Page 13 - EBA 2013.2869 Risk Assesment Report final proof4

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R I S K A S S E S S M E N T O F T H E E U R O P E A N B A N K I N G S Y S T E M
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tinued impairments associated with interna-
tional subsidiaries, goodwill impairments di-
minished in 2012 when compared to the large
impairments registered in 2011 as a sign of
optimism of the European banks. Neverthe-
less, it is necessary to maintain a cautious
outlook on revenues in light of the macro-
backdrop and expected generally weak busi-
ness generation towards the next months.
Forward-looking macroeconomic indicators
continue to show signs of retreatment, and
risks to the global outlook remain tilted to-
wards the downside.
A weak macroeconomic environment and
weaker-than-expected economic data have
extended into the first semester of 2013 and
loan dynamics remain subdued and sub-
ject to downside risks, translated into non-
performing loans. The EU outcome for real
GDP continues to be weak and with signs of
contraction. Recent indicators confirm that
the decline reflects not only a significant fall
in demand but also a decrease in exports.
The subdued loan dynamics are a result
of the current stage of the business cycle,
characterised by heightened credit risk and
the ongoing adjustment of financial and non-
financial-sector balance sheets.
Attainable information on non-financial cor-
porates’ access to financing indicates tighter
credit conditions in comparison to previous
semesters, in particular for SMEs, in several
EU countries. SME lending has significantly
contracted and among some reasons for
weak SME lending a low average profitability
for SMEs is pointed as well as a further dete-
riorating business confidence. Therefore, the
resulting deterioration in creditworthiness is
one of the key reasons for weak SME lending.
In parallel, a growing number of banks also
identify demand-driven factors and register
a lower demand from SMEs in a context of a
preference for de-leveraging and compres-
sion in investment. As policy responses, ac-
tions involving funding, risk-reduction guar-
antees and increased disintermediation may
be necessary for a significant shift in confi-
dence in SMEs in order to result in improved
lending volumes.
Regulatory developments
The current environment is characterised
by regulatory measures that are both sig-
nificant in their impact and many in quantity.
Some of the regulations are shaping the en-
vironment for financial services and will sig-
nificantly influence and impact on the form
of intermediation as well as the scale and
the functioning of the EU banking sector.
In April 2013, the European Parliament ap-
proved the CRD IV/CRR, the legislation im-
plementing Basel III within the EU. In June
2013, the CRD IV and CRR were published (
3
).
This new framework will influence banking
activities as it requires banks to hold more
and higher quality of capital and increases
capital charges on certain banking activi-
ties. In addition, it will discourage trading
activities using balance sheet and certain
business structures. With reference to the
future liquidity framework, banks are now
strongly encouraged to increase stable
funding such as customer deposits. The lev-
erage ratio should also limit balance sheet
expansion and the harmonised definition of
capital and liquidity standards engendering
an easier and more effective comparison
among banks, hence enhancing transparen-
cy (the regulation on liquidity and leverage
is not binding and requirements are there
only in terms of reporting requirements for
the CRR). This approval was a positive step
forward in reducing uncertainties and rein-
forcing market confidence in the EU banking
sector and has provided some clarity on the
regulatory process, technical details and
implementation for CRD IV/CRR on capital,
liquidity and funding. Previously, in early
January 2013, the announcement of imple-
mentation details by the Basel Committee
on Banking Supervision (BCBS) on the li-
quidity coverage ratio (LCR) was also an im-
portant step towards global liquidity stand-
ards. In Basel III, the LCR will be instilled
as planned in 2015, with a minimum require-
ment set at 60 % and will rise in equal an-
nual steps to reach 100 % in 2019. Given the
important role liquidity mismatches played
in the financial crisis, the EU legislators
(
3
) Directive 2013/36/EU of the European Parliament and of
the Council of 26 June 2013 on access to the activity of credit
institutions and the prudential supervision of credit institu-
tions and investment firms, amending Directive 2002/87/EC
and repealing Directives 2006/48/EC and 2006/49/EC. Reg-
ulation (EU) No 575/2013 of the European Parliament and
of the Council of 26 June 2013 on prudential requirements
for credit institutions and investment firms and amending
Regulation (EU) No 648/2012.