Tuesday, July 21, 2015

European Banking Authority's Semi-Annual Report On Risks In The European Banking Sector


Author: David Schwartz J.D. CPA

On July 3, 2015, the European Banking Authority (EBA) published its seventh semi-annual report assessing the risks and vulnerabilities in the European banking sector.  The July report summarizes the primary developments and trends that have affected the EU banking sector since mid-2014 until June 12, 2015 as well as the EBA's view of the key micro-prudential risks in the near future. Because it is based on 2014 data, the report does not attempt to address the situation currently occurring with Greece. The EBA has supplemented the report, however, with an addendum based on the most recent supervisory data. Aside from more recent concerns about the effect of the situation in Greece on the greater EU financial system, the EBA highlights a number of other sensitive areas of concern.

The EBA notes significant improvement in the strength and funding of the EU banking sector, particularly with respect to peers in the US.

"EU banks increased their common equity tier 1 (CET1) ratio between December 2011 and December 2014 from 9.2 % to 12.1 %. On a Basel III fully loaded basis, EU banks report a 10.9 % CET1 ratio as of December 2014, 80 bps above March 2014 levels. The capital ratios of the major EU banks are now comparable, if not higher, to those of their US peers. The improvement of capital ratios has been achieved more through increases of common equity than decreases of risk-weighted assets (RWAs) and has been accompanied by a process of regulatory harmonisation of the definition of capital in the EU."

Regardless of the generally improved funding conditions of the EU banking sector, according to the EBA financial markets remain overall fragile and volatile as a result of factors like:

  • Funding in foreign currencies, particularly in the US Dollar.
  • Subdued cross-border interbank markets,
  • Concerns about trading market liquidity
  • Potential increases the costs of accessing term funding or raising additional Tier 1 and Tier 2 instruments necessary to meet new regulatory ratios.


Despite many positive developments, banks’ enhanced capital position, and an improved market sentiment, the EBA warns that there are still significant risks and vulnerabilities that demand further policy and supervisory action.

  • Predominant challenges to profitability in a context of low interest rates, still high NPL levels and increased competition underline the necessity of in‑depth supervisory assessment of banks’ business models.
  • The growing role and competition from shadow banking institutions, the increasing exposures of banks to this kind of institution and the impact that such institutions might have on banks’ business due to additional competitors demands supervisory attention. - The increasing scope and scale of operational risks related to information and communications technology for institutions requires special supervisory oversight.
  • Supervisory and regulatory convergence across the single market should also extend to macro‑prudential measures that authorities might take to mitigate risks.


The full text of the report is available via http://www.eba.europa.eu/documents/10180/1132391/Risk+Assessment+Report+-+June+2015.pdf

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