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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 — J U N E 2 0 1 4
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3. Assets side
The EBA’s KRI demonstrate that the quality of
banks’ loan portfolios continued to deteriorate
throughout 2013. Nonetheless, responses to
the RAQ indicate expectations of marginal im-
provements in asset quality in the first months
of 2014 in comparison to the previous months.
The expectation of improvements emerges for
the first time after several months of negative
prospects. At the same time, investor capital
is returning to Europe and banks have been
able to sell their non-performing loans to ex-
ternal investors.
Pre-emptive measures have been taken
in the context of EU banks’ preparation
for both asset quality reviews and stress
test exercise
Deleveraging has mostly been achieved
through run-off, rather than sales of assets,
but there is an increasing evidence of portfo-
lios sales and lines of businesses in the first
six months of 2014. As pre-emptive measures,
it is now evident that banks are doing their ut-
most to frontload the adjustments that result
from the EU-wide asset quality review and the
stress-test of 2014.
EU banks are adapting to the new business
environment as a direct result of the financial
crisis, economic uncertainty and regulatory
reform. The financial crisis has exposed weak
business models and business lines, and the
wave of global regulatory reform is appreci-
ably altering the risk return dynamics of nu-
merous business lines going forward.
There is a continuing reduction in balance
sheets and loan books across the EU (Fig-
ure 5); however, there is still a need for ad-
justments in order to remove excess capacity
and to restructure balance sheets and to set
the basis for a more stable and sound banking
sector. Significant challenges persist due to
the heavy debt overhang in the public and non-
financial private sectors (e.g. households) and
the still very high level of indebtedness of non-
financial corporations by historical standards.
The on-going process of achieving sustain-
able levels of debt and possible restructuring
of the debt-burdened corporate sector will
maintain important vulnerabilities within the
EU banking sector due to a still fragile eco-
nomic activity and interest rate developments,
in particular in scenarios of higher costs of
debt financing. Therefore, further challenges
lie ahead and the ongoing repair of the banks’
balance sheets should remain a key priority
also after the EU-wide asset quality reviews
and stress test exercise.
3.1 De-risking
Deleveraging and de-risking continue to be
very important components for repairing and
strengthening the EU banking sector as well
as improvement in the transmission mecha-
nism of monetary policy, so as to allow the
real economy to benefit from the current
level of interest rates. Stable and long-term
solutions for repairing the EU banking sector
include more transparency through both the
EU wide asset quality review and the stress
test exercise in 2014. Therefore, completing
the action of balance sheet repair in the EU
banking sector, far from hampering growth, is
instead a precondition to kick-starting lending
in the real economy.
Figure 5: Risk-weighted assets and Total assets — trillion EUR (
source
: KRI data)
8.5
9.0
9.5
10.0
10.5
11.0
Dec 11 Jun 12 Dec 12 Jun 13 Dec 13
– 6 %
YoY
23.0
24.0
25.0
26.0
27.0
28.0
29.0
30.0
Dec 11 Jun 12 Dec 12 Jun 13 Dec 13
Total assets (trillion EUR)
– 7 %
YoY
RWA (trillion EUR)
– 2 %
YoY
– 10 %
YoY
– 3.4 € Tn
– 12 %
(2011–2013)