In its Q3 2023 quarterly risk dashboard and risk assessment questionnaire, published on Friday 12 January, the European Banking Authority reported that banks in the EU/EEA region, despite their robust and profitable status with strong liquidity levels, are encountering challenges from rising interest rates that could affect their asset quality.
The report noted that economic activity in Europe remained subdued with high macroeconomic uncertainty. This is largely attributed to the monetary policy response to high inflation, which has only begun to ease inflationary pressures towards the end of 2023, said EBA.
Capital ratios
In terms of capitalisation, the banks in the EU/EEA maintained robust levels. The weighted average CET1 ratio (fully loaded) stood at 15.8%, a slight decrease from the historical high of 15.9% reported in the previous quarter but still 100 basis points higher than September 2022. However, risk-weighted assets saw a slight increase, primarily driven by credit risk.
Mrel compliance and liquidity
The report stated a marginal minimum requirement for own funds and eligible liabilities (Mrel) shortfall at 0.25% of risk-weighted assets on the EU/EEA level as of Q2 2023. Liquidity ratios remained high despite a slight decrease. Market funding conditions were also favorable, with banks issuing more debt across nearly all classes by November 2023 compared to previous years.
Lending standards have tightened across the EU, but this has not yet led to a decrease in outstanding loans to non-financial corporates and households, the report stated. Loan growth, however, remained subdued as banks remain hesitant to increase their lending exposures, reasoned EBA.
Asset quality
The asset quality of the banks stayed robust. Yet, there was a concern over real estate-related exposures, both commercial and residential, as a higher share of banks expect a deterioration in these portfolios’ asset quality. The return on equity for EU/EEA banks was reported at 10.9%, supported by widening net interest margins (1.62% in Q3 2023) and net interest income generation.
Operational risks
Operational risks remained a significant concern, driven by cyber and data security risks, as well as conduct and legal risks. An increasing number of banks cited fraud as a primary operational risk, indicating a shift in the risk landscape, reported EBA.
