EBA Report on risks and vulnerabilities of the European banking system

11 July 2012

This annual report issued by the European Banking Authority describes the main developments and trends that affected the EU banking sector in the previous year, and provides the EBA's outlook on the main micro-prudential risks and vulnerabilities looking ahead.

As stated in the EBA Regulation, the reports are sent to the European Parliament, the Council, the Commission and the ESRB.

This is the first Annual Report on Risks and Vulnerabilities of the European banking sector by the European Banking Authority (EBA). It has been prepared in accordance with the EBA Regulation (Art. 32(3) Of Regulation (EU) No 1093/2010 of the European Parliament and of the Council) which states:

• without prejudice to the tasks of the ESRB set out in Regulation (EU) No 1092/2010, the Authority shall, at least once a year, and more frequently as necessary, provide assessments to the European Parliament, the Council, the Commission and the ESRB of trends, potential risks and vulnerabilities in its area of competence.
• the Authority shall include a classification of the main risks and vulnerabilities in these assessments and, where necessary, recommend preventative or remedial actions.

The EBA is presenting this report to discharge its responsibilities under the relevant regulation. The report describes the main developments and trends that affected the EU banking sector in 2011 and provides the EBA’s outlook on the main micro-prudential risks and vulnerabilities looking ahead.

This report focuses on the short- and medium-term challenges that the EU banks face. It draws on the views of national supervisors and banks to construct a forward-looking view of risks that are becoming of concern to regulators and policy-makers. The report also identifies some of the measures that are being set in train now to address these forward-looking risks.

The report is based on various sources, such as supervisory data, public disclosure by banks including audited statements, market indicators and other metrics, as well as the EBA’s own ad hoc thematic analyses.

Micro-prudential information on an institution-by-institution basis is the first essential component for the assessment of risks and vulnerabilities. The EBA collects a core set of “Key Risk Indicators” (KRIs), which are reported quarterly by national authorities and cover 57 banks from 20 EEA countries. In terms of coverage, the banks in the sample cover at least 50 per cent of each national banking sector and timeseries have been collected, on a best effort basis, from the last quarter of 2008 (see the Annex for details).

Since KRIs are collected at a point in time, they tend to be backward-looking in nature. They are thus the starting point for the EBA analysis and are complemented with various other forward-looking sources of information and data.

In particular, information from the Risk Assessment Questionnaire (RAQ) is also analysed. The RAQ is a qualitative questionnaire completed for individual banks in order to get a bottom-up view on the main risks and vulnerabilities as perceived by supervisors and banks themselves. The main findings of the RAQ are reported throughout the report and have contributed to the overall risk assessment.

The report is organised as follows:

• Chapter 3 presents notes on the sovereign crisis and the interconnections between banks and sovereigns under stress and sets the stage for the rest of the report. It also illustrates the impact of the crisis on banks’ liquidity and funding positions and the actions put in place by the authorities.
• Chapter 4 provides a broader description of the current conjuncture, based on the supervisory data that the EBA collects as well as on the results of the RAQ, carried out last March.
• Chapter 5 switches to the medium-term assessment. The leitmotif is again banks’ funding and liquidity and the post-LTRO strategy, but also the outlook on asset quality as the result of the difficult macro-economic environment.
• Chapter 6 looks more generally at the possible shape of the EU banking sector after the crisis and discusses the perspectives in terms of business models and deleveraging.
• Finally, Chapter 7 introduces the issue of consumer protection and identifies how poor customer relationship practices may affect banks’ profitability and risk profiles.

Full report

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