14 December 2018

Financial Times: EU bank watchdog warns e-money firms not all ready for cliff-edge Brexit

With just over three months to go until the UK is due to leave the European Union, smaller financial institutions and e-money firms are not doing enough to prepare for a cliff-edge Brexit, Europe’s watchdog of watchdogs has warned.

The European Banking Authority said that since it rang the alarm in June over lenders’ “inadequate” planning for a situation where the UK crashed out of the bloc with no deal, contingency plans have improved among bigger banks. But it is still concerned about the preparations of payment and e-money institutions and warned that some may need to plan to relocate their businesses.

The EBA said e-money and payment institutions “are of particular importance from an EU27 perspective, because of the large volumes of payments business being offered by UK-based institutions through their cross-border passporting activities. For such institutions, contingency planning, including relocation, where appropriate, is needed, and effective communication with customers ex-ante to prepare for any disruption is vital.”

The warning was included in the EBA’s annual report on key risks to the banking sector across Europe, including the UK.

Beyond Brexit, stagnant profitability, an addiction to central-bank financing and an emerging money-laundering scandal are key challenges.

The EBA — which is the watchdog of watchdogs, ensuring that regulations are implemented across the bloc in an even way — said that replacing financing from central banks would be instrumental to banks’ funding plans, while high costs and low inefficiency were contributing to profitability that did not budge over the year from 7.2 per cent return-on-equity.

“EU banks’ net interest income has continued its declining trend in recent quarters, despite growing lending volumes, tightening the net interest margin further,” the EBA report reads. “High costs and low efficiency represent a major driver of the poor performance of the EU banking sector. Costs dynamics are affected by elevated IT related expenses.”

On the positive side, banks managed to decrease the amount of bad loans on their books over the past 12 months, with the average relative to overall loans dipping to 3.6 per cent, its lowest level since the legal definition of a non-performing loan was introduced in 2014. But the EBA, which ensures regulations are implemented in an even way across the European Union, said that growing protectionism and political uncertainty may weigh on banks’ ability to further reduce the pile of soured loans. [...]

Full article on Financial Times (subscription required)

European Banking Authority report on risks and vulnerabilities in the EU banking sector

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