EBA updates on risk and vulnerabilities in EU banking sector

The European Banking Authority (EBA) published its eighth semi-annual report on Risks and Vulnerabilities in the EU banking sector. The report shows that EU banks have continued to strengthen their capital position and to improve asset quality. However, the level of non-performing exposures remains high and profitability is still weak. The report also analyses the exposures towards emerging market (EM) countries and non-bank financial intermediaries.
Throughout the first half of 2015, EU banks continued to strengthen their capital ratios, mainly due to retained earnings. Banks’ equity tier 1 (CET1) ratio was 12.5 % in June, 40bps higher than in December 2014(1). This improvement has been accompanied by a modest recovery of loans and increase in risk-weighted assets.
Asset quality improved although trends differ significantly across countries and banks. The ratio of impaired and past due loans to total loans decreased to 6.4 % in the first half of 2015, compared to 7 % at the end of 2014, and the coverage ratio increased. Banks’ expectation of further gradual improvements in asset quality depends on the progress of economic recovery, which in turn is strongly dependent on developments in emerging markets.

International central bank committes release reports on fixed income markets

The Committee on the Global Financial System (CGFS) and the Markets Committee released two reports on the structure and liquidity of fixed income markets.

The CGFS report, Fixed income market liquidity, finds signs of greater fragility, with liquidity conditions being more susceptible to disruptions, such as sudden stops of liquidity in key segments of the market and a deterioration of market depth metrics.

“Fixed income markets are in a state of transition,” said CGFS Chairman William Dudley, President of the Federal Reserve Bank of New York. He added: “So far, the effects of ongoing regulatory, technology and market structure changes do not appear to have had large, persistent effects on the price of liquidity services for most major asset classes, but rather have been reflected in increasingly fragile liquidity conditions.”

The report identifies the key drivers of the change as:

  • the rise of algorithmic trading in fixed income markets, which may accelerate the rate at which seemingly ample liquidity can evaporate after the first signs of stress;
  • banks’ trimming of trading-related exposures in response to lower risk appetite in the wake of the financial crisis and to more demanding regulatory requirements; and
  • unconventional monetary policies, which can give rise to crowded trades and one-sided risk expectations on the part of market participants.