July 31, 2017

EBA published two reports on funding plans and asset encumbrance of EU banks. The results of the assessment show that banks plan to increase their lending and expand deposits as well as market-based funding. The funding plans of banks paint an optimistic outlook for growth while nonperforming loans (NPLs) remain a drag on EU banks new lending. The two reports shall be published on an annual basis.

The report on funding plans of EU banks highlights that the forecasted loan growth is to be funded by client deposits and issuance of long-term debt. EBA had asked 155 banks for their plans for funding over three years to 2019. These plans show that, on an average, total assets are projected to grow by 3.9% between 2016 and 2019, driven by loans to households and non-financial corporates. Further analysis suggests that high NPL levels, combined with more thinly capitalized banks, could be a drag on new lending, unless addressed. Client deposits remain the main component in EU banks' funding mix with a share of more than 50%. Banks forecast an expansion of deposits at both an individual and system level. Planned issuances of debt securities in 2017 also looks set to increase in 2018 and 2019. The plans suggest that the share of covered bonds as a source of asset encumbrance will continue its rising trend. The outlook for funding plans should be seen in the context of the need to issue further minimum requirements for eligible liabilities (MREL) and the wind down of central banks' funding support measures. Amid such trends, banks' forecasted reliance on interest income to improve profitability will require careful monitoring.

 

The asset encumbrance report, which is backward-looking (based on data for from December 2014 to December 2016), shows that, in December 2016, the overall weighted average encumbrance ratio stood at 26.6%, against 25.4% in December 2015. However, the report highlights a wide dispersion across institutions and countries, which is consistent with what was observed in the previous report. Besides covered bonds, the main sources of asset encumbrance are repos and over-the-counter derivatives. Some countries, particularly those affected by the sovereign debt crisis, showed a decreased dependence toward the use of central bank funding, which could reflect a general improvement of the funding situation in these countries.

 

Related Links

Report on Asset Encumbrance (PDF)

Report on Funding Plans (PDF) 

EBA Thematic Reports

Keywords: Europe, EU, Banking, Asset Encumbrance, Funding Plan, NPLs, EBA