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Risk Assessment Questionnaire – Summary of the Results (December 2018)

Introduction

The European Banking Authority (EBA) conducts semi-annual Risk Assessment Questionnaires (RAQs) among banks and market analysts. This summary presents the findings from the autumn 2018 RAQs, which were completed by 53 banks and 15 market analysts. The results are published alongside the EBA's quarterly Risk Dashboard (Q3 2018). The data is aggregated, with figures rounded for clarity. Respondents may have selected "n/a" or "no opinion" for some questions, leading to discrepancies from 100%.

Summary of the Main Results

The EU banking sector faces potential risks due to:

• Clouded market sentiment and heightened financial market volatility
• Rising global protectionism
• Subdued profitability in EU banks
• Uncertain asset quality outlook from market analysts

Banks anticipate growth in lending for SME loans, residential mortgages, and consumer credit, while reducing sovereign and asset financing exposures. They also aim to increase MREL instruments and retail deposits. Banks expect an improvement in portfolio quality, but market analysts remain cautious. Cyber risk and data security are identified as the main drivers of increased operational risk. There is concern over the disorderly Brexit and its implications on financial contracts and data transfer.

Banks' Questionnaire

1. Business Model / Strategy / Profitability

• 55% of banks believe their current earnings cover the Cost of Equity (CoE), stable compared to previous surveys.
• 70% of banks estimate their CoE between 8% and 10%, while 15% (up from 20%) estimate it between 10% and 12%.
• 10% of banks estimate CoE below 8%, slightly higher than previous results.
• 30% of banks expect an increase in profitability over the next 6-12 months, up from 15% and 20% in previous surveys.
• Banks primarily target net fees and commissions income and operating costs reduction as areas for improving profitability.
• 60% of banks see net interest income as an important driver of profitability.

2. Funding / Liquidity

• Banks aim to increase MREL eligible instruments, retail deposits, and secured funding.
• 85% of banks are working on solutions to replace IBOR benchmark rates.
• Half of the banks identify lengthy and expensive judiciary processes as a major obstacle to resolving non-performing loans (NPLs).
• 35% of banks have contingency plans for a disorderly Brexit, while 80% of market analysts are concerned about its implications.

3. Asset Volume Trends

• 90% of banks plan to increase SME financing.
• Banks also plan to increase consumer credit, residential mortgages, and corporate lending.
• 25% of banks intend to reduce commercial real estate and sovereign exposures.

4. Asset Composition & Quality

• Majority of banks expect an improvement in asset quality across portfolios.
• SME, residential mortgages, and corporate portfolios are expected to show positive developments.
• Market analysts are more cautious, particularly regarding sovereign and asset finance.
• 40% of analysts expect a deterioration in asset quality, while 20% of banks share this view.

5. Conduct, Reputation, and Operational Risk

• Cyber risk and data security are the main operational risk drivers for 90% of banks.
• Compliance with regulatory initiatives and conduct and legal risk are also significant, with the latter doubling from previous results.
• Litigation costs are expected to rise by 45% of analysts, up from 5% in June 2018.

6. FinTech

• 85% of banks develop their own FinTech products or sponsor FinTech incubators.
• 80% of banks plan to cooperate with non-bank FinTech firms.
• 55% of banks use their own venture capital funds for FinTech investments.
• 45% of banks plan to acquire FinTech firms directly.
• 35% of banks made no investment in FinTech in 2017, while 25% invested between EUR 10m and EUR 50m.

7. General Open Question

• Banks identify political risk and geopolitical challenges as main future vulnerabilities.
• Market analysts highlight regulatory risks (MREL, TLAC, prudential provisioning) and low interest rate environment as key concerns.
• Shadow banking, cyber security, and FinTech are also noted as potential risks.

Market Analysts' Questionnaire

1. Business Model / Strategy / Profitability

• 65% of analysts agree or somewhat agree that banks will see an increase in profitability.
• 60% of analysts expect an improvement in cost efficiency.
• 75% of analysts identify regulatory requirements and complexity as the main obstacles to M&A.

2. Funding / Liquidity

• 80% of analysts believe banks will be able to issue subordinated debt instruments.
• Analysts expect rising costs for such issuances compared to last year.
• AT1 instruments are expected to be issued by 65% of analysts, down from 95% in previous surveys.

3. Asset Composition & Quality

• 95% of analysts expect an increase in SME financing.
• Two-thirds of analysts expect increases in residential mortgages, corporate, and consumer credit.
• Market analysts are more cautious about asset quality, with 45% expecting deterioration in sovereign and asset finance.

4. General Open Question

• Market analysts identify regulatory risks, economic challenges, and low interest rates as the main risks.
• Shadow banking, cyber security, and FinTech are also noted as potential vulnerabilities.

Key Findings

• Profitability remains subdued but is expected to improve in the next 6-12 months.
• Cyber risk and data security are the primary drivers of operational risk.
• MREL instruments and retail deposits are targeted for growth.
• Brexit and regulatory requirements are key concerns for both banks and market analysts.
• FinTech is a growing area of focus for banks, with increased investment and collaboration expected.
• Market analysts are more cautious about asset quality and regulatory risks compared to banks.