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Summary of Andrea Enria's Keynote Speech on Reshaping European Banks

Core Content

Andrea Enria, Chairperson of the European Banking Authority (EBA), delivered a keynote speech at the Networking Seminar on Economic and Financial Issues hosted by Danmarks Nationalbank in Copenhagen on 14/06/2017. The speech focused on the progress and remaining challenges in the European banking sector since the financial crisis, emphasizing the need for continued reform to ensure a robust and sustainable banking system.

Main Trends and Developments

1. Safer and Sounder Banks: How Far Have We Come?

• Capital Strengthening: Significant progress has been made in increasing capital ratios across EU banks. The Common Equity Tier 1 (CET1) ratio reached 14.2% in December 2006, a 500 bps increase from the end of 2011. Major EU banks now have capital ratios comparable to their US counterparts, with Nordic banks leading the way.

• Asset Quality Review: A comprehensive asset quality review was conducted in 2014, and ongoing supervisory assessments have helped identify non-performing loans (NPLs). The EBA developed a common EU definition of NPLs, which has been crucial in this process.

• Balance Sheet Cleaning: While progress is evident, the cleaning of balance sheets remains slow and uneven. NPLs are still at very high levels, with some countries showing NPL ratios above 10%. The reduction in risk-weighted assets (RWAs) in 2016 was mainly due to a decline in credit risk, with a notable drop in RWAs (over 5%) since 2015.

2. What Remains to Be Done?

• Low Profitability: EU banks' profitability has declined, with a weighted average return on equity (RoE) of 3.3% in 2016. The low interest rate environment, high NPLs, and operational cost stickiness are key factors. Nordic banks outperform in terms of RoE.

• High Non-Performing Loans (NPLs): The NPL stock is slightly below one trillion euros. While the NPL ratio has declined to 5.1% in Q4 2016, the pace of adjustment remains slow. Contagion risks across the Single Market are a concern due to cross-border exposure and the impact on monetary policy transmission.

• FinTech Competition: The rise of FinTech companies is challenging traditional banking models. While competition can be beneficial for consumers, it also threatens profitability and business models. The revised PSD2 will increase competition by allowing new players to access customer data and accounts.

• Conduct Risk: Uncertainty around conduct-related risks, including litigation and regulatory penalties, continues to affect market sentiment. Conduct costs have had a significant impact on bank profits and capital levels. These costs are expected to remain high in 2017 but may decline in the medium term.

Key Challenges

• Low Interest Rates: Continue to pressure net interest margins and profitability.
• High NPLs: Remain a major obstacle to recovery and sustainable lending.
• FinTech Disruption: Threatens traditional banking models and requires adaptation.
• Conduct Risk: Deters public confidence and increases costs.
• Resolution Framework: Requires clarity and consistency in the implementation of MREL and resolution plans.

Resolution and Financial Safety Net

1. Minimum Requirement for Own Funds and Eligible Liabilities (MREL)

• MREL Eligible Debt: Banks hold around 37% of their RWAs in MREL eligible liabilities, indicating progress. However, actual MREL targets have not yet been set.
• MREL Shortfalls: The EBA report shows that aggregate shortfalls range between 2.1% and 2.9% of system-wide RWAs. MREL instruments have longer maturities, with over 40% having a maturity of more than 5 years.
• Sectoral Differences: G-SIBs are more advanced in meeting MREL requirements, while smaller banks face challenges. The current market environment supports buffer build-up, but progress is needed to avoid delays in resolution planning.

2. Resolution Planning

• Resolution Strategies: Most banks have identified their preferred resolution strategies, such as single point of entry, multiple point of entry, or liquidation.
• Operational Complexity: The development of detailed resolution plans is the most complex and resource-intensive phase. These plans must include operational details and define tools for coordinated crisis management.

Conclusion

The European banking sector has made progress in becoming safer and sounder since the financial crisis, but challenges remain. Continued efforts are needed to address NPLs, improve profitability, adapt to FinTech competition, and enhance conduct risk management. The resolution framework is also evolving, with the need for clearer guidance on MREL and resolution plans to ensure a robust financial safety net for the EU.