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Risk Assessment Questionnaire – Summary of the Results (June 2019)

Introduction

The European Banking Authority (EBA) conducts semi-annual Risk Assessment Questionnaires (RAQs) among banks and market analysts. This summary presents the results of the spring 2019 edition, with 62 banks and 18 market analysts participating. The increase in the number of banks has led to a more representative sample across the EEA, but caution is needed when comparing results over time. The RAQ results are published alongside the EBA's quarterly Risk Dashboard (Q1 2019).

Summary of the Main Results

• Economic and Profitability Risks: The EU banking sector faces potential risks due to the deterioration in economic growth prospects, driven by geopolitical tensions and protectionism, as well as the low profitability of EU banks. The cost of equity (CoE) for banks is estimated between 8%–10%, with nearly half of them indicating that current earnings do not cover CoE.
• Lending and Growth Strategies: Banks plan to expand lending in selected portfolios such as SME loans, corporate lending, and consumer credit, primarily funding this growth through MREL liabilities and retail deposits. However, analysts and banks are more pessimistic about asset quality, especially for corporate and commercial real estate exposures.
• Operational Risk: Cyber risk and data security are the main operational risk drivers for banks, while market analysts identify money laundering, terrorist financing, and conduct/legal risks as the primary threats.
• FinTech Impact: FinTech firms are seen as a significant threat to payment and settlement revenues, although more banks now view them as an opportunity. The impact of FinTech is more pronounced in retail segments.
• Sustainable Finance: Sustainable finance is a growing area, with 90% of banks developing or planning to develop green products. Environmental, social, and governance (ESG) criteria are the main motivations for this development. Market analysts expect a slight increase in green assets and liabilities over the next year.

Core Findings by Section

1. Business Model / Strategy / Profitability

• Profitability Expectations: Only 25% of banks expect an increase in profitability over the next 6–12 months.
• Cost of Equity: 60% of banks believe their current earnings cover the cost of equity, up from 55% in previous periods. Nearly 20% estimate CoE below 8%.
• Profitability Strategies: Banks aim to reduce operating costs and increase net fee and commission income, focusing on payment services and asset management.
• M&A Obstacles: The main obstacles to M&A are cost and riskiness (50%), followed by complexity and regulatory requirements (35%).
• Brexit Impact: Banks are mainly responding to Brexit-related risks by ensuring access to EU financial market infrastructures and re-papering contracts.

2. Funding / Liquidity

• Funding Priorities: Banks plan to increase senior non-preferred and senior holdco debt (45%) and retail deposits (40%).
• MREL/TLAC and AT1/T2 Instruments: There is a significant increase in the percentage of banks planning to issue T2 and AT1 instruments (25% in June 2019, compared to 15% in December 2018).
• Subordinated Instruments: Analysts are confident banks will issue more subordinated instruments eligible for MREL, with around 80% of them expecting this. Banks are increasingly concerned about pricing issues related to MREL issuance.

3. Asset Volume Trends

• Portfolio Adjustments: Banks plan to increase SME financing, consumer credit, and residential mortgages, while decreasing commercial real estate and sovereign exposures.
• Market Analysts' Views: Market analysts are more optimistic about SME and residential mortgages but more pessimistic about corporate and commercial real estate. A notable increase in the share of analysts expecting an increase in sovereign exposures.

4. Asset Composition & Quality

• Asset Quality Outlook: Analysts are more pessimistic about asset quality than banks, with a significant increase in the share expecting deterioration in corporate and commercial real estate exposures.
• NPL Management: Both banks and analysts identify lengthy and expensive judiciary processes as a major obstacle in resolving non-performing loans (NPLs). Banks primarily use hold and forbearance strategies, followed by NPL sales and legal options.

5. Conduct, Reputation, and Operational Risk

• Operational Risk Increase: Around 50% of banks and analysts expect an increase in operational risk.
• Risk Drivers: Banks cite cyber risk and data security as the main drivers, while analysts focus on money laundering, terrorist financing, and conduct/legal risks.
• Litigation Costs: 20% of banks and 45% of analysts expect an increase in litigation costs in the next 6–12 months.

6. FinTech

• FinTech Impact: FinTech firms are seen as a major threat to payment and settlement revenues, but more banks now see them as an opportunity.
• Segment Focus: The impact of FinTech is more significant in retail segments, with 40% of banks reporting increased threats from retail brokerage activities.

7. Sustainable Finance

• Green Products Development: 90% of banks have developed or plan to develop green products and services based on environmental considerations. 80% also consider social criteria, and 65% consider governance.
• Popular Green Products: Energy-efficient mortgage loans (75%) and green CRE loans (50%) are the most popular green products. Banks also consider other green loans for retail customers.
• Motivations for Green Products: Strengthening client relationships and corporate/social responsibility are the main motivations.
• Barriers to Green Finance: Low volumes and lack of customer demand are the main barriers (85%), followed by lack of incentives (50%) and insufficient data (15%).

8. General Open Question

• Banks' Risks: Banks highlight central bank policies, low interest rate environment, trade wars, and geopolitical risks as main vulnerabilities.
• Analysts' Risks: Market analysts emphasize economic developments, China, protectionism, trade wars, and money laundering investigations as key risks for the EU banking sector.

Key Information

• The RAQ results are presented in an aggregated form, with charts corresponding to the questions in the distributed questionnaires.
• The inclusion of smaller banks in the sample has made the results more representative, but time-based comparisons should be made with caution.
• The cost of equity remains a significant concern, with nearly half of banks not covering it with current earnings.
• Banks are increasingly relying on digitalization and automation to reduce operating costs and improve profitability.
• FinTech is a growing threat to payment and settlement segments, but also seen as an opportunity.
• Sustainable finance is gaining traction, with a majority of banks planning to develop green products and services.
• Market analysts are more pessimistic about asset quality and more concerned about regulatory and operational risks.