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Executive summary

The repair process of the European bank‑

ing system since 2011 has led to a major

strengthening of banks’ capital position.


banks increased their common equity tier 1

(CET1) ratio between December 2011 and De-

cember 2014 from 9.2 % to 12.1 %. On a Ba-

sel III fully loaded basis, EU banks report

a 10.9 % CET1 ratio as of December 2014,

80 bps above March 2014 levels. The capital

ratios of the major EU banks are now compa-

rable, if not higher, to those of their US peers.

The improvement of capital ratios has been

achieved more through increases of com-

mon equity than decreases of risk‑weighted

assets (RWAs) and has been accompanied by

a process of regulatory harmonisation of the

definition of capital in the EU.

EU banks still face important challenges and

vulnerabilities remain.

Private and public

debt overhang remains high, with aggregated

values compared to gross domestic product

(GDP) ranging between 175 % and 514 % for

EU countries. Geopolitical risk, economic

and financial uncertainties in some euro area

countries (e.g. Greece), risks coming from

emerging markets as well as general macro-

economic uncertainty raise concerns on fur-

ther instability, possible effects on sovereign

bond markets and potential future deteriora-

tion of asset quality. The search for yield in

a low inflation and low interest environment

might contribute to potential asset price bub-

bles while also low interest rates pose chal-

lenges for bank profitability in the medium

term. In addition to asset quality and profit-

ability concerns, the results of the supervi-

sory review and evaluation process (SREP)

showed heightened concern about opera-

tional risks (like litigation and IT risks) among

supervisors. Market analysts also consider

these factors as possible sources of further

uncertainty in banks’ market sentiment ac-

cording to the results of the European Bank-

ing Authority’s (EBA) risk assessment ques-

tionnaire (RAQ).

On the asset side, the deleveraging trend has

plateaued with some signs of growth in total

assets and loan volumes.

After an initial sta-

bilisation, total asset volumes increased by

5.9 % as of December 2014 on a yearly basis.

Gross loan volumes grew by 2.6 %. The over-

all deleveraging trend in the sector — pre-

dominant in the past years — has stopped,

although banks are still reducing exposures

in certain regions or sectors, such as invest-

ment banking. Views expressed by analysts

and banks in the RAQ confirm this trend and

point to a general recovery of banks’ tradi-

tional business and a return to plain vanilla

products. Despite a progressive reduction of

impairments on financial assets, asset qual-

ity remains a concern, albeit mainly linked

to uncertainties in specific geographies with

action needed to move along the resolution

of non‑performing exposures. The SREP re-

sults confirm that credit and counterparty

risk remains one of the supervisors’ key con-


Funding markets and deposit bases showed

a stable and partially even positive pic‑

ture in the second half of 2014 and the first

quarter of 2015.

Despite some volatility in

issuance volumes, there has been no real

shortage of market funding. Cumulative is-

suance volumes for secured and unsecured

instruments in 2014 were higher than in 2013.

Banks have also issued a significant volume

of subordinated debt instruments. The de-

mand side has been positively influenced by

investors in search of yield, especially since

the announcement of the quantitative easing

(QE) programme. Spreads have, on average,

slightly decreased for secured as well as un-

secured euro‑denominated funding instru-

ments during the second half of last year,

although showing certain volatility, for exam-

ple at times of heightened public discussions

about euro area coherence. Deposit bases, in

general, also increased, supporting the over-

all positive evolution of funding.

Regardless of generally benign funding con‑

ditions, financial markets remain overall

fragile and volatile.

Persisting vulnerabilities

are linked to funding in foreign currencies,

including USD, subdued cross‑border inter-

bank markets, and from raising concerns