the less significant institutions remains solid, with banks in the sector showing, on average, ample liquidity buffers. Despite the positive situation overall, increasing maturity mismatches between assets and liabilities could represent a source of vulnerability going forward.
- Although new risks such as those arising from technological developments are increasing the overall operational risk, the weight of operational risk in terms of risk exposure amount is diminishing across all less significant institutions. Interest rate risks in the banking book (IRRBB) have decreased on a year-by-year basis while market risk requirements for the less significant institution sector remain stable and structurally marginal due to business model specificities.
- Capitalization levels for the less significant institutions remain comfortably above minimum requirements; the average common equity tier 1, or CET1, ratio is 17%, or about 250 basis points, higher than that of the significant institutions sector. The less significant institutions maintain a fully loaded excess CET1 capital (which is above the minimum requirements of between 3% and 6% of their risk exposure amount).
Related Link: Risk Report
Keywords: Europe, EU, Banking, Less Significant Institutions, Credit Risk, NPLs, Market Risk, Operational Risk, IRRBB, Regulatory Capital, Fintech, ECB
Previous ArticleISDA Publishes First Issue of ISDA Quarterly in 2020
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.