Page 6 - EBA 2013.2869 Risk Assesment Report final proof4

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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
4
Executive summary
Throughout the first semester of 2013, fol-
lowing the publication of the EBA’s last risk
assessment report (
Report on risks and vul-
nerabilities of the European Banking System
,
January 2013), the EU banking sector has
continued to observe some limited improve-
ments in market confidence, from both debt
and equity investors. Conversely, a clear dis-
location between financial markets and the
real economy is being observed, with mac-
roeconomic data and forward looking leading
indicators displaying signs of a general weak
macroeconomic environment. Given the con-
tinued disappointing economic activity and
some deep recessions in parts of the EU, the
outlook for the near future remains subdued.
Consequently, significant challenges within
the EU banking sector continue to persist due
to probable rising provisions and continuing
asset quality deterioration along with this
trend showing no sign of reversal.
Market sentiment has improved in compari-
son to last year as a consequence of decisive
policy measures and regulatory steps since
the summer of 2012, perceived as very posi-
tive moves to reduce the risks of both EMU
break-up and outright sovereign defaults.
The recapitalisation of EU banks through
2012 on the back of the EBA’s recapitalisation
recommendation has combined with ample
central bank liquidity such that the second-
ary market is showing that investor demand
is substantial and exceeds supply from new
issuances. At the same time, spreads of bank
benchmark bonds of different durations have
continued to decline in both ‘core’ and ‘pe-
ripheral’ countries. However, a sudden reas-
sessment of expectations regarding liquid-
ity programmes of major central banks may
trigger significant corrections in markets.
Whilst the return of calmer conditions paved
the way for a gradual return of market confi-
dence, financial markets still remain fragile
and susceptible to a sudden switch of mar-
ket sentiment.
With regard to regulatory developments
and structural reforms, the EU parliament
approval of the CRD IV, the legislation imple-
menting Basel III within the EU, and publica-
tions of the CRR/CRD, were likewise posi-
tive steps forward in reducing uncertainties.
Withal, despite some clarity on the technical
details, significant implementation challeng-
es remain ahead. The numerous regulatory
reforms still underway continue to be of con-
cern for investors and other market partici-
pants in particular in regard to the timing and
respective contents. Moreover, there con-
tinues to be evidence of a fragmented Eu-
ropean financial sector with regard to bank
lending. In parallel, the sovereign-bank link-
age still persists, smaller banks are facing
relatively higher funding costs, and cross-
border interbank markets continue to be very
subdued and fragile in many jurisdictions. To
bring fragmentation to a halt and strengthen
the single market, it is fundamental to press
ahead with structural and institutional re-
forms at the European level, in particular the
establishment of the banking union, includ-
ing a Single Supervisory Mechanism (SSM)
and bank resolution schemes. Meanwhile,
the EBA will continue to pursue its objectives
in advancing towards an EU-wide single rule-