The European Systemic Risk Board (ESRB) has published a report on the macroprudential issues arising from low interest rates and structural changes in the financial system of the European Union. The report has been jointly prepared by the Advisory Scientific and Advisory Technical Committees of the ESRB and the Financial Stability Committee of the European Central Bank. The report analyses potential macroprudential issues arising from both a prolonged period of low interest rates and structural changes and discusses what impact these may have on financial markets and the real economy over a long-term horizon. The analysis in the report takes a forward-looking and holistic approach by considering all major sectors in the financial system as well as cross-sectoral spillovers and contagion channels. The annexes to the report cover these aspects in more detail.
The EU banking sector continues to struggle with high levels of non-performing loans (NPLs), low profitability and efforts to restore confidence, notwithstanding the steady strengthening of the capital base. Nonetheless, modest asset growth continues, also supported by lower-risk traditional lending. External events saw heightened volatility in market sentiment towards banks’ funding in the first three quarters of 2016. Whilst funding costs have been kept low by accommodative monetary policy stances, including central banks’ asset purchase programmes, overall issuance volumes of unsecured debt were reduced in the first three quarters of 2016 compared to 2015. Issuance concentrated on banks with a strong market perception. Volume reductions of subordinated debt issued were particularly pronounced. Volatility has also seen increased fluctuations in spreads for unsecured debt in 2016. Going forward, banks will also have to take into account in their funding plans the need to meet the requirements of the global standard on total loss absorbing capacity (TLAC) and the bank recovery and resolution Directive (BRRD).