Page 9 - 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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Table 1: Main risks facing the EU banking sector
Bank risk
Risk drivers
Level of risk
Trend
Contributing factors/interactions
CAPITAL
Pillar 1
Credit risk (includes
asset quality, provisions,
indebtedness, etc.)
Asset quality
Uncertainty on timely recognition of problem loans, loan
restructuring and modifications, level of impairments, real
estate dynamics
Market risk
Volatility, hedge effectiveness
Geopolitical uncertainty, monetary policy stance of the
different world central banks
Operational risk
Pressure for changes and
weak operational resilience,
indiscriminate cost cutting
Degradation of controls, increased risk of fraud in down-
turn, IT service continuity
Pillar 2
Concentration risk, interest
rate risk in the banking
book-IRRBB and other
Interest rates
Low interest rates improve affordability, but squeeze down
profitability due to increased margin pressures
Reputational and legal
Libor/Euribor investigations,
mis-selling
Banks face endogenous confidence pressures due to
failures in practices, but also exogenous from possibility
of bail-in of non-insured deposits. Prudential implications
from fines and redress costs, and consequent impact on
profitability
Profitability
Margins, asset quality, provi-
sions workout, business model
changes
Low interest margins, increased cost of funding, non-
performing loans on the rise, limited room for cost cutting
Liquidity and funding
Access to funding and
maturity distribution
Market confidence, pricing
High reliance on public sources of funding, though
decreasing. National compartmentalisation and ring fenc-
ing, increasing reliance on deposit funding but unsecured
markets are now open and functioning. Bail-in uncertainty
increases funding prices
Funding structure (encum-
brance, loan to deposit,
official vs private sector)
Leverage
Business model changes, macroeconomic condition,
fragmentation, ongoing de-risking
Environment
Regulatory environment
Timing and scope of implement-
ing regulatory initiatives
Perceived lack of clarity on convergence of regulatory
initiatives, implications on business models, but increased
clarity with vote on CRD/CRR package, implementation
risk of SSM
Fragmentation
Continued lack of confidence,
sovereign/bank link, national-
only regulatory/policy initiatives
Increasing home bias and requirements to match asset and
liabilities at country level; cross-border interbank markets
remain very subdued. Rates for comparable companies
divergent in different countries.
Sovereign risk
Fiscal policy and effectiveness,
budgets imbalances
Implementation delays of the banking union
High
Increasing
The level of risk summarises, in a judgmental fashion, the probability of the materialisation of the
risk factors and the likely impact on banks. The assessment takes into consideration the evolution
of market and prudential indicators, NSAs and banks’ own assessments as well as analysts’ views.
Medium
Stable
Low
Decreasing