EBA Risk Assesment
Rising Geopolitical Risks for the EU/EEA banking sector
The European Banking Authority (EBA) has published its Risk Assessment Report (RAR) for July 2024.The report addresses key developments, emerging risks, and future outlooks based on qualitative and quantitative data.
EU/EEA banks are navigating a period of heightened uncertainty, driven by significant geopolitical risks and an unpredictable economic growth outlook. Despite initial reductions in interest rates by central banks in various jurisdictions, the rates remain high, contributing to the uncertain financial environment.
Macroeconomic conditions have negatively impacted the loan growth of EU/EEA banks. Despite these challenges, banks plan to gradually increase loan growth over the coming years. The quality of assets has shown signs of stress, with non-performing loans (NPLs) increasing across all segments in 2023. Banks are cautiously optimistic about asset quality stabilization, with expectations of improvement compared to earlier subdued outlooks.
EU/EEA banks hold over EUR 1.4 trillion in loans collateralized by commercial real estate. While this represents less than 100% of banks' capital, smaller banks are particularly vulnerable to downturns in this market. In 2023, NPL volumes in the CRE segment rose by more than 12%, with significant variations across countries.
Deposits remain the primary funding source for EU/EEA banks. Central bank funding decreased in 2023, largely replaced by debt securities issuance. The EBA's data shows an increase in long-term market-based funding plans from 2024 to 2026, particularly for Additional Tier 1 (AT1) and Tier 2 (T2) capital instruments. Liquidity positions remain strong, although a decrease in the liquidity coverage ratio (LCR) is anticipated in 2024.
The profitability of EU/EEA banks increased significantly in 2023, driven by a rise in net interest income (NII). However, indicators suggest profitability may have peaked, with some signs of decline emerging. Operational risks, including cyber risks and data security, have gained prominence, with the EBA’s Risk Assessment Questionnaire (RAQ) highlighting these as top concerns.
The activity of NBFIs has grown considerably within the EU/EEA and globally, raising concerns about the potential risks these entities pose to banks through direct or indirect links. EU/EEA banks' exposures to NBFIs accounted for 9.2% of their total assets in 2023, underscoring the significance of monitoring these interconnections.
The EBA's Risk Assessment Report for July 2024 provides a detailed analysis of the current and future risks facing the EU/EEA banking sector. Despite the challenges, including high geopolitical risks and uncertain economic conditions, the sector remains resilient with strong liquidity positions and a focus on increasing long-term funding. The report emphasizes the need for continued vigilance and prudent risk management to navigate the evolving financial landscape.
Entering Italian NPE Market is a newsletter and a Linkedin Group focused on News, Updates and Insights on Italian Banks, Ditressed Credit Market, Fintech and Real Estate.
Relevant Links:
https://www.eba.europa.eu/publications-and-media/press-releases/eba-calls-caution-amid-rising-geopolitical-risks-eueea-banking-sector
This newsletter is free please consider supporting it with a small donation
See my full professional profile (available for consulting projects)
My Podcast on Financial News and Education
My new Podcast on Italian Politics