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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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3. Assets side
The quality of banks’ loan portfolios continued
to deteriorate throughout 2013 as suggested
by the KRI and the responses to the RAQ.
As a direct result of the financial crisis, eco-
nomic uncertainty and regulatory reform,
banks are adapting to the new business en-
vironment. There is an ongoing reduction of
balance sheets and loan books across the
EU. However a number of European banks
have not yet completed the cleanup of their
balance sheets. The financial crisis has ex-
posed weak business models and business
lines, and the wave of global regulatory re-
form is considerably altering the risk return
dynamics of numerous business lines go-
ing forward. There is still a need for adjust-
ments in order to remove excess capacity
and to restructure balance sheets, and to
set the basis for a more stable and sound
banking sector. As a result, it is still neces-
sary to reduce further and strengthen Euro-
pean banks’ balance sheets.
De-risking
Deleveraging and de-risking are very impor-
tant components for the strengthening of the
EU banking sector. Completing the action of
balance sheet repair in the banking sector,
far from hampering growth is instead a pre-
condition for kick-start lending into the real
economy. Some indicators show that a down-
sizing of banks’ balance sheets has started
and continues to take place. Over the last six
months, the debt-to-equity ratio decreased
from 18.1 to 17.5, the loan-to-deposit ratio
declined, and customer deposits over total li-
abilities increased. For the same period, the
sum of total assets decreased by 3.5%, and
further changes to banks’ balance sheets are
expected as business models adapt to a new
environment. Deleveraging has mostly been
achieved through run-off, rather than sales
of assets, but there is some evidence of sales
of portfolios and lines of businesses dur-
ing 2013. Some evidence also suggests that
banks do their utmost to frontload the adjust-
ments that will result from the EU-wide asset
quality review and the stress-test of 2014. In
parallel, the loan-to-deposit ratio has shown
a general downward trend in the last few se-
mesters, indicating a steady reduction in the
on-balance-sheet financial sector leverage
to lower levels within the EU.
Not only has the weighted average of the
loan-to-deposit ratio been decreasing since
September 2011 (from 120% to 114% in June
2013), but so also have the 75th percentile
(from 139% to 131% in June 2013). The 75th
percentile declined to 131% in June 2013,
and 18 percentage points less than its March
2012 maximum value). This trend is observed
within the EU per size class, with different
intensities across geographies (see figure 3).
60%
80%
100%
120%
140%
160%
180%
200%
220%
240%
90
95
100
105
110
115
120
Numerator
Denominator
Dispersion
5th and 95th pct, interquartile range and median.
Numerator and denominator: trends
Total numerator and denominator. December 2009 = 100.
Figure 3: Loan-to-deposit (source: KRI) – 5th and 95th percentiles, interquartile range and
median, and by size class – medians (as of June 2013)