Page 66 - EBA 2015.1815 Annual report 2014 web 2

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E U R O P E A N B A N K I N G A U T H O R I T Y
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Figure 19: December 2014 Risk Analysis Dashboard (Extract)
Level of risk
Last quarter (memo)
Current quarter
Bank risk
Risk drivers
Level
Expected
trend
Level
Forward
trend
Contributing factors/interactions
C A P I TA L
P I L L A R 1
Credit risk
Asset quality
¾
Ú
¾
Ú
The AQR and stress test resulted in more clarity on problem loans and
level of impairments/provisions. However, asset quality remains a major
challenge, also in light of increasingly uncertain economic developments
with lower growth prospects in the EU and worldwide (including emerging
markets). Credibility of banks’ risk weighted assets is also a challenge
over seemingly improving capital ratios. Banks remain vulnerable to
exogenous shocks (e.g. FX and commodity price volatilities).
Market risk
Volatility
and risk of
decreasing
market liquidity
¾
Û
¾
Û
Geopolitical tensions and political risks rise again, including risks from
elections in several EU countries, Russia / Ukraine, etc. Market volatility
continues to be affected by the diverging monetary policy stances by
global central banks, including risk of deflation. Financial markets are
vulnerable to a reversal of market sentiment, to asset price volatility and
to decreasing market liquidity.
Operational risk IT risk,
litigation risk
¾
Ú
¾
Ú
IT and internet related risks (e.g. cyber-risks) are growing further. Litigation
costs have become increasingly onerous and unpredictable, and further costs
from misconduct fines and settlements are expected.
P I L L L A R 2
Concentration
risk, IRRBB and
other
Interest rates
¾
Ú
¾
Ú
Low interest rates help maintain asset quality and improve affordability
of bank credit, but affect profitability by reduced interest income. Low
interest rates also provide incentives for increased risk taking and for loan
forbearance.
Reputational
and legal
Index/FX
investigations,
mis-selling
¾
Ú
¾
Ú
Confidence in banks continues to be affected by legacy practices.
Litigation costs have been substantial and continue to materialize, in
some cases severely impacting profitability levels.
Profitability
Margins,
provisions,
business model
changes
¾
Ú
¾
Ú
Non-performing loans still stand close to their peak and interest income
generation opportunities are still reduced. New lending seems to be
recovering, although net interest margins remain low. Additional pressure
is on banks with low profitability to rethink business models. Legal
and redress costs have and will continue to materialize, in some cases
severely impacting banks’ profitability.
L I QU I D I T Y & F UND I NG
Access to
funding and
maturity
distribution
Market funding
and liquidity
¾
Ü
¾
Û
Banks, including those from peripheral countries, benefited from strong
investor demand for European banks’ debt in combination with the
reduction of their issuance volume. However, issuance volumes have
been volatile. No real shortage of market funding has been observed,
but access to market funding at reasonable prices remains susceptible
to adverse news. However, there is an ongoing high risk of contracting
liquidity in the funding market.
Funding
structure
Reliance on
central bank
funding
¾
Ü
¾
Ú
Even though more and more banks have returned to funding markets many
institutions rely on central bank funding. The share of market funding as
well as through deposits from customers remained rather stable. Issuance
volumes of CoCo bonds have been significant.
Risk analysis dashboard