The European Banking Authority (EBA) published the annual update on the funding plans of banks in EU. The assessment in this report helps bank supervisors in EU to assess the sustainability of the main sources of funding at banks. The results of the assessment show the impact the pandemic had on the funding composition of banks and conclude that funding plans of banks in EU are poised to gradually return to a pre-pandemic funding composition by 2023; this implies a partial replacement of the central bank funding with market-based funding. The report is based on data submissions of banks in accordance with the EBA guidelines on funding plans.
Nearly 160 banks submitted their funding plans for the forecast period of 2021 to 2023. The report notes that total assets of banks increased by 8% in 2020, mainly driven by a surge in cash balances at central banks because of central bank support measures introduced in response to the pandemic. While loan growth was sluggish in 2020, banks expect loans to non-financial corporates and to households to grow by 4% per year over the forecast period 2021 to 2023. In 2020, client deposits surged and by the end of the year represented 73% of banks’ total funding sources. Banks’ reliance on public sector sources of funding (such as the Targeted Longer Term Refinancing Operations Program of ECB increased significantly and, as of December 2020, contributed almost 7% to the total funding of banks. While deposits will continue to be the main source of funding, banks plan to focus on issuing more debt instruments (mostly unsecured instruments) in the coming years, to make up for an expected decline in central bank funding but equally to comply with minimum requirement for own funds and eligible liabilities (MREL) requirements.
Over the three-year forecast period, banks plan to increase market-based funding by 12%, reaching EUR 4.2 trillion in 2023. Senior non-preferred instruments are expected to grow by 31% over the forecast period and regulatory capital instruments as well as senior unsecured instruments issued by the holding company instruments by 17%. Data also show that the spread between interest rates for client deposits and for loans to clients declined in 2020 and is expected to decline further in 2021. Despite the market turbulence in the first half of 2020, banks reported a decline in their market-based funding costs in 2020. In 2021, most banks expect funding conditions to remain very benign and costs to decline even further. The impact of the pandemic is visible when comparing bank forecasts for 2020 (provided in 2019 before the COVID outbreak) with actual figures as reported in December 2020. For all balance sheet positions that were selected for back-testing, significant gaps between forecasts and actual amounts were found for almost all banks in the sample.
Keywords: Europe, EU, Banking, Funding Plans, COVID-19, MREL, Lending, TLTRO, Regulatory Capital, Basel, EBA
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.