Page 7 - 2014_3865_EBA 5th

Basic HTML Version

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
Executive summary
The EBA’s key risk indicators show that a
positive market sentiment and confidence
are strengthening; however, the signs of re-
covery remain modest and fragile.
out the first half of 2014, following the pub-
lication of the EBA’s last report on the risks
and vulnerabilities of the European Banking
System (December 2013), the EBA has con-
tinued to observe improvements in market
confidence towards the EU banking sector,
from both debt and equity investors. Never-
theless, a dislocation between financial mar-
kets and the real economy continues to be
observed and risks to the EU growth outlook
still weigh more heavily on the downside with
forward-looking leading indicators point-
ing to the broad-based weakness of several
EU Member States. Financial fragmentation
persists, although it is receding, and geopo-
litical risks are increasing with retrenchment
to home markets still a concern. Significant
challenges within the EU banking sector con-
tinue due to the heavy debt overhang in the
public and private sectors, the necessary re-
structuring of the debt-burned corporate and
households sectors, the potential prudential
impact of conduct-related issues, persistent
asset quality deterioration, likely rising level
of provisions, squeezed net interest margins
and profitability concerns. Therefore, further
challenges lie ahead and the ongoing repair
of the individual banks’ balance sheets and
sector restructuring should remain a key pri-
ority for the medium term.
European banks have been taking advan-
tage of favourable market conditions to raise
capital ahead of the 2014 EU wide stress
Following the EBA’s recapitalisation
exercise, the weighted average tier 1 capital
ratio increased to 13.1 % and the weighted
average tier 1 ratio excluding hybrid instru-
ments — a good proxy of the core tier 1 ra-
tio — for the largest European banks stood
at 11.6 % in December 2013, a level broadly
equivalent to the largest US banks. In 2013,
for example, the euro area banks raised over
EUR 80 billion in capital and in 2014, they will
raise over EUR 60 billion, according to some
market estimates, with significant amounts
already raised during the first half of 2014
as a precursor to the 2014 EU wide stress
test. The banks’ issuance of equity across the
EU, including by larger banks in financially
stressed countries, have been able to benefit
from a benign market sentiment. At the same
time, quality of banks assets and the con-
sistency of the the calculation of banks’ risk
weighted assets remains an area for close
Nonetheless, the quality of some banks’ loan
portfolios continued to decline in 2013 and the
first months of 2014 and remains a concern
across the EU, pointing to the need for rigor-
ous asset quality reviews
The ratio of impaired
and past due (> 90 days) loans to total loans
increased slightly from 6.7 % in June 2013 to
6.8 % in December 2013 (the highest since
2009). The 75th percentile continues to pre-
sent worrisomely high levels of approximately