Page 8 - 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
6
eigns, and the average cost of equity of banks
in the EU has decreased. With regard to de-
posits, their importance for bank funding has
been steadily increasing. Not only the weight-
ed average of the loan-to-deposit ratio has
been decreasing since September 2011 (from
147 % to 139 %, in December 2012), but also
the median (from 152 % to 140 % in Decem-
ber 2012). Nonetheless, some behavioural
changes could be expected for deposits not
covered by deposit guarantee schemes, and
heightened supervisory attention is neces-
sary. A sustainable development also needs
to take into consideration the necessity to
restore market access for banks and a move
away from central bank support.
The EU banks’ income and profitability has
continued to be faced with significant head-
winds which are not likely to dissipate in
2013. The low interest rates environment
creates some pressure on bank net interest
margins, especially for banks with exposure
to tracker type mortgages, and increases the
risk of hidden forbearance with build-up of la-
tent credit risk and inefficient market alloca-
tion of available credit resources. At the same
time, net interest margins are pressured by
high funding costs, official funding notwith-
standing, which are not being matched by a
full re-pricing of assets. The cost-to-income
ratio and similar indicators also point to
some deterioration of banks’ ability to keep
relative costs under control whereas the
credit costs are on the rise, leading to higher
levels of loan-loss provisions. In a context of
economic downturn and sector deleverag-
ing there are limited and less flexible levers
available to meet minimum returns, making
some business models unviable. There is
limited evidence of banks grasping the need
for fundamental restructuring and adapting
business models to cope with the changing
environment. Moreover, sustainable profit
generation is necessary for some banks to
satisfy Basel III requirements.
With reference to reputational concerns
linked to the relationship between banks
and consumers, a number of detrimen-
tal business practices of European banks
have affected consumer confidence. These
incidents concern detrimental behaviour
and inappropriate conduct of various types,
namely mis-selling of products, failures with
regard to rate benchmark setting processes
and taxation issues. These prudential risks
have crystallised in some EU members and
are significant, therefore other jurisdictions
should pay heightened attention to potential
risks, especially in geographies where inno-
vative instruments have been sold to retail
customers.