Risk assessment of the European banking system. July 2013.
Date: 2013-08-23
Institutions: European Banking Authority
Subjects: banking system, market economy, market supervision, report

RISK ASSESSMENT OF THE  
EUROPEAN BANKING SYSTEM

JULY 2013

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RISK ASSESSMENT OF THE  
EUROPEAN BANKING SYSTEM

JULY 2013

Contents

Executive summary 

1.  Introduction 

2.  External environment 

3.  Assets side 

De-risking 

Business models 

Asset quality 

4.  Capital and recapitalisation results 

5.  Liabilities side 

Funding 

6.  Income and profitability 

7.  Consumer issues and reputational concerns 

Appendix: Samples 

Annex 

4

8

10

15

15

17

20

26

29

29

32

35

39

41

3

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMExecutive summary

Throughout  the  first  semester  of  2013,  fol-
lowing  the  publication  of  the  EBA’s  last  risk 
assessment  report  (Report  on  risks  and  vul-
nerabilities  of  the  European  Banking  System, 
January  2013),  the  EU  banking  sector  has 
continued to observe some limited improve-
ments in market confidence, from both debt 
and equity investors. Conversely, a clear dis-
location  between  financial  markets  and  the 
real  economy  is  being  observed,  with  mac-
roeconomic data and forward looking leading 
indicators displaying signs of a general weak 
macroeconomic environment. Given the con-
tinued  disappointing  economic  activity  and 
some deep recessions in parts of the EU, the 
outlook for the near future remains subdued. 
Consequently,  significant  challenges  within 
the EU banking sector continue to persist due 
to  probable  rising  provisions  and  continuing 
asset  quality  deterioration  along  with  this 
trend showing no sign of reversal.

Market sentiment has improved in compari-
son to last year as a consequence of decisive 
policy  measures  and  regulatory  steps  since 
the summer of 2012, perceived as very posi-
tive  moves  to  reduce  the  risks  of  both  EMU 
break-up  and  outright  sovereign  defaults. 
The  recapitalisation  of  EU  banks  through 
2012 on the back of the EBA’s recapitalisation 
recommendation  has  combined  with  ample 
central  bank  liquidity  such  that  the  second-
ary market is showing that investor demand 
is  substantial  and  exceeds  supply  from  new 
issuances. At the same time, spreads of bank 
benchmark bonds of different durations have 
continued  to  decline  in  both  ‘core’  and  ‘pe-
ripheral’ countries. However, a sudden reas-

sessment  of  expectations  regarding  liquid-
ity programmes of major central banks may 
trigger  significant  corrections  in  markets. 
Whilst the return of calmer conditions paved 
the way for a gradual return of market confi-
dence, financial markets still remain fragile 
and susceptible to a sudden switch of mar-
ket sentiment.

With  regard  to  regulatory  developments 
and  structural  reforms,  the  EU  parliament 
approval of the CRD IV, the legislation imple-
menting Basel III within the EU, and publica-
tions  of  the  CRR/CRD,  were  likewise  posi-
tive steps forward in reducing uncertainties. 
Withal, despite some clarity on the technical 
details, significant implementation challeng-
es  remain  ahead.  The  numerous  regulatory 
reforms still underway continue to be of con-
cern for investors and other market partici-
pants in particular in regard to the timing and 
respective  contents.  Moreover,  there  con-
tinues  to  be  evidence  of  a  fragmented  Eu-
ropean financial sector with regard to bank 
lending. In parallel, the sovereign-bank link-
age  still  persists,  smaller  banks  are  facing 
relatively  higher  funding  costs,  and  cross-
border interbank markets continue to be very 
subdued and fragile in many jurisdictions. To 
bring fragmentation to a halt and strengthen 
the single market, it is fundamental to press 
ahead  with  structural  and  institutional  re-
forms at the European level, in particular the 
establishment  of  the  banking  union,  includ-
ing  a  Single  Supervisory  Mechanism  (SSM) 
and  bank  resolution  schemes.  Meanwhile, 
the EBA will continue to pursue its objectives 
in advancing towards an EU-wide single rule-

4 

EUROPEAN BANKING AUTHORITYbook and promoting regulatory convergence 
across the Union, in both rules and practices.

With  regard  to  capital  levels,  over  the  last 
months,  EU  banks  and  respective  capital 
positions  continued  to  maintain  a  notewor-
thy  increasing  trend,  notwithstanding  the 
challenging  conditions  in  financial  markets. 
Nonetheless,  the  continued  deterioration 
of  both  the  quality  of  banks’  loan  portfolios 
and profitability may also pose challenges in 
some cases to the maintenance of adequate 
capital  levels.  Therefore,  European  super-
visors  will  need  to  continue  monitoring  the 
increasing  credit  risks  and  the  smooth  and 
timely transition to the CRR/CRD framework.

On  the  asset  side  of  the  EU  banks,  there  is 
an  ongoing  and  limited  de-risking  process 
through the reduction of balance sheets and 
loan  books  across  the  EU,  and  the  optimal 
pace of deleveraging justifies close attention. 
There is evidence of a continuing deteriora-
tion  of  the  quality  of  banks’  loan  portfolios 
throughout 2012 and the first months of 2013. 
The  increasing  credit  risks  and  the  deterio-
ration in asset quality are spread across the 
EU. The ratio of impaired loans and past due 
(> 90 days), in terms of weighted average, has 
increased from 6 % in June 2012 to 6.3 % in 
December  2012  (the  highest  since  2009). 
Loans in arrears, and impaired assets in par-
ticular, continue to increase and provisioning, 
in some cases, has not increased in conform-
ity  with  rising  credit  risks,  which  continues 
to  raise  questions  on  the  extent  to  which 
provisioning  is  adequate.  Banks  with  a  cov-
erage  ratio  of  less  than  25  %  increased  and 

represented  approximately  14  %  of  total  key 
risk indicator (KRI) sample assets in Decem-
ber 2012. At the same time, there is a general 
market  view  that  forbearance  is  practised, 
particularly,  in  residential  mortgages,  com-
mercial real estate, and real estate developer 
loans. In addition, banks active efforts to deal 
with  problem  assets  have  been  to  some  ex-
tent hampered by the absence of a lively sec-
ondary market in banks assets in the EU. The 
EBA  agreed,  in  May  2013,  on  recommenda-
tions to supervisors to conduct asset quality 
reviews  on  major  EU  banks  in  order  to  dis-
pel  concerns  over  the  deterioration  of  asset 
quality (1). In addition, the EBA proposed har-
monised definitions on forbearance and non-
performing  exposures  (2).  These  consistent 
EU-wide definitions are a key step in the early 
identification of risks to the financial stability 
at EU level and will facilitate further actions, 
such as asset quality assessments.

With  reference  to  the  EU  banks’  liability 
side,  the  funding  conditions  have  improved 
with some consistent banks’ issuance of un-
secured debt. There has also been some evi-
dence of deposit inflows from both retail and 
corporate  customers,  including  into  banks 
in  countries  with  financially  stressed  sover-

(1)  EBA recommends supervisors to conduct asset quality 
reviews and adjusts the next EU-wide stress test timeline. 
http://www.eba.europa.eu/-/eba-recommends-supervi-
sors-to-conduct-asset-quality-reviews-and-adjusts-the-
next-eu-wide-stress-test-timeline

(2)  EBA  Consultation  Paper  on  supervisory  reporting  on 
forbearance  and  non-performing  exposures.  http://www.
eba.europa.eu/-/eba-consultation-paper-on-supervisory-
reporting-on-forbearance-and-non-performing-exposures

5

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMeigns, and the average cost of equity of banks 
in the EU has decreased. With regard to de-
posits, their importance for bank funding has 
been steadily increasing. Not only the weight-
ed  average  of  the  loan-to-deposit  ratio  has 
been decreasing since September 2011 (from 
147 % to 139 %, in December 2012), but also 
the median (from 152 % to 140 % in Decem-
ber  2012).  Nonetheless,  some  behavioural 
changes  could  be  expected  for  deposits  not 
covered  by  deposit  guarantee  schemes,  and 
heightened  supervisory  attention  is  neces-
sary. A sustainable development also needs 
to  take  into  consideration  the  necessity  to 
restore market access for banks and a move 
away from central bank support.

The  EU  banks’  income  and  profitability  has 
continued to be faced with significant head-
winds  which  are  not  likely  to  dissipate  in 
2013.  The  low  interest  rates  environment 
creates some pressure on bank net interest 
margins, especially for banks with exposure 
to tracker type mortgages, and increases the 
risk of hidden forbearance with build-up of la-
tent credit risk and inefficient market alloca-
tion of available credit resources. At the same 
time, net interest margins are pressured by 
high  funding  costs,  official  funding  notwith-
standing,  which  are  not  being  matched  by  a 
full re-pricing of assets. The cost-to-income 
ratio  and  similar  indicators  also  point  to 

some  deterioration  of  banks’  ability  to  keep 
relative  costs  under  control  whereas  the 
credit costs are on the rise, leading to higher 
levels of loan-loss provisions. In a context of 
economic  downturn  and  sector  deleverag-
ing there are limited and less flexible levers 
available to meet minimum returns, making 
some  business  models  unviable.  There  is 
limited evidence of banks grasping the need 
for  fundamental  restructuring  and  adapting 
business  models  to  cope  with  the  changing 
environment.  Moreover,  sustainable  profit 
generation  is  necessary  for  some  banks  to 
satisfy Basel III requirements.

With  reference  to  reputational  concerns 
linked  to  the  relationship  between  banks 
and  consumers,  a  number  of  detrimen-
tal  business  practices  of  European  banks 
have  affected  consumer  confidence.  These 
incidents  concern  detrimental  behaviour 
and  inappropriate  conduct  of  various  types, 
namely mis-selling of products, failures with 
regard to rate benchmark setting processes 
and  taxation  issues.  These  prudential  risks 
have  crystallised  in  some  EU  members  and 
are  significant,  therefore  other  jurisdictions 
should  pay  heightened  attention  to  potential 
risks, especially in geographies where inno-
vative  instruments  have  been  sold  to  retail 
customers.

6 

EUROPEAN BANKING AUTHORITYTable 1:  Main risks facing the EU banking sector

Bank risk

Credit risk (includes 
asset quality, provisions, 
indebtedness, etc.)

Risk drivers

Asset quality

Market risk

1

r
a
l
l
i
P

Operational risk

L
A
T
I

P
A
C

Concentration risk, interest 
rate risk in the banking 
book-IRRBB and other

Reputational and legal

2

r
a
l
l
i
P

Volatility, hedge effectiveness

Pressure for changes and 
weak operational resilience, 
indiscriminate cost cutting

Interest rates

Libor/Euribor investigations, 
mis-selling

Profitability

Access to funding and 
maturity distribution

Margins, asset quality, provi-
sions workout, business model 
changes

Market confidence, pricing

Funding structure (encum-
brance, loan to deposit, 
official vs private sector)

Regulatory environment 

Leverage

Timing and scope of implement-
ing regulatory initiatives 

Fragmentation

Continued lack of confidence, 
sovereign/bank link, national-
only regulatory/policy initiatives

Sovereign risk

Fiscal policy and effectiveness, 
budgets imbalances

i

g
n
d
n
u
f

d
n
a

i

y
t
i
d
u
q
i
L

t
n
e
m
n
o
r
i
v
n
E

Level of risk

Trend

Contributing factors/interactions











































Uncertainty on timely recognition of problem loans, loan 
restructuring and modifications, level of impairments, real 
estate dynamics

Geopolitical uncertainty, monetary policy stance of the 
different world central banks

Degradation of controls, increased risk of fraud in down-
turn, IT service continuity

Low interest rates improve affordability, but squeeze down 
profitability  due to increased margin pressures

Banks face endogenous confidence pressures due to 
failures in practices, but also exogenous from possibility 
of bail-in of non-insured deposits. Prudential implications 
from fines and redress costs, and consequent impact on 
profitability

Low interest margins, increased cost of funding, non-
performing loans on the rise, limited room for cost cutting

High reliance on public sources of funding, though 
decreasing. National compartmentalisation and ring fenc-
ing, increasing reliance on deposit funding but unsecured 
markets are now open and functioning. Bail-in uncertainty 
increases funding prices

Business model changes, macroeconomic condition, 
fragmentation, ongoing de-risking

Perceived lack of clarity on convergence of regulatory 
initiatives, implications on business models, but increased 
clarity with vote on CRD/CRR package, implementation 
risk of SSM 

Increasing home bias and requirements to match asset and 
liabilities at country level; cross-border interbank markets 
remain very subdued. Rates for comparable companies 
divergent in different countries.



Implementation delays of the banking union

 High
 Medium
 Low

 Increasing
 Stable
 Decreasing

The level of risk summarises, in a judgmental fashion, the probability of the materialisation of the 
risk factors and the likely impact on banks. The assessment takes into consideration the evolution 
of market and prudential indicators, NSAs and banks’ own assessments as well as analysts’ views.

7

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
1.  Introduction

This is the third semi-annual report on risks 
and  vulnerabilities  of  the  European  banking 
sector  by  the  European  Banking  Author-
ity (EBA). The report describes the main de-
velopments  and  trends  that  affected  the  EU 
banking sector in the first semester of 2013 
and  provides  the  EBA’s  outlook  on  the  main 
micro-prudential  risks  and  vulnerabilities 
looking ahead.

With this report and those published in July 
2012  and  January  2013,  the  EBA  discharges 
its  responsibility  pursuant  to  recital  43  of 
Regulation  (EU)  No  1093/2010  of  the  Euro-
pean Parliament and of the Council of 24 No-
vember  2010  to  monitor  and  assess  market 
developments  as  well  as  to  provide  infor-
mation  to  other  EU  institutions  and  general 
public. The EBA believes that the information 
contained in the report provides the relevant 
stakeholders  with  a  useful  benchmark  for 
analysis.

The report draws on the views of banks and 
national supervisors to construct a forward-
looking  view  of  risks  that  are  becoming  of 
concern  to  regulators  and  policy-makers. 
Among  other  sources  of  information,  this 
report  is  based  on  four  main  exclusive  data 
sources, namely:

(a)  EBA key risk indicators;
(b)  EBA  risk  assessment  questionnaire  for 

banks;

(c)  EBA  risk  assessment  questionnaire  for 

market analysts; and

(d)  Micro  prudential  expertise  and  college 

information gathering.

The EBA key risk indicators (KRIs) are a set 
of 53 indicators collected on a quarterly ba-
sis by national supervisors, from a sample of 
57 European banks in 20 EEA countries from 
2009 onwards. The banks in the sample cover 
at least 50 % of the total assets of each na-
tional banking sector. Most of the indicators 
are  not  publicly  available;  therefore  these 
data provide a unique and valuable source of 
information. The reference date for the most 
recent data is 31 December 2012. Information 
about the sample and descriptive statistics of 
the latest KRIs can be found in both the ap-
pendix and annex.

Since  KRIs  are  collected  at  a  point  in  time, 
they  tend  to  be  backward-looking  in  nature. 
They  are  thus  complemented  with  various 
forward-looking  sources  of  information  and 
data, such as semi-annual surveys.

The EBA conducts semi-annual surveys, the 
risk  assessment  questionnaire  (RAQ),  ask-
ing  banks  and/or  their  financial  supervisors 
a  number  of  multiple  choice  questions.  In-
formation from the questionnaire completed 
in April 2013 and comparisons with previous 
answers from a representative sample of 35 
banks,  listed  in  the  appendix,  was  used  for 
this  report.  In  addition,  the  EBA  conducted 
a  survey  (RAQ  for  market  analysts)  asking 
market  analysts  (nine  respondents)  a  num-
ber of questions in a five-way multiple choice 
format with responses reflecting the degree 
of  agreement  to  the  statement  made.  Con-
clusions  should  be  treated  with  caution  due 
to the fact that questionnaires are sampling 
only  the  large  EU  groups  (RAQ  for  banks) 

8 

EUROPEAN BANKING AUTHORITYand only some market analysts (first attempt 
and for future increase). The main findings of 
both  RAQs  are  reported  through  the  report 
and  have  contributed  to  the  overall  risk  as-
sessment.

The  report  also  analyses  information  gath-
ered by the EBA from the European colleges 
of supervisors and from informal discussions 
as part of the regular risk assessments and 
ongoing dialogue on risks and vulnerabilities 
of the EU banking sector.

The  report  views  EU  banks  as  a  set  of  bal-
ance sheets and is organised as follows.

Chapter 2 looks at the external environment 
and  processes  by  which  EU  banks’  balance 
assets and liabilities are developing in a given 
market sentiment and macroeconomic envi-
ronment,  taking  into  account  the  regulatory 
developments and structural and institution-
al reforms at the European level.

Chapter  3  presents  the  assets  in  the  bank-
ing system, explaining the ongoing de-risking 
process,  the  respective  influence  in  banks’ 
business models and risk appetite, the asset 
quality  and  evolution  of  banks’  loan  portfo-
lios,  loans  in  arrears  and  impaired  assets, 
as  well  as  policy  implications  and  possible 
measures  to  address  these  prudential  is-
sues.

Chapter 4 provides an overview of the banks’ 
capital  positions  and  respective  positive 
trends,  taking  into  account  the  challenging 
conditions  in  financial  markets  and  the  na-

tional  efforts  progressing  towards  strong 
capital  buffers,  as  well  as  the  EBA  recapi-
talisation exercise and the smooth and timely 
transition to the CRR/CRD framework.

Chapter  5  switches  to  the  liabilities  side, 
presenting  the  general  positive  evolution 
of  funding  conditions,  the  rethinking  of  de-
pendence  on  less  stable  funding  sources, 
the  higher  reliance  on  deposit  funding  and 
potential  in-market  competition  for  new  de-
posits. It also discusses the development of 
asset encumbrance and highlights remaining 
structural fragilities and challenges, in par-
ticular in countries having experienced some 
sovereign stress.

Chapter 6 describes banks’ income and prof-
itability and the significant headwinds during 
the end of 2012 and the first semester of 2013, 
taking into account the weak economic envi-
ronment  and  ongoing  net  interest  margins 
compression, as well as banks’ ability to keep 
relative costs under control, the sustainabili-
ty of their respective business models, policy 
implications and possible measures.

Finally,  Chapter  7  touches  upon  aspects  of 
banks’  consumer  issues  and  reputational 
concerns,  business  conduct,  effective  and 
potential financial costs stemming from mis-
selling and other unfair past business prac-
tices, policy implications and possible meas-
ures to address these prudential issues.

9

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM2.  External environment

Market sentiment and macroeconomic 
environment

There  is  a  comprehensive  consensus  that 
funding conditions have improved compared 
to  last  year.  Examining  various  aspects  of 
banks issuance, it is visible that the situation 
in bank funding is healthier. Bank debt issu-
ance is being relatively strong in the favour-
able spread environment and even banks in 
countries  with  financially  stressed  sover-
eigns  have  re-accessed  the  markets.  How-
ever,  a  weak  macroeconomic  environment 
and respective data and indicators continue 
to show signs of retreatment and risks to the 
global outlook remain evident, in a clear dis-
location between financial markets and the 
real economy.

Funding conditions are particularly improv-
ing  for  peripheral  banks  —  both  large  and 
small  —  and  they  have  been  active  issuers 
in the last couple of months, suggesting that 
wholesale funding markets remain open. Is-
suance  is  still  not  very  large,  but  it  seems 
that it has more to do with the lack of need 
rather than the lack of ability to issue. Con-
currently, banks have more funding avenues 
including  increased  deposits  and  central 
bank  access.  Maturities  are  similar  to  last 
year’s level, but banks are continuing to de-
leverage, deposit growth remains positive in 
most countries, and banks still benefit from 
ample central bank liquidity.

Figure 1:  Stoxx  600  banks share price index 
(source: Bloomberg)

Moreover, the secondary market is showing 
that investor demand is substantial and ex-
ceeds supply from new issues. Benign fund-
ing  conditions,  in  particular  in  ‘peripheral’ 
countries,  are  not  only  supported  by  im-
proved market sentiments but also by bank 
debt  investors  being  prepared  to  go  down 
the credit curve in search for yield. In paral-
lel, spreads of bank benchmark bonds of dif-
ferent durations have continued to decline in 
both ‘core’ and ‘peripheral’ countries. At the 
same time, banks are also taking advantage 
of  the  renewed  USD  investors’  confidence, 
seeming to have little problem in accessing 
USD funding. The increasing USD funding of 
European banks could be considered a sign 
of regaining trust from the US investors.

In addition, unsecured funding has grown in 
terms of share from 60 % to 65 %, collater-
alised funding decreased from 31 % to 27 %, 
and government-guaranteed funding, which 
was largely absent in the first months of the 
year, has returned in the second quarter of 
2013.  Even  the  sovereign  developments  in 
March  did  not  lead  to  a  lasting  reversal  of 
the benign trend but only to some temporary 
deterioration. The secured issuance falling, 
as  an  overall  percentage,  confirms  the  im-
provement of the unsecured market.

The  first-quarter  earnings  season  points  to 
improved capital positions owing to run-offs 
of  non-core  assets,  organic  capital  gen-
eration  and  cost-containing  efforts  flowing 
through.  In  addition,  notwithstanding  con-

Cyprus crisis

160

140

120

100

80

60

40

20

0

 Itraxx euro ﬁnancials (senior S y)
 Euro Stoxx 600 banks

Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12

Jan 13

Mar 13

May 13

Jul 13

10 

EUROPEAN BANKING AUTHORITYtinued impairments associated with interna-
tional subsidiaries, goodwill impairments di-
minished in 2012 when compared to the large 
impairments  registered  in  2011  as  a  sign  of 
optimism of the European banks. Neverthe-
less,  it  is  necessary  to  maintain  a  cautious 
outlook  on  revenues  in  light  of  the  macro-
backdrop and expected generally weak busi-
ness  generation  towards  the  next  months. 
Forward-looking  macroeconomic  indicators 
continue  to  show  signs  of  retreatment,  and 
risks  to  the  global  outlook  remain  tilted  to-
wards the downside.

A  weak  macroeconomic  environment  and 
weaker-than-expected  economic  data  have 
extended into the first semester of 2013 and 
loan  dynamics  remain  subdued  and  sub-
ject to downside risks, translated into non-
performing loans. The EU outcome for real 
GDP continues to be weak and with signs of 
contraction.  Recent  indicators  confirm  that 
the decline reflects not only a significant fall 
in  demand  but  also  a  decrease  in  exports. 
The  subdued  loan  dynamics  are  a  result 
of  the  current  stage  of  the  business  cycle, 
characterised by heightened credit risk and 
the ongoing adjustment of financial and non-
financial-sector balance sheets.

Attainable information on non-financial cor-
porates’ access to financing indicates tighter 
credit  conditions  in  comparison  to  previous 
semesters, in particular for SMEs, in several 
EU  countries.  SME  lending  has  significantly 
contracted  and  among  some  reasons  for 
weak SME lending a low average profitability 
for SMEs is pointed as well as a further dete-
riorating business confidence. Therefore, the 
resulting deterioration in creditworthiness is 
one of the key reasons for weak SME lending. 
In parallel, a growing number of banks also 
identify  demand-driven  factors  and  register 
a lower demand from SMEs in a context of a 
preference  for  de-leveraging  and  compres-
sion in investment. As policy responses, ac-
tions involving funding, risk-reduction guar-
antees and increased disintermediation may 
be  necessary  for  a  significant  shift  in  confi-
dence in SMEs in order to result in improved 
lending volumes.

Regulatory developments

The  current  environment  is  characterised 
by  regulatory  measures  that  are  both  sig-
nificant in their impact and many in quantity. 
Some of the regulations are shaping the en-
vironment for financial services and will sig-
nificantly  influence  and  impact  on  the  form 
of  intermediation  as  well  as  the  scale  and 
the functioning of the EU banking sector.

In April 2013, the European Parliament ap-
proved  the  CRD  IV/CRR,  the  legislation  im-
plementing  Basel  III  within  the  EU.  In  June 
2013, the CRD IV and CRR were published  (3). 
This  new  framework  will  influence  banking 
activities as it requires banks to hold more 
and  higher  quality  of  capital  and  increases 
capital  charges  on  certain  banking  activi-
ties.  In  addition,  it  will  discourage  trading 
activities  using  balance  sheet  and  certain 
business  structures.  With  reference  to  the 
future  liquidity  framework,  banks  are  now 
strongly  encouraged  to 
increase  stable 
funding such as customer deposits. The lev-
erage ratio should also limit balance sheet 
expansion  and  the  harmonised  definition  of 
capital and liquidity standards engendering 
an  easier  and  more  effective  comparison 
among banks, hence enhancing transparen-
cy  (the  regulation  on  liquidity  and  leverage 
is  not  binding  and  requirements  are  there 
only in terms of reporting requirements for 
the CRR). This approval was a positive step 
forward in reducing uncertainties and rein-
forcing market confidence in the EU banking 
sector and has provided some clarity on the 
regulatory  process,  technical  details  and 
implementation  for  CRD  IV/CRR  on  capital, 
liquidity  and  funding.  Previously,  in  early 
January  2013,  the  announcement  of  imple-
mentation  details  by  the  Basel  Committee 
on  Banking  Supervision  (BCBS)  on  the  li-
quidity coverage ratio (LCR) was also an im-
portant step towards global liquidity stand-
ards.  In  Basel  III,  the  LCR  will  be  instilled 
as planned in 2015, with a minimum require-
ment  set  at  60  %  and  will  rise  in  equal  an-
nual steps to reach 100 % in 2019. Given the 
important  role  liquidity  mismatches  played 
in  the  financial  crisis,  the  EU  legislators 

(3)  Directive 2013/36/EU of the European Parliament and of 
the Council of 26 June 2013 on access to the activity of credit 
institutions and the prudential supervision of credit institu-
tions and investment firms, amending Directive 2002/87/EC 
and repealing Directives 2006/48/EC and 2006/49/EC. Reg-
ulation (EU) No 575/2013 of the European Parliament and 
of the Council of 26 June 2013 on prudential requirements 
for credit institutions and investment firms and amending 
Regulation (EU) No 648/2012.

11

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMTable 2:  Key EU regulatory measures

Items already adopted or about to be adopted

Timeline

Items under consideration

Timeline

Basel 2.5 (Securitisation and market risks)

Recovery & resolution 

CRD IV/CRR

CRD IV/CRR (liquidity coverage ratio-LCR)

Basel III (liquidity coverage ratio-LCR)

G-SIFI 

2011

2012

2013–18

2015-18

2015–19

2016

CRD IV CVA implementation

BCBS proposal on securitisations

Financial transaction tax

MiFID II

Banking union

European market infrastructure regulation

Fundamental review of the trading book 

Crisis management directive

Basel III (NSFR/leverage ratio)

Liikanen report recommendations

2013

2013

2013

2013

2013

2013

2014

2014

2013-18

-

considered  it  more  appropriate  to  have  a 
faster  implementation  schedule  than  Basel 
and  the  100%  LCR  implementation  will  be 
reached in 2018 (one year earlier than Basel 
III). These publications and communications 
reduced  some  uncertainties  and  concerns 
for  investors  in  bank  instruments,  allow-
ing  the  markets  to  price  the  risk  premium 
demanded for investment and expeditiously 
moving capital and credit more efficiently.

Simultaneously,  other  measures  are  about 
to  be  implemented  or  are  being  discussed 
and  therefore  becoming  increasingly  clear 
as concepts and that may also result in fur-
ther  regulation.  The  numerous  regulatory 
reforms  still  under  way  continue  to  be  of 
concern for investors and other market par-
ticipants, well acknowledged in the RAQ re-
sponses, in particular in regard to the timing 
and respective contents.

The  new  regulatory  environment  is  creat-
ing  significant  strategic  challenges,  forcing 
banks’ business models and a range of ac-
tivities  to  adjust  given  the  new  capital  and 
liquidity levels. There are significant imple-
mentation  challenges  ahead  and  several 
procedures and policies need to be aligned 
with  the  new  rules,  creating  particular  dif-
ficulties for banks.

Fragmentation of the EU single market

The last Risk Assessment Report published 
in January 2013 presented some evidence of 
fragmentation in the EU single market. There 
was  evidence  of  a  material  scaling  back  of 
global  activities  such  as  trade  and  com-
modity  finance,  international  cross-border 
lending and leasing, trading and investment 
banking, in particular intra-EU cross-border 
lending into economies experiencing stress 
or recession. Risks of further fragmentation 
of  the  EU  single  market  were  also  evident 
through  the  increasing  national  retrench-
ment of assets and liabilities, home bias and 
reduced  banks’  cross-border  financial  ac-
tivity. This trend was mainly driven by banks’ 
revised business strategies, changes in risk 
appetite, higher funding costs and the chal-
lenging macro environment, but it was also 
exacerbated by uncoordinated national poli-
cy measures, including ring-fencing of local 
bank  capital  and  liquidity.  This  evidence  of 
fragmentation  and  retrenchment  has  been 
hindering the free movement of capital and 
funding, increasing funding costs, signalling 
supervisory  divergence,  rolling  back  inte-
gration gains and risking further safeguard 
measures.

Throughout the first semester of 2013, there 
have been some positive signs of decelera-
tion of the detrimental trend towards market 
fragmentation.  Fundamentally,  the  inter-
bank  flows  across  borders  and  the  foreign 
claims  have  stabilised  after  the  significant 

12 

EUROPEAN BANKING AUTHORITYFigure  2:  Consolidated  total  foreign  claims  (ultimate  risk  basis)  of  reporting  european  banks 
vis-à-vis selected countries, 2010 Q4 = 100 (source: BIS)

160

140
160
120
140

100
120

80
100

60
80

40
60

20
40

0
20

DE
FR
DE
EL
FR
IT
EL
IT

ES
GB
ES
IE
GB
PT
IE
PT

1
Q
7
0
0
2

0

2
Q
7
0
0
2

3
Q
7
0
0
2

4
Q
7
0
0
2

1
Q
8
0
0
2

2
Q
8
0
0
2

3
Q
8
0
0
2

4
Q
8
0
0
2

1
Q
9
0
0
2

2
Q
9
0
0
2

3
Q
9
0
0
2

4
Q
9
0
0
2

1
Q
0
1
0
2

2
Q
0
1
0
2

3
Q
0
1
0
2

4
Q
0
1
0
2

1
Q
1
1
0
2

2
Q
1
1
0
2

3
Q
1
1
0
2

4
Q
1
1
0
2

1
Q
2
1
0
2

2
Q
2
1
0
2

3
Q
2
1
0
2

4
Q
2
1
0
2

1
Q
7
0
0
2

2
Q
7
0
0
2

3
Q
7
0
0
2

4
Q
7
0
0
2

1
Q
8
0
0
2

2
Q
8
0
0
2

3
Q
8
0
0
2

4
Q
8
0
0
2

1
Q
9
0
0
2

2
Q
9
0
0
2

3
Q
9
0
0
2

4
Q
9
0
0
2

1
Q
0
1
0
2

2
Q
0
1
0
2

3
Q
0
1
0
2

4
Q
0
1
0
2

1
Q
1
1
0
2

2
Q
1
1
0
2

3
Q
1
1
0
2

4
Q
1
1
0
2

1
Q
2
1
0
2

2
Q
2
1
0
2

3
Q
2
1
0
2

4
Q
2
1
0
2

Figure 3:  Evidence of fragmentation of the EU single market (source: RAQ market analysts)

 Agree
 Somewhat agree
 Somewhat disagree
 Agree
 Disagree
 Somewhat agree
 No opinion
 Somewhat disagree
 Disagree
 No opinion

You view credit and interbank market 
fragmentation across the EU as: 

You view credit and interbank market 
fragmentation across the EU as: 

1. Not materially relevant with a few 
exceptions 

1. Not materially relevant with a few 
exceptions 
2. Occurring but not materially relevant for 
systemic stability and growth 

2. Occurring but not materially relevant for 
systemic stability and growth 
3.Occurring and with negative implications 
for systemic stability and growth 

3.Occurring and with negative implications 
for systemic stability and growth 

0 %

0 %

10 %

10 %

20 %

20 %

30 %

30 %

40 %

40 %

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis. The y-axis 
carries the distribution ABCDE, i.e. answers to all closed questions, namely: ‘A’ — agree; ‘B’ — somewhat/mostly agree; ‘C’ — somewhat/mostly 
disagree; ‘D’ — disagree; and ‘E’ — not applicable or no opinion.

decreases  of  the  previous  semester.  At 
the  same  time,  there  are  two  main  factors 
proving  divergent  evolutions,  namely  bank 
funding and bank lending. On the one hand, 
with regard to bank funding, some observed 
rebalancing  of  funding  flows  amongst  EU 
countries  and  the  recent  deposit  inflows 
evidence,  including  into  banks  in  countries 
with  financially  stressed  sovereigns,  are 
positive  signs  of  retreating  fragmentation. 
On the other hand, with regard to bank lend-

ing, indications of a substantial widening of 
cross-border lending rates and contracting 
new  bank  lending  in  countries  with  finan-
cially  stressed  sovereigns  provide  further 
evidence  of  increasing  retrenchment  pre-
venting  the  extension  of  credit  in  sectors 
and geographies where it may be used most 
effectively. The same is being acknowledged 
in the RAQ market analysts’ responses, with 
recognised implications for systemic stabil-
ity and growth.

13

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 4:  Evidences of sovereign-bank linkage (source: RAQ)

There is correlation in market sentiment on your 
bank’s debt and your home country’s sovereign debt

a. If yes:

                                         i. Very strong

                                        ii. Relatively strong

                                       iii. Loose

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or Somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

100 %

This divergent evolution between bank fund-
ing and lending is perturbing. Amongst other 
inefficiencies,  an  increased  cross-country 
dispersion of lending rates has substantially 
weakened  capital  allocation.  Consequently, 
firms face increasingly different credit sup-
ply  and  pricing  conditions  across  countries 
irrespective  of  their  own  profitability  and 
risk. Therefore, an immediate consequence 
of market fragmentation has led to a short-
age  of  new  lending  to  small  and  medium-
sized  enterprises  (SMEs),  which  in  many 
European countries are the main engine for 
economic  growth.  These  are  clear  signs  of 
significant inefficiencies across the EU sin-
gle market that need to be rectified.

Overall, the sovereign-bank linkage still per-
sists,  despite  the  peripheral  deposit  flows 
stabilisation as well as decreasing Target 2 
imbalances and all the efforts developed so 
far  to  decrease  this  linkage,  with  spreads 
within the EU widening, including divergent 
rates to real-economy comparable firms. In 
addition, smaller banks are facing relatively 
higher  funding  costs,  cross-border  lending 
is  still  decreasing,  and  cross-border  inter-
bank  markets  continue  to  be  very  subdued 
and  fragile  in  many  jurisdictions,  also  con-
tributing among other reasons to a continu-
ing  dependency  of  some  banks  on  the  cen-
tral banks’ liquidity providing operations.

Structural and institutional reforms at 
European level

into  a  halt  and 
To  bring  fragmentation 
strengthen  the  single  market,  it  is  funda-
mental  to  press  ahead  with  structural  and 
institutional  reforms  at  European  level,  in 

particular  the  banking  union  establishment, 
including  a  Single  Supervisory  Mechanism 
(SSM) and bank resolution schemes. In June 
2012, the European Council decided that euro 
area  countries,  and  other  Member  States 
that may wish to opt in, would create an SSM 
mainly as a response to the banking and sov-
ereign  crisis,  and  in  December  2012  Ecofin 
made  specific  progress  in  this  direction. 
More  recently,  in  April  2013,  the  Council  of 
the European Union approved a compromise 
agreed with the European Parliament on the 
establishment  of  an  SSM  for  the  oversight 
of credit institutions. The SSM, coupled with 
other  measures  to  drive  further  integration 
such  as  the  European  Stability  Mechanism 
(ESM)  and  harmonised  deposit  guarantee 
scheme(s)  will  be  instrumental  in  breaking 
the adverse bank–sovereign link and a major 
step to promote the unity and integrity of the 
EU single market.

Simultaneously,  it  is  necessary  to  foster  su-
pervisory convergence through a strong role 
in supervisory colleges and through the devel-
opment of both the EU-wide Single Rulebook 
and Supervisory Handbooks. The EBA contin-
ues  to  strongly  support  colleges  of  supervi-
sors  as  the  proper  forum  for  discussion  and 
agreement on appropriate supervisory meas-
ures for cross-border banking groups. At the 
same time, the EBA will continue pursuing its 
objectives  in  advancing  towards  an  EU-wide 
Single  Rulebook  and  promoting  regulatory 
convergence  across  the  Union,  in  both  rules 
and practices. The unity and integrity of the EU 
single market could be achieved through uni-
form rules in key areas — the Single Rulebook 
—  and  effective  convergence  in  supervisory 
practices within the EU as a whole. 

14 

EUROPEAN BANKING AUTHORITY3.  Assets side

There  is  an  ongoing  reduction  of  balance 
sheets  and  loan  books  across  the  EU  and 
it  is  still  necessary  to  reduce  further  and 
strengthen European banks’ balance sheets. 
Many  examples  in  financial  history  empha-
sise the importance of bank deleveraging to 
overcome banking crises and restore stabil-
ity in a banking sector. However, the optimal 
pace of deleveraging is a difficult process and 
warrants close attention.

As a direct result of the financial crisis, eco-
nomic  uncertainty  and  regulatory  reform, 
banks need to adapt to the new business en-
vironment.  The  financial  crisis  has  exposed 
weak  business  models  and  business  lines, 
and  the  wave  of  global  regulatory  reform  is 
considerably  altering  the  risk  return  dynam-
ics of numerous business lines going forward.

The  quality  of  banks’  loan  portfolios  contin-
ued  to  deteriorate  throughout  2012  and  the 
first months of 2013. The September and De-
cember 2012 KRIs, and the responses to the 
RAQ on asset quality both point to a contin-
ued deterioration of asset quality in the last 
few months.

De-risking

Across the EU banking sector there is a need 
for  de-risking,  bringing  leverage  to  more 
conservative levels and a number of Europe-
an  banks  have  not  yet  completed  the  clean-
up  of  their  balance  sheets  and  shedding  of 
legacy assets.

In EU countries there is no evidence that an 
excessive  or  disorderly  asset  deleveraging 
has  occurred,  especially  insofar  as  assets 
related  to  the  real  economy  (loans  to  busi-
nesses and households) are concerned. This 
is  an  important  element  taking  into  account 
if  deleveraging  happens,  disorderly 
that 
banks  can  sharply  restrict  bank  credits,  in-
ducing a credit crunch. Nevertheless, Euro-
pean banks have been systematically tighten-
ing credit conditions, underscoring the risks 
of  a  disproportionate  lending  retrenchment. 
On  the  other  hand,  a  slow  and  not  convinc-
ing process of deleveraging can raise ques-
tions whether assets still remain overvalued, 
undermining market confidence and normal 
funding  for  growth.  More  severe  deleverag-

Figure 5:  Loan-to-deposit (source: KRI) —  
5th and 95th percentiles, interquartile range and median

300 %

250 %

200 %

150 %

100 %

50 %

0 %

9
0

c
e
D

0
1

r
a
M

0
1

n
u
J

0
1

p
e
S

0
1

c
e
D

1
1

r
a
M

1
1

n
u
J

1
1

p
e
S

1
1

c
e
D

2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

Total loans advances (Loans and advances held for trading, designated at fair value through profit or loss, AFS, Loans and receivables, HTM). Total 
deposits (other than from credit institutions: Deposits held for trading, designated at fair value through profit or loss, measured at amortised cost).

15

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 6:  Deleverage (source: RAQ)

Asset deleverage is an element of your strategy

a. If yes: 

i. It was required or suggested by national 
supervisors

ii. It is part of the EU State aid conditions

iii. It was decided by your bank independently

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis. 

0 %

20 %

40 %

60 %

80 %

ing has been occurring in financially stressed 
countries  and  this  trend  is  set  to  continue, 
partly  due  to  their  ongoing  macroeconomic 
and  financial  adjustment  programmes.  For 
this reason, completing the action of balance 
sheet  repair  in  the  banking  sector,  far  from 
hampering  growth  is  instead  a  precondition 
for kick-start lending into the real economy. 
There  is  still  a  need  for  adjustments  to  re-
move excess capacity and to restructure bal-
ance sheets, and to set the basis for a more 
stable  and  sound  banking  sector.  There  are 
indicators  that  a  downsizing  of  banks’  bal-
ance  sheets  has  started  and  continues  to 

take place to complete the repair of their bal-
ance sheets.

Over  the  last  12  months  while  total  assets 
remained fairly stable, risk-weighted assets 
decreased  by  6.3  %,  approximately  EUR  673 
billion.  In  parallel,  the  loan-to-deposit  ratio 
has shown a general downward trend in the 
last few years, indicating a steady reduction 
in the on-balance-sheet financial sector lev-
erage to sustainable levels.

According to the KRIs, the loan-to-deposit ra-
tio continues to decrease markedly. Not only 

Figure 7:  Deleverage drivers (source: RAQ)

 If applicable, your deleverage strategy is driven primarily (even if not solely) by:

a. Lower level of investment banking/trading

b. Lower demand for credits

c. The decision to de-risk further your bank’s business and balance sheet 
(e.g., shedding highly risky or less proﬁtable assets, non-core assets)

d. Funding constraints

e. No immediate funding constraints but the desire to match asset growth 
to liability growth under your chosen funding mix

f. The need to avoid growing ALM mismatches by relying too heavily on STF

g. The need to avoid relying too heavily on central bank borrowing (for the EZ: MRO-LTRO)

h. Constraints on the existing level of capital

i. Constraints due to future capital needs (required by either regulators or markets or both)

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

16 

EUROPEAN BANKING AUTHORITYhas the weighted average of the loan-to-de-
posit ratio been decreasing since September 
2011 (from 147 % to 139 % in December 2012), 
but also the median (from 152 % to 140 % in 
December 2012). Moreover, a decreasing dis-
persion is being seen since March 2012, with 
the 75th percentile decreasing from 184 % to 
163 % in December 2012. The weighted aver-
age  loan-to-deposit  ratio  declined  to  139  %, 
10 percentage points less than 3 years before 
and this trend is observed within the EU, with 
different intensities across geographies.

The  majority  of  the  RAQ  respondents  agree 
or somewhat agree that the asset deleverage 
is an element of their strategy. The majority 
refer they were deleveraging for both ‘private’ 
drivers as described earlier, i.e. according to 
their own business strategy reasons, and in 
some  cases  ‘public’  drivers  according  to  of-
ficial requirements or suggested by national 
supervisors.

Most  RAQ  respondents  continue  to  consider 
that their deleverage strategy is mainly driven 
by  the  decision  to  de-risk  a  bank’s  business 
and  balance  sheet,  for  instance,  shedding 
highly risky or less profitable assets, followed 
by constraints due to future capital needs.

Business models

EU banks continue to rebalance their willing-
ness to take risk and to embrace risk-averse 
strategies across products and geographies, 
systematically avoiding material risk-taking 
both  in  credit  and  market  activities.  The 
most  impacted  business  lines  are  invest-
ment  banking  and  trading,  reflecting  a  dis-
interest  from  high-risk  high-return  activi-
ties  and  moving  towards  a  more  balanced 
approach with an emphasis on retail activi-
ties. In parallel, cross-border activities have 
also reduced across non-core and emerging 
markets, provoking a significant withdrawal 
of  large  EU  banks  from  global  finance,  on 
aggregate  by  far  the  largest  participants, 
with impact on international trade finance.

Banks  are  also  seeking  to  increase  effi-
ciency  of  low-margin  businesses,  either 
through  lower  cost  income  ratios,  increas-
ing  asset/inventory  turnover  or  regulatory 
optimisation.  In  parallel,  banks  continue 
to  consolidate  on  areas  where  they  have  a 
natural advantage or economies of scale — 
both on the retail and the trading side — and 
where the emergence of banks with signifi-

cant transaction volumes is apparent. These 
trends  point  towards  further  consolidation 
of  the  sector  as  banks  with  strong  infor-
mation  technology  (IT),  infrastructure,  risk 
management  and  trading  platforms  stand 
to  benefit  from  the  increasing  automation 
of  banking  services,  while  the  emergence 
of  regional  niche  players  is  also  a  theme 
that  is  gaining  momentum.  This  structural 
transformation  process  occurring  across 
the  banking  sector  presents  considerable 
execution  risk,  and  heightens  the  risk  that 
banks  will  be  less  able  to  rely  on  organic 
capital  generation  to  meet  the  new  regula-
tory requirements.

In  addition,  some  inability  of  many  banks  to 
adjust their balance sheets and their reduced 
risk  appetite  has  also  led  to  an  increase  in 
banking  activities  being  undertaken  by  the 
non-bank  sector  (disintermediation)  or  in 
some  instances  by  other  banks  operating 
under  a  more  favorable  regulatory  regime. 
Overall  though,  the  risks  in  the  banking 
system  are  now  better  understood  and  ad-
dressed  than  prior  to  the  crisis;  however, 
there  is  still  considerable  uncertainty  as 
banks  are  sometimes  slow  to  adapt  to  the 
new reality and the transition is costly.

The responses from the RAQ present some 
general trends. With regard to the main driv-
ers, while for banks there are several refer-
ences  to  market  structures  and  dynamics 
as well as earnings pressure as reasons for 
changes, market analysts regard regulatory 
initiatives as a main reason. There is a grow-
ing  trend  for  banks  to  also  agree  or  some-
what  agree  that  they  have  already  achieved 
the right earnings-risk mix; nevertheless, a 
strong  majority  anticipate  changing  it  fur-
ther  in  order  to  better  match  their  risk-re-
turn targets.

RAQ respondents’ views on changes to busi-
ness models and on the scaling down of busi-
ness lines show that banks have reduced the 
intention  in  making  material  changes,  pos-
sibly due to the fact they have already started 
implementing  changing  programmes.  Nev-
ertheless,  the  business  lines  to  be  scaled 
down continue to be similar to those in previ-
ous questionnaires, that is, commercial real 
estate  (CRE),  wholesale  lending  (including 
international leasing, and shipping), and pro-
ject finance.

RAQ  respondents  show  an  increasing  trend 
referring that their banks’ business models 
have  been  making  adjustments  in  recent 

17

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMFigure 8:  Changes to business model (source: RAQ)

 You envisage making material changes to your bank’s business model going 
forward
a. If yes, business lines to be scaled down would be:

1. Secondary markets 

2. Investment banking/trading across the board 

3. Trade ﬁnance.

4. Other wholesale lending (international leasing, shipping, etc.) 

5. Non-domestic activities outside the EU 

6. Non-domestic activities within the EU 

7. Project ﬁnance/public sector 

8. Domestic:

a. Corporate lending 

b. SME lending 

c. Consumer credit 

d. CRE 

e. Residential mortgages 

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

Figure 9:  Business model adjustments (source: RAQ)

a. Your business model has been witnessing some material adjustments in recent years, 
both due to the initial ﬁnancial crisis and to the subsequent EU sovereign crisis.

b. If you (somewhat) disagree, it is because:

                                             i. Your existing business model has proved to be 
recession-proof and did not need meaningful alteration

                                           ii. Your main markets have not been materially 
affected by the sovereign crisis

c. If you (somewhat) agree the changes so far have been driven by:

                                             i. Changes in market structure and dynamics

                                           ii. Regulatory changes (e.g., Basel II, V/CRD III)

                                          iii. National supervisory recommendations

                                          iv. Funding challenges

                                           v. Capital constraints

                                          vi. Earnings pressure

                                        vii. Some or all the above

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis. 

0 %

20 %

40 %

60 %

80 %

18 

EUROPEAN BANKING AUTHORITYFigure 10:  Business model adjustments (source: RAQ market analysts)

The main factors causing adjustments in banks’ business models are: 

1. New regulations on capital, liquidity and funding. 

2. New regulations on resolution/bail-in. 

3. New regulations and policies on banking structures (activity ring fencing etc.). 

4. Investor pressure. 

5. Strategies adopted by new management teams in place. 

6. Competitive/peer pressures. 

7. Macro evolution (economic and ﬁnancial market trends  etc.). 

 Agree
 Somewhat agree
 Somewhat disagree
 Disagree
 No opinion

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.
The y-axis carries the distribution ABCDE, i.e. answers to all closed questions, namely: ‘A’ — agree; ‘B’ — somewhat/mostly agree; ‘C’ — somewhat/mostly disagree; ‘D’ — disa-
gree; and ‘E’ — not applicable or no opinion.

0 %

20 %

40 %

60 %

80 %

100 %

years. In addition, there are fewer respond-
ents  affirming  that  their  bank’s  business 
model has proved to be recession-proof and 
that their main markets have not been mate-
rially affected by the sovereign crisis. There 
are several drivers underpinning this trend, 
such as: (i) earnings pressure, with a notice-
able augmentation in positive responses and 
possibly signalling an increasing scepticism 
in regard to the quality and sustainability of 
earnings; (ii) regulatory changes (e.g. CRR/
CRD  framework,  transition  towards  Ba-
sel III); (iii) reforms on market structure; and 
(iv)  increased  capital  charges  and  funding/
liquidity  constraints,  with  possible  impacts 
on the intermediation form and on the scale 
and functioning of the banking sector.

A strong majority of the RAQ market analysts 
respondents  also  agree  that  the  main  fac-
tors causing adjustments in banks’ business 
models  are  the  new  regulations  on  capital, 
liquidity,  funding,  resolution,  bail-in,  and  on 
banking structures. In addition, the economic 
and  financial  market  trends  are  also  men-
tioned as main factors.

Regarding  the  new  regulations,  the  EU  is 
closer  to  resolving  some  of  the  regulatory 
uncertainty  through  the  agreement  on  the 
CRD  IV/CRR  legislative  package.  Further-
more,  regulatory  discussions  on  the  bail-in 
framework also need to be finalised in order 
to  continue  to  reduce  uncertainties  and  es-
tablish  a  clear  framework  for  adjustments 
in banks’ business models, consequently re-
ducing creditors’ and investors’ concerns.

At the same time, EU banks’ home markets 
and businesses — in particular SMEs — have 
tightened  their  credit  conditions  further,  as 
shown by more recent statistics and lending 
surveys at EU level. There is also evidence of 
significant  differences  in  lending  conditions 
and very low numbers in new lending within 
EU  countries.  Looking  forward,  European 
banks  expect  further  tightening  of  lending 
conditions  and  weaker  demand  in  the  next 
few months. Therefore, this trend is unlikely 
to reverse itself in the immediate future — at 
least  not  while  domestic  economies  do  not 
show signs of recovery.

19

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMAsset quality

The  quality  of  banks’  loan  portfolios  contin-
ued  to  deteriorate  throughout  2012  and  the 
first months of 2013. The September and De-
cember 2012 KRIs, and the responses to the 
RAQ on asset quality both point to a contin-
ued deterioration of asset quality in the last 
few months. The deterioration in asset qual-
ity is spread across the EU; however, the de-
clining  intensity  varies  considerably  across 
portfolios and geographies.

According to the KRIs, loans in arrears, and 
impaired  assets  in  particular  continue  to 
increase  showing  that  asset  quality  is  still 
declining. On the other hand, provisioning in 
some cases has not increased in conformity 
with  rising  credit  risks.  While  the  weighted 
average  of  the  coverage  ratio  has  been  in-
creasing  since  December  2011,  an  increas-
ing dispersion is being observed and trans-
lated into more banks and respective assets 
with a coverage ratio of less than 25 %. Thus, 
there is a mixed picture in terms of coverage 
ratio, which continues to raise several ques-
tions about the extent to which provisioning 
is  adequate.  Refocusing  on  some  activities 
such  as  mortgage  lending  instead  of  com-
mercial  lending  might  partly  explain  a  re-
duction  in  the  coverage  ratios  (composition 
effect).  However,  whereas  it  is  known  that 
mortgage  portfolios  have  generally  recog-
nised  lower  losses,  the  average  provisions 
for  exposures  to  real  estate  continues  to 
raise some doubts. 

The RAQ respondents also expect the level of 
non-performing  loans  to  remain  high.  Such 
deterioration  would  require  increasing  im-
pairment  provisioning,  in  line  with  deterio-
rating  asset  quality  and  increasing  residual 
credit  risk  throughout  loan  portfolios.  This 
trend would not only adversely affect already 
subdued  earnings,  but  in  some  cases  may 
also  pose  challenges  to  the  maintenance  of 
adequate capital levels. In addition, both dif-
ferent national approaches and banks’ widely 
differing practices at EU level to address not 
only  asset  quality  concerns,  but  also  debt 
forbearance,  creates  significant  uncertain-
ties;  therefore,  coordinated  supervisory  ac-
tions would be crucial to restore market con-
fidence.

Loans in arrears and impaired assets

The most recent evolution set of KRIs contin-
ue  to  reflect  increasing  credit  risks  and  de-
clining asset quality, as both the ratio of im-
paired loans and past due loans to total loans 
and  the  ratio  of  accumulated  impairments 
on financial assets to total assets once again 
increased within the last semester. Also the 
ratio of impairments on financial assets to to-
tal  operating  income  increased  markedly  in 
the last quarter.

Impaired loans continue to show an increas-
ing  trend.  The  ratio  of  impaired  loans  and 
past  due  (>  90  days),  in  terms  of  weighted 
average, increased from 6 % in June 2012 to 
6.3  %  in  December  2012  (the  highest  since 
2009). Interestingly, the median and the 75th 
percentile decreased in the last quarter, af-
ter significant increases in September 2012. 
Nevertheless, the 75th percentile continues 
to  present  concerning  levels  of  approxi-
mately 14 %, well above historical levels for 
this  ratio.  The  dispersion  also  continues  to 
be significant, achieving the highest level in 
September  2012  (since  2009).  Banks  with  a 
ratio of more than 10 % represented 12.5 % 
of  total  assets  in  December  2012  (from  ap-
proximately  11.6  %  and  12  %  in  December 
2011 and June 2012, respectively).

A trend in growing geographical dispersion 
of  asset  quality  indicators  across  Europe 
can  also  be  identified.  Impairments  contin-
ued  to  increase  particularly  in  banks  in  fi-
nancially  stressed  countries,  but  they  have 
also increased in other regions. Real estate 
portfolios  have  been  particularly  affected 
and  deserve  attention.  Banks  from  five 
countries have values of impaired loans and 
past  due  loans  to  total  loans  of  more  than 
16 %, while the figure is less than 2 % only 
for  two  banks  from  other  countries  (there 
were  four  countries  in  June  2012,  confirm-
ing the increase of the 25th percentile from 
2.8 % to 3 %).

In regard to the coverage ratio, an increasing 
dispersion  is  being  observed  (the  difference 
between  the  25th  and  the  75th  percentile  is 
the highest since December 2010). Whereas 
the  weighted  average  has  been  increasing 
since  December  2011  and  shows  one  of  the 
largest  levels  since  2009,  the  median  (and 
the  75th  percentile)  continues  to  decrease. 
Banks with a coverage ratio of less than 25 % 

20 

EUROPEAN BANKING AUTHORITYFigure 11:  Impaired loans and past due (> 90 days) loans to total loans (source: KRI) — 5th and 
95th percentiles, interquartile range and median

40 %

35 %

30 %

25 %

20 %

15 %

10 %

5 %

0 %

9
0

c
e
D

0
1

r
a
M

0
1

n
u
J

0
1

p
e
S

0
1

c
e
D

1
1

r
a
M

1
1

n
u
J

1
1

p
e
S

1
1

c
e
D

2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

Figure 12:  Coverage ratio (specific allowances for loans to total gross loans; source: KRI) — 5th 
and 95th percentiles, interquartile range and median

80 %

70 %

60 %

50 %

40 %

30 %

20 %

10 %

0 %

9
0

c
e
D

0
1

r
a
M

0
1

n
u
J

0
1

p
e
S

0
1

c
e
D

1
1

r
a
M

1
1

n
u
J

1
1

p
e
S

1
1

c
e
D

2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

increased  and  represented  around  14  %  of 
total  KRI  sample  assets  in  December  2012. 
Similarly, banks with a coverage ratio higher 
than  50  %  also  increased  and  represented 
29 % of total assets in December 2012 (from 
approximately 24 % in June 2012).

Responses to the RAQ indicate expectations 
of  further  marginal  deterioration  in  asset 
quality and of further increasing impairment 
levels for a majority of banks. Nevertheless, 
currently there are more responses that the 

general  trend  in  the  quality  of  banks’  credit 
portfolios is remaining steady (32 % in June 
2013 against only 23 % in June 2012). On the 
other  hand,  there  is  a  strong  response  de-
crease  in  saying  that  the  general  trend  is 
marginally improving (a decrease from 23 % 
in  June  2012  to  9  %  in  June  2013).  In  addi-
tion,  the  responses  show  expectations  of 
further  increasing  impairments  from  banks 
in  financially  stressed  countries,  but  also  in 
countries with significant recent asset price 
increases.

21

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 13:  Quality of loan portfolios (source: RAQ)

 Looking back to the last 12 months and 
on to the next 6,  the general trend in the 
quality of your bank’s credit portfolio is:

a. Materially deteriorating

b. Marginally deteriorating

c. Remaining steady

d. Marginally improving

e. Materially improving

a. Materially deteriorating

50 %

40 %

30 %

20 %

10 %

b. Marginally 
deteriorating

e. Materially 
improving

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

d. Marginally 
improving

c. Remaining steady

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

10 %

20 %

30 %

40 %

50 %

Figure 14:  Drivers of asset quality trend (source: RAQ)

  In reference to the trend for the next 12 months, you see it being generated by the 
following segment(s) of your bank’s credit portfolio (when applicable):

a. Residential mortgages

b. Consumer credit

c. Loans to SMEs (small and medium-sized enterprises)

d. CRE (commercial real estate)

                                     e. Loans to larger corporates

f. Project ﬁnance

g. Public-sector loans (including to regions and municipalities)

h. Household sector in general

i. Business sector in general

j. All or most sectors (respond no to previous options)

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

100 %

22 

EUROPEAN BANKING AUTHORITYFurther  reflecting  on  the  expectations  of 
exacerbated  asset  quality  concerns  for  the 
next  12  months,  in  the  light  of  a  deteriorat-
ing  economic  environment,  a  large  majority 
of the RAQ respondents expect deteriorating 
quality  of  loan  portfolios  across  most  seg-
ments, but in particular in SME lending port-
folios,  despite  a  slight  decrease  since  June 
2012, residential mortgages and commercial 
mortgages. 

In line with deteriorating asset quality, most 
of the RAQ respondents referred that the im-
pairment provisions over the time horizon of 
the next 12–18 months will remain at roughly 
the  same  level  (there  was  an  increase  from 
29  %  to  47  %  who  agreed  or  somewhat 

impairment  provisions  will 

agreed,  from  December  2012  to  June  2013, 
respectively).  A  significant  level  of  RAQ  re-
spondents,  despite  being  less,  still  believe 
the 
increase 
(there was a small decrease in the percent-
age of answers from 57 % in December 2012 
to 44 % in June 2013). The number of RAQ re-
spondents who believe the impairment provi-
sions  will  decrease,  has  fallen  considerably 
reaching only 9 % in June 2013, compared to 
14 % in June 2012.

The  majority  of  the  RAQ  respondents  men-
tioned  that  the  overall  composition  of  their 
loan portfolios is relatively well balanced with 
no  material  sector  or  exposure  concentra-
tion. The trends in impaired loans are driven 

Figure 15:  Expectations for impairments (source: RAQ)

Based on your view on future trends in credit quality and 
impairment levels for your bank, impairment provisions over the 
time horizon of the next 12-18 months:

a. Will increase

b. Will remain at roughly the same level

c. Will decrease

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

Figure 16:  Drivers of impaired loans trends (source: RAQ)

Moves in the levels of impairment provisions would 
occur primarily in:

a. Speciﬁc credit sectors:

                                         i. Mortgages

                                        ii. RE developers

                                       iii. SME loans

                                      iv. Large corporate

v. Particular sub-sectors (e.g., shipping)

b. Speciﬁc geographies

 Jun 2012 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree

80 %
The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

40 %

60 %

20 %

0 %

100 %

23

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMFigure 17:  Forbearance practices (source: RAQ and RAQ market analysts)

Forbearance is practised and its 
extent determinesthe level 
of impairmentprovisioning

a. If so, this is happening in:

i. Residential mortgages.

ii. CRE

iii. Loans to real estate 
developers

iv. Retail sector in general

v. Business sector 
in genera.

Banks in general show 
sufﬁcient loan-loss 
coverage 

Existing accounting 
and disclosure are 
insufﬁcient to show 
the true picture for AQ 

You assume that the 
sector engages in loan 
forbearance on a 
material scale 

You would like to 
have a better view of AQ 
included forbearance 

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 %

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 %

 Jun 2012 — Agree or somewhat agree
 Dec 2012 — Agree or somewhat agree

 Agree
 Somewhat agree
 Somewhat disagree
 Disagree
 No opinion

For the left-hand side figure, the length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis. For the right-hand side 
figure, the length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis. The y-axis carries the distribution ABCDE, i.e. 
answers to all closed questions, namely: ‘A’ — agree; ‘B’ — somewhat/mostly agree; ‘C’ — somewhat/mostly disagree; ‘D’ — disagree; and ‘E’ — not applicable or no opinion.

primarily by SME loans, mortgages and real 
estate developer loans and would occur pri-
marily  in  specific  geographies.  The  relevant 
variables to explain potential impairments in 
the real estate developer loans are the debt 
coverage ratio and the respective collateral. 
Moreover,  the  RAQ  respondents  consider 
that  the  current  levels  of  impairment  provi-
sions  adequately  protect  their  bank  against 
loan impairment losses.

A  large  majority  of  RAQ  respondents  con-
tinued  to  step  up  efforts  to  monitor  institu-
tions’ asset quality. They have introduced or 
strengthened  regular  reviews  of  different 
loan  portfolios  conducted  to  assess  their 
current  quality,  and  they  have  introduced 
or  strengthened  reviews  of  existing  policies 
for  arrears  management.  At  the  same  time, 
there  was  a  reduction  in  the  percentage  of 
RAQ  respondents  who  agreed  or  somewhat 
agreed that the number and volume of loans 
classified as restructured or under restruc-
turing has increased.

Regarding  forbearance  issues,  the  majority 
of the RAQ respondents agreed or somewhat 

agreed that forbearance is practised and its 
extent influences the level of impairment pro-
visioning.  There  was  a  significant  increase 
from 54 % in December 2012 to 65 % in June 
2013  in  the  percentage  of  RAQ  respondents 
who agreed or somewhat agreed on what is 
happening,  particularly,  in  residential  mort-
gages, commercial real estate, and real es-
tate  developer  loans.  The  market  analysts’ 
expectation  is  that  asset  quality  (AQ)  will 
decrease  in  the  next  12  months,  believing 
that banks in general continue to show insuf-
ficient  loan–loss  coverage.  In  addition,  they 
somewhat agree that the sector is engaging 
in loan forbearance on a material scale and 
they would like to have a better view of asset 
quality.

Consequently,  further  coordinated  super-
visory  actions  and  commitments  to  reduce 
uncertainties  surroundig  practices  and  the 
valuation of bank assets would be beneficial 
in  restoring  market  confidence  in  regard  to 
the  reliability  and  comparability  of  reported 
asset values and of the banks’ status.

24 

EUROPEAN BANKING AUTHORITYPolicy implications and possible 
measures

While  many  supervisors  have  stepped  up 
efforts to monitor asset quality, a variety of 
different  national  approaches  continues  to 
make it difficult to obtain a clear picture of the 
extent  of  asset  quality  problems  across  the 
EU  in  a  transparent  way.  The  vast  majority 
of the RAQ respondents agree or somewhat 
agree that policies are in place to govern for-
bearance and to outline triggers/thresholds 
if and when loans, which have been subject 
to  some  form  of  forbearance,  may  become 
subject to credit workout procedures. How-
ever, differing practices across jurisdictions 
to  address  not  only  asset  quality  concerns, 
but  also  debt  forbearance,  continue  to  cre-
ate  uncertainties  about  the  actual  level  of 
credit risk in banks’ balance sheets and the 
valuation  of  bank  assets.  At  EU  level  there 
are  differences  in  loan  classifications  (e.g. 
performing  loans,  non-performing  loans 
(NPLs), ‘doubtful’ loans, ‘watch list’). There 
are  also  differences  in  the  way  forbear-
ance is defined, assessed, classified and re-
ported.  In  addition,  uncertainties  also  arise 
through  accounting  practices  for  loans  in 
arrears, or the status of restructured loans, 
and  through  different  practices  of  reclassi-
fying  performing  loans  which  can  substan-
tially distort information on reported NPLs.

The level increase of non-performing loans 
would  require  increasing  impairment  pro-
visioning,  in  line  with  deteriorating  asset 
quality.  In  some  cases  this  may  pose  chal-
lenges  to  the  maintenance  of  adequate 
capital  levels.  In  addition,  different  nation-
al  approaches  and  banks’  widely  differing 
practices  at  an  EU  level  to  address  asset 
quality concerns and debt forbearance cre-
ates  significant  uncertainties.  The  doubts 
related to banks’ asset quality and forbear-
ance,  and  the  uncertainty  on  timely  recog-
nition  of  problem  loans,  loan  restructur-
ing,  level  of  impairments,  and  real  estate 
market  dynamics  need  to  be  undoubtedly 
addressed in order to rebuild confidence in 
banks’  balance  sheets.  The  EBA’s  work  on 
harmonised  definitions  and  data  collection 
aims  to  provide  the  supervisory  authorities 
with the tools to monitor asset quality devel-
opments  in  a  coordinated  fashion  and  on  a 
comparable basis across the EU. Therefore, 
coordinated  supervisory  actions  would  be 
crucial  to  restore  market  confidence.  Con-
sequently, it is extremely important that EU 
supervisors  conduct  comprehensive  asset 
quality reviews on major EU banks in order 
to  dispel  concerns  over  asset  quality  dete-
rioration.  Importantly,  in  order  to  ensure 
transparency  and  comparability  over  the 
years,  appropriate  disclosure  on  the  actual 
exposures of the EU banking sector is also a 
fundamental  measure  to  address  concerns 
on asset quality.

25

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM4.  Capital and  
recapitalisation results

Over the 12 months ending in December 2012, 
EU  banks  and  respective  capital  positions 
continued  to  maintain  a  noteworthy  increas-
ing trend. In particular, over the second half of 
2012,  notwithstanding  the  challenging  condi-
tions  in  financial  markets,  the  banks’  capital 
position once more has strengthened further.

This  evolution  reflects  the  national  efforts 
progressing  towards  strong  capital  buffers 
as well as the EBA recapitalisation exercise, 
leading to substantial infusions of capital into 
EU banks and establishing new standards for 
the quantity and quality of banks’ capital. Eu-
ropean  supervisors,  nonetheless,  will  need 
to continue to monitor the smooth and timely 
transition to the CRR/CRD framework.

The  KRIs  confirm  this  positive  evolution. 
The median Tier 1 ratio increased by 10 ba-
sis  points  (from  11.7  %  to  11.8  %),  after  an 
increase of almost 1 percentage point, from 
10.9  %  to  11.7  %  in  the  previous  semester. 
Banks with a Tier 1 capital ratio above 12 % 
significantly  increased  and  represented  ap-
proximately  72  %  of  the  total  assets  of  the 
KRI sample in December 2012 (in comparison 
with 63 % in June 2012 and more than three 
times  than  the  December  2009  value).  This 
positive trend is also confirmed when looking 
at the median of Tier 1 ratio excluding hybrid 
instruments  (a  rough  proxy  of  the  Core  Tier 
1  ratio  (CT1))  which  increased  from  10.3  % 

to  10.5  %.  Both,  the  25th  percentile  and  the 
weighted average also increased from 9.3 % 
and 10.2 % to 9.6 % and 10.8 %, respectively. 
Equivalently,  banks  with  Tier  1  ratio  exclud-
ing  hybrid  instruments  lower  than  5  %  de-
creased  and  represented  only  1  %  of  total 
assets in December 2012 (from around 2 % in 
June 2012). At the same time, banks with Tier 
1  ratio  excluding  hybrid  instruments  higher 
than  10  %  increased  and  represented  more 
than  80  %  of  total  assets  in  December  2012 
(from  73  %  in  June  2012).  The  dispersion  of 
the indicators decreased markedly, suggest-
ing that banks in the sample are converging 
towards a more conservative solvency base.

This evolution partly reflects European banks’ 
significant  progress  in  boosting  their  capital 
positions and in strengthening the overall re-
silience of the EU banking system as a result of 
the EBA recapitalisation exercise. The recapi-
talisation recommendations have brought the 
common  equity  capital  ratios  of  EU  banks  in 
line with those of major international competi-
tors. EU bank capital levels are aligning busi-
ness  models  to  both  markets’  expectations 
and  to  forthcoming  regulatory  requirements 
and the capital strengthening is also a result 
of measures taken by EU banks to comply with 
the  2011  EBA  recommendation  which  asked 
EU  banks  to  raise  their  CT1  ratio  to  9  %,  af-
ter accounting for an additional buffer against 
sovereign  risk  holdings.  The  capital  exercise 

Figure 18:  Tier 1 ratio (excluding hybrid instruments) (source: KRI) — 5th and 95th percentiles, 
interquartile range and median

25 %

20 %

15 %

10 %

5 %

0 %

- 5 %

26 

9
0

c
e
D

0
1

r
a
M

0
1

n
u
J

0
1

p
e
S

0
1

c
e
D

1
1

r
a
M

1
1

n
u
J

1
1

p
e
S

1
1

c
e
D

2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

EUROPEAN BANKING AUTHORITY 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
led to an increase in banks’ capital positions 
of more than EUR 200 billion. For the 27 banks 
which were requested to submit capital plans, 
due to a capital shortfall of EUR 76 billion, the 
exercise  resulted  in  an  aggregate  recapitali-
sation in the amount of EUR 116 billion. Over-
all, the cumulative impact on capital levels of 
the  measures  put  in  place  by  banks  in  2011 
and  2012  in  relation  to  the  EBA  initiatives  is 
about EUR 250 billion.

a lesser extent, by releasing capital through 
measures  impacting  risk-weighted  assets 
(RWAs) (e.g. by reduced lending and sales of 
assets).  Banks  have  been  increasing  capital 
relative to assets even if total asset reduction 
has been less pronounced than risk-weight-
ed  declines  might  suggest.  In  this  respect, 
aggregate data shows that these new capital 
measures  have  been  more  than  enough  to 
cover shortfalls.

Despite  the  challenging  conditions  in  finan-
cial  markets  and  little  investor  appetite  for 
new  equity,  banks’  capital  position  and  re-
spective  compliance  with  the  EBA  recom-
mendation has been achieved mainly via new 
capital measures such as retained earnings, 
new equity, and liability management, and, to 

Nonetheless,  measures  to  strengthen  capi-
tal  directly  may  be  vulnerable  to  the  risk  of 
weaker  earnings.  While  the  banks’  capital 
positions  have  improved,  European  supervi-
sors will continue to monitor the smooth and 
timely  transition  from  the  new  EBA  stand-
ards to the CRR/CRD framework for banks.

COMPLIANCE WITH THE EBA DECEMBER 2011  
RECOMMENDATION (EBA/REC/2011/1)

As  of  December  2012,  the  banks  involved  in 
the data collection reached a Core Tier 1 ratio 
of 11 %, taking into account Sovereign Capital 
Buffer  (EUR  31.5  billion  and  0.3  %  of  RWAs) 
and  including  other  instruments  eligible  and 
existing  government  support  measures.  The 
same ratio was equal to 10.7 % in June 2012 
and  to  9.1  %  in  September  2011.  The  overall 
surplus of capital in excess of 9 % increased 
by  EUR  175  billion  from  September  2011  to 
December  2012.  At  the  same  time  bank  dis-
persion has narrowed during the same period 
with the range between minimum and maxi-
mum declining from 20.3 % to 13.2 % and the 
interquartile ranging from 4.3 % to 3.3 %.

An  analysis  has  been  carried  out  to  identify 
the  main  drivers  of  the  CT1  ratio  trend  and 
to  decompose  its  variation  into  capital  and 
RWAs  components.  Chart  below  illustrates 
the  relative  importance  of  the  CET1  (nu-
merator)  and  RWA  (denominator)  effects  on 
the CET1 ratio by jurisdiction. The green ar-
eas represent a positive variation of the CT1 
ratio  between  September  2011  and  Decem-
ber  2012.  In  contrast,  the  red  areas  show  a 
negative  variation  of  the  CT1  ratio  between 
September 2011 and December 2012. In one 
country (area Q4/b) there has been a reduc-
tion of CT1 ratio, due to a reduction of capi-
tal, partially offset by a reduction of RWAs. In 

Figure 19:  CT1 ratio after including sovereign capital buffer and additional impairments on 
sovereign exposures

30 %

25 %

20 %

15 %

10 %

5 %

0 %

Range
[Min, Max]
= 20.3 %

9.1 %

Interquartil
range
= 4.3 %

9.7 %

10.7 %

Range
[Min, Max]
= 13.2 %

11.0 %

Interquartil
range
= 3.3 %

Sep 11

Dec 11

Jun 12

Dec 12

The figures represent the CT1 ratio and respective minimum (orange line) and maximum (blue line), interquartile range (25th and 75th) and 
weighted average (based on risk-weighted assets per institution).

27

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMFigure  20:  Trend  of  CT1  ratio  (Sept  11  -  Dec  2012)  by  country  of  the  banks:decomposition  of 
Capital effect and RWAs Effect

6.0 %

4.0 %

2.0 %

0.0 %

t
c
e
f
f
E

s
A
W
R

– 2.0 %

– 4.0 %

Q4-b
Delta CT1 ratio < 0
RWAs Effect >  0  > Capital Effect
RWAs Effect < Abs (Capital Effect)

Q3-a
Delta CT1 ratio < 0
0  > RWAs Effect > Capital Effect

Q4-a
Delta CT1 ratio > 0
RWAs Effect > 0 > Capital Effect
RWAs Effect > Abs (Capital Effect)

Q1-a
Delta CT1 ratio > 0
RWAs Effect > Capital Effect > 0

Q3-b
Delta CT1 ratio < 0
0 > Capital Effect > RWAs Effect

Q2-b
Delta CT1 ratio < 0
Capital Effect > 0 > RWAs Effect
Capital Effect < Abs (RWAs Effect)

Q1-b
Delta CT1 ratio > 0
Capital Effect > RWAs Effect > 0

Q2-a
Delta CT1 ratio > 0
Capital Effect > 0 > RWAs Effect
Capital Effect > Abs (RWAs Effect)

– 6.0 %

– 6.0 %

– 4.0 %

– 2.0 %

0.0 %
Capital  Effect

2.0 %

4.0 %

6.0 %

6  countries  (area  Q1/b)  the  impact  of  higher 
CT1  has  been  larger  than  the  impact  of  the 
decline  in  RWAs.  On  the  other  hand,  for  6 
countries (area Q1/a), the improvement in the 
CT1 ratio has been largely driven by a reduc-
tion  of  RWAs.  In  4  countries  (area  Q2-a)  the 
increase in the CT1 has been partially offset 
by an increase of RWAs while for two coun-
tries  along  with  a  reduction  of  RWAs  there 
has been a reduction of capital.

Therefore,  improvement  has  been  achieved 
by  acting  on  both  numerator  and  denomi-
nator;  however  recent  trends  show  growing 
importance of the RWAs effect. Focussing on 
the  6  months  ending  in  December  2012,  for 
most  EU  countries  in  which  there  has  been 
an increase in the Core Tier 1 ratio, this has 
been  achieved  mainly  by  combining  both  an 

increase in capital and a reduction in RWAs 
(areas Q1/a and Q1/b of the chart below). The 
green areas represent a positive variation of 
the CT1 ratio between June 2012 and Decem-
ber  2012.  In  contrast,  the  red  areas  show  a 
negative  variation  of  the  CT1  ratio  between 
June  2012  and  December  2012.  In  4  coun-
tries, the RWAs reduction has been partially 
offset by a reduction of capital. Vice-versa, in 
three EU countries, along with an expansion 
in  RWAs  banks  have  increased  their  capital 
levels (areas Q4/a and Q2/a of the chart be-
low). In the 4 countries where there has been 
a reduction of the Core Tier 1 ratio, this has 
been  the  result  of  the  contraction  of  capital 
which  in  two  cases  has  been  partially  off-
set by a decrease of RWAs (area Q4/b of the 
chart below).

Figure 21:  Trend of CT1 ratio (Jun - Dec 2012) by country of the banks: decomposition of Capital 
effect and RWAs Effect

3.0 %

2.0 %

1.0 %

0.0 %

t
c
e
f
f
E

s
A
W
R

– 1.0 %

– 2.0 %

Q4-b
Delta CT1 ratio < 0
RWAs Effect >  0  > Capital Effect
RWAs Effect < Abs (Capital Effect)

Q3-a
Delta CT1 ratio < 0
0  > RWAs Effect > Capital Effect

Q4-a
Delta CT1 ratio > 0
RWAs Effect > 0 > Capital Effect
RWAs Effect > Abs (Capital Effect)

Q1-a
Delta CT1 ratio > 0
RWAs Effect > Capital Effect > 0

Q3-b
Delta CT1 ratio < 0
0 > Capital Effect > RWAs Effect

Q2-b
Delta CT1 ratio < 0
Capital Effect > 0 > RWAs Effect
Capital Effect < Abs (RWAs Effect)

Q1-b
Delta CT1 ratio > 0
Capital Effect > RWAs Effect > 0

Q2-a
Delta CT1 ratio > 0
Capital Effect > 0 > RWAs Effect
Capital Effect > Abs (RWAs Effect)

– 2.0 %

– 1.0 %

0.0 %
Capital  Effect

1.0 %

2.0 %

3.0 %

– 3.0 %

– 3.0 %

28 

EUROPEAN BANKING AUTHORITY 
 
5.  Liabilities side

Subsequent  to  the  last  December  2012  re-
port,  the  funding  conditions  seem  to  have 
improved with some consistent banks’ issu-
ance  of  unsecured  debt,  particularly  in  the 
beginning of 2013, and market funding slowly 
replacing early repayments of the two 3-year 
refinancing  operations  (long-term  refinanc-
ing operations (LTROs)), and thus decreasing 
reliance on official sources of funding. There 
is also some evidence of deposit inflows from 
both retail and corporate customers, includ-
ing  into  banks  in  countries  with  financially 
stressed  sovereigns.  At  the  same  time,  the 
average cost of equity of banks in the EU has 
decreased and there has been a compression 
in  bank  equity  prices  when  comparing  core 
and peripheral banks.

funding, consequently paving the way for re-
ducing  concerns  regarding  the  levels  of  as-
set  encumbrance,  i.e.  assets  earmarked  as 
collateral for specific secured funding. Whilst 
events  related  to  Cyprus  led  to  a  temporary 
deterioration of market funding sentiment in 
March, they did not lead to a lasting reversal 
of  the  benign  trend  started  months  earlier. 
Nevertheless, persistent evidence of increas-
ing  differences  in  funding  conditions  and 
funding costs can be identified between banks 
domiciled in financially strong sovereigns and 
those domiciled in financially stressed sover-
eigns. In addition, several banks remain reli-
ant on central bank support and future with-
drawals of public funding sources are still a 
challenge for many of them.

Despite  improved  funding  conditions,  the  fi-
nancial markets remain in a fragile state and 
may  not  reflect  an  enhancement  in  the  fun-
damentals but are mainly due to an improved 
market sentiment and perceived reduction in 
the  equity  risk  premium  as  a  consequence 
of  decisive  policy  measures  adopted  since 
the sovereign and bank funding crisis. These 
policy measures and central banks’ engage-
ment  in  unconventional  policies  to  support 
macroeconomic  stability  and  bank  funding 
have helped ease funding pressures. Never-
theless,  fundamental  fragilities  and  contin-
ued  structural  funding  challenges  remain, 
in particular in countries having experienced 
some sovereign stress.

In parallel, there are indicators that a down-
sizing  of  banks’  balance  sheets  has  started 
and more severe deleveraging has been oc-
curring  in  financially  stressed  countries, 
partly  due  to  their  ongoing  macroeconomic 
and financial adjustment programmes.

With regard to deposits, their importance for 
bank  funding  has  been  steadily  increasing. 
While  March  events  led  to  a  heightened  at-
tention on deposits, they have to date not had 
a material impact on deposit flows. Be that as 
it  may,  some  behavioural  changes  could  be 
expected for deposits not covered by deposit 
guarantee schemes, and heightened supervi-
sory attention is warranted.

Funding

Market funding conditions have been relative-
ly  benign  during  the  first  semester  of  2013. 
Large  banks,  including  financially  stronger 
banks  domiciled  in  financially  stressed  sov-
ereigns,  have  been  issuing  unsecured  debt, 
particularly  in  the  first  quarter  of  the  year. 
Sovereign  developments  in  March  did  not 
lead to a lasting reversal of the benign trend 
but  only  to  some  temporary  deterioration. 
Nevertheless,  the  absence  of  fundamental 
improvements is demonstrated by the nega-
tive reaction of the financial markets during 
May and June 2013 to suggestions of tighten-
ing liquidity by central banks.

Looking  ahead,  based  on  RAQ  answers, 
banks  expect  an  increasing  importance  of 
unsecured  debt  as  a  significant  source  of 

Competition for deposits

Strong  pressure  for  deleveraging  emerged 
in Europe during the final quarter of 2011 and 
will continue throughout 2013. With a need for 
de-risking and aligning the business models 
to  the  market’s  expectations,  EU  banks  are 
bringing their leverage to more conservative 
levels  and  rethinking  their  dependence  on 
less stable funding sources, such as short-
term  wholesale  financing,  which  have  also 
become  more  expensive  in  the  new  market 
environment.  As  part  of  the  deleveraging 
process,  banks  could  strengthen  their  li-
quidity  and  funding  positions  by  attracting 
more  deposits.  In  this  respect,  EU  banks 
have been able to attain their funding needs 
not only via refinancing operations, but also 
by  reducing  their  overall  balance  sheet  and 
diminishing the need to attract new funding, 
as well as through the strengthening of their 

29

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMFigure 22:  Deposits (source: RAQ)

You see threats to your retail deposit 
growth due to increased market 
competition and changing customer 
behaviour

You see threats to your wholesale deposit 
growth due to increased competition and 
rate shopping

You accept increasing your deposit base 
through offering better rates and terms to 
gain market share

You are aiming to reduce your 
loan-deposit ratio

a. If so:

i. Via loan growth control or 
reduction

                ii. Via funding growth

                      iii. Via both

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

0 %

20 %

40 %

60 %

80 %

deposit  base  in  order  to  target  lower  loan-
deposit ratios.

Therefore,  aiming  for  higher  reliance  on  de-
posit funding is leading to more balance sheet 
stability  and  a  better  funding  mix,  but  at  the 
same  time  may  result  in  an  increase  of  in-
market  competition  among  banks  for  new 
deposits in some geographies, raising overall 
funding costs and thus potentially challenging 
bank profitability.

Moreover,  increasing  reliance  on  deposits 
could  also  pose  vulnerabilities  as  deposits 
might become more volatile as new resolution 
and bail-in requirements emerge. As a result, 
continued funding challenges continue to ex-
ist, particularly in distressed countries.

RAQ  respondents  reduced  their  apprehen-
sion for increased market competition in re-
tail  deposits  and  wholesale  deposits.  At  the 
same  time,  they  also  reduced  their  accept-
ance  to  increase  deposit  base  through  of-
fering better rates and terms to gain market 
share, consequently reducing competition for 
deposits.  The  majority  of  the  RAQ  respond-
ents are still aiming to reduce their loan-to-
deposit ratio via both loan growth control or 
reduction and funding growth.

Asset encumbrance and collateral

In 2012, the reliance on secured funding has 
created  a  substantial  amount  of  asset  en-
cumbrance. In cases where it exceeds certain 
thresholds the asset encumbrance could be 
harmful and self-reinforcing. Amongst many 
reasons,  the  excessive  reliance  on  central 
bank  borrowing  required  banks  to  earmark 
significant amounts of collateral in their bal-
ance sheets. At the same time, forthcoming 

regulations  are  likely  to  lead  to  an  increase 
in  the  demand  for  collateral.  A  sustainable 
development needs to consider the necessity 
to  restore  market  access  for  banks,  both  in 
terms  of  costs  and  availability,  and  a  move 
away from central bank support towards the 
increasing use of unsecured funding on pri-
vate markets.

Looking  ahead,  there  are  some  positive 
signs.  A  majority  of  RAQ  respondents  con-
tinue to consider that there will be less need 
for central bank borrowing and do not intend 
to rely more on secured lending. At the same 
time,  there  is  a  strong  response  decrease 
in  saying  that  the  level  of  collateral  neces-
sary  for  new  lending  is  increasing.  In  addi-
tion,  the  majority  of  RAQ  respondents  are 
measuring the amount and growth of asset 
encumbrance  and  an  increasing  number  of 
respondents  have  internally  set  a  strategic 
ceiling for the level of asset encumbrance in 
their balance sheets.

A regain in confidence within the banking sys-
tem  would  be  the  re-emergence  of  an  active 
cross-border interbank market. Signs of frag-
mentation of the single market can be identi-
fied  in  funding  conditions,  also  evidenced  by 
a strong reduction in cross-border interbank 
activities.  Despite  a  benign  funding  environ-
ment,  banks  remain  susceptible  to  a  sudden 
switch of market sentiment, and the sustain-
ability  of  benign  conditions  remains  fragile. 
Nevertheless,  the  RAQ  respondents  provide 
some  signs  of  improvement  (in  comparison 
to December 2012) with both a significant de-
crease in the number of banks affected by the 
reduction  in  cross-border  activity  and  also 
with  fewer  banks  agreeing  to  a  reduction  on 
their cross-border interbank lending.

30 

EUROPEAN BANKING AUTHORITYFigure 23:  Central bank and secured funding (source: RAQ)

Your bank will have to to rely more on borrowing from central banks 

Your bank plans to rely more than in the past on secured lending — both 
covered bonds and secured STF 

In general the level of collateral necessary for new funding is increasing 

You are concerned that higher reliance on secured funding will lead to higher 
asset encumbrance 

You are measuring the amount and growth of asset encumbrance for your 
balance sheet 

Your bank has set internally a strategic ceiling for the level of asset 
encumbrance in your balance sheet 

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree
 Jun 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

100 %

Figure 24:  Cross-border borrowing and lending (source: RAQ)  

You have been affected by the reduction in 
cross-border interbank activities

a. If yes, you have contingency plans to 
replace cross-border interbank funds:

i. With central bank funds

ii. With domestic interbank funds

iii. With other short-term funds

iv. With short-term deposits

v. Do without funding equivalents

You have reduced your cross-border 
interbank lending

a. If yes, this is due to:

i. Higher general risk aversion and fear of 
uncertainty in the EU

ii. Apprehension about speciﬁc banks or 
banking markets

iii. Guidance from regulators to limit risk

iv. View that pricing does not reﬂect the 
true risk level of the transactions

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

0 %

20 %

40 %

60 %

80 %

31

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM6.  Income and profitability

During  the  end  of  2012,  EU  banks’  income 
and  profitability  levels  have  continued  to  be 
faced  with  significant  headwinds  which  are 
not likely to dissipate in 2013. EU banks have 
seen their net interest margins compressed 
while  the  weak  economic  environment  pro-
vides limited new lending opportunities, with 
banks  scrapping  for  the  few  quality  credits 
that  exist  and  leaving  some  question  marks 
over  some  institutions’  future  profitability 
and viability.

Persistent low interest rates are also putting 
pressure on the business model sustainabil-
ity  of  banks  which  find  overall  net  interest 
margins squeezed, contributing to profitabil-
ity  pressures.  Given  the  fact  that  customer 
capacity  to  bear  higher  lending  rates  is  af-
fected by the economic downturn, banks’ at-
tempts  to  increase  lending  rates  may  prove 
not possible and even insufficient to address 
a low interest rates environment and increas-
es in funding costs in some cases. Thus, net 
interest  margins  are  pressured  and  are  not 
being matched by a full re-pricing of assets.

Fee and commission incomes, which have tra-
ditionally  been  an  important  source  of  earn-
ings  for  banks,  are  also  under  pressure  due 
to low economic growth. The reduced demand 
for  banking  products  and  services  blunts 
growth-generated  earnings  hikes.  In  order 

to  reduce  expenses  and  improve  efficiency 
controls,  banks  are  also  trying  to  cut  costs, 
mostly  staff-related  through  lay-offs  and  re-
adjusting the remuneration structures as well 
as  utilising  economies  of  scale  and  innova-
tions.  However,  the  cost-to-income  ratio  and 
similar indicators point also to some deterio-
ration  of  banks’  ability  to  keep  relative  costs 
under control.

Reflecting the continued macro-deterioration 
and some deep recessions in parts of the EU, 
the credit costs are rising and this trend shows 
no sign of reversal. Concurrently, more trans-
parency on impairments and potential losses 
are leading to higher levels of loan–loss provi-
sions. When benchmarked against low growth 
and flat or declining volumes of loans, higher 
credit costs are an important driver for weak-
er  earnings,  putting  bank  profitability  at  risk 
and removing an important  source of capital 
growth and banks’ performance.

The KRIs show that the return on equity (RoE) 
in  December  2012  decreased.  The  weighted 
RoE  and  the  25th  percentile  have  signifi-
cantly  decreased  (from  1.7  %  and  –  0.9  %  in 
June 2012, to 0.6 % and – 4.6 % in December 
2012,  respectively).  The  median  and  the  75th 
percentile have also eroded since March 2012 
(from 6.5 % and 11.6 % to 3.2 % and 7.4 % in 
December 2012, respectively).

Figure 25:  Return on Equity (source: KRI) —  
5th and 95th percentiles, interquartile range and median

60 %

40 %

20 %

0 %

– 20 %

– 40 %

– 60 %

– 100 %
– 200 %
– 300 %
– 400 %

9
0

c
e
D

0
1

r
a
M

0
1

n
u
J

0
1

p
e
S

0
1

c
e
D

1
1

r
a
M

1
1

n
u
J

1
1

p
e
S

1
1

c
e
D

2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

32 

EUROPEAN BANKING AUTHORITY 
 
 
 
 
 
 
 
 
 
 
 
 
 
The majority of the RAQ respondents consid-
er an RoE value in the range of 10 % to 12 % as 
the target for the long-term viability of their 
businesses.  For  the  RAQ  respondents,  the 
main factors that will influence the RoE in the 
next months are both the operating margins 
and  the  pre-tax  profit  margins.  In  addition, 
a  vast  majority  agree  or  somewhat  agree 
that  the  current  earnings  levels  are  within 
market expectations. In contrast, some RAQ 
responses  from  market  analysts  (RAQ  for 
market analysts) refer that the current earn-
ings  levels  are  moderately  below  market 
expectations.  In  regard  to  the  cost  of  equity 
(CoE), most respondents believe it to be also 
in the 10 % to 12 % range. Given the fact that 
banks  need  to  provide  a  return  to  investors 
at  or  above  their  cost  of  equity,  in  a  context 
of economic downturn and sector deleverag-
ing there are limited and less flexible levers 

available to meet minimum returns, turning 
some business models unviable.

According to many respondents, the CoE has 
subsided significantly since August 2012, and 
this is widely attributed to the European Cen-
tral  Bank’s  outright  monetary  transactions 
(OMT)  announcement.  The  rise  in  banks’ 
share prices over this period is attributed to 
the falling CoE, as it has happened despite a 
drop in the banks’ earnings.

At  the  same  time,  the  KRIs  show  that  the 
cost-to-income  ratio  in  December  2012  in-
creased. For instance, the weighted cost-to-
income ratio has significantly increased from 
59.7  %  in  June  2012  to  63.2  %  in  December 
2012.  The  median  and  the  75th  percentile 
have  also  eroded  since  March  2011  (from 
56.3 % and 63.2 % to 63.1 % and 71.6 % in De-
cember 2012, respectively).

Figure 26:  Return on equity and cost of equity (source: RAQ)

Your bank can operate on a longer-term 
basis with a return on equity (RoE):

a. Below 10 %

b. Between 10 % and 12 %

c. Between 12 % and 14 %

d. Between 14 % and 16 %

c. Above 16 %

In your ﬁnancial planning you estimate 
your bank’s cost of equity (CoE).

a. If yes, you estimate it at:

                                     i. Below 8 %

                    ii. Between 8 % and 10 %

                  iii. Between 10 % and 12 %

                               iv. Above 12 %

 Jun 2013 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

0 %

20 %

40 %

60 %

80 %

Figure 27:  Cost-to-income ratio (source: KRI) —  
5th and 95th percentiles, interquartile range and median

180 %

160 %

140 %

120 %

100 %

80 %

60 %

40 %

20 %

0 %

9
0

c
e
D

0
1

r
a
M

0
1

n
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J

0
1

p
e
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0
1

c
e
D

1
1

r
a
M

1
1

n
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J

1
1

p
e
S

1
1

c
e
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2
1

r
a
M

2
1

n
u
J

2
1

p
e
S

2
1

c
e
D

33

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
 
 
 
 
 
 
 
 
 
Figure 28:  Cost-to-income ratio (source: KRI) —  
numerator and denominator trends (Dec 2009 = 100)

120 %

115 %

110 %

105 %

100 %

95 %

90 %

9
0

c
e
D

0
1

r
a
M

0
1

n
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0
1

p
e
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0
1

c
e
D

1
1

r
a
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1
1

n
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1
1

p
e
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1
1

c
e
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2
1

r
a
M

2
1

n
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2
1

p
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2
1

c
e
D

The indicators point to some deterioration of banks’ ability to keep relative costs under control. The numerator of the cost-to-income ratio 
shows an increasing trend since December 2009.

Policy implications and possible 
measures

EU banks face strong challenges in adapting 
to the many changes derived from the emerg-
ing  new  economic,  regulatory  and  financial 
landscape and the sustainability of their re-
spective  business  models  remains  a  motive 
for concern. All these changes have led some 
banks to be confronted with a situation where 
their  current  business  model  proves  to  be 
unviable.  Overall,  existing  business  models 
will experience pressure by stronger compe-
tition and banks will need to adjust their busi-
ness models by finding additional sources of 
income  and  cost  efficiency,  whilst  it  is  still 
unclear from where their future profitability 
drivers will originate from.

Hence,  supervisors  need  to  create  a  more 
coordinated  analysis  of  banks’  business 

models across the EU to assess banks’ profit 
and  funding  model,  business  mix,  manage-
ment  strength  and  strategy.  The  current 
methodologies  and  the  monitoring  intensity 
are  substantially  different  for  each  Europe-
an  supervisor;  therefore  a  coherent  under-
standing  of  the  commonalities  and  differ-
ences of approaches could be beneficial, as 
would be the development of best practices 
and  harmonisation  of  assessments.  To  this 
end,  the  EBA  is  devoting  part  of  the  Single 
Supervisory  Handbook  to  be  written  to  the 
assessment of banks’ business models. Su-
pervisors  are  required  to  have  an  accurate 
assessment of core banking risks and chal-
lenge banks’ business plans. This should in 
turn  facilitate  the  joint  decision  processes 
and business model risk could be an explicit 
part  of  the  joint  risk  assessment  decision 
discussion.

34 

EUROPEAN BANKING AUTHORITY 
 
 
 
 
 
 
 
 
 
 
 
 
7.  Consumer issues  
and reputational concerns

A number of detrimental business practices 
of  European  banks  have  recently  come  to 
light and affect consumer confidence, leading 
to adverse implications not only on the banks 
involved, but also on the banking sector as a 
whole.  These  incidents  concern  detrimental 
behaviour and inappropriate conduct of vari-
ous types, including mis-selling of products, 
failures  with  regard  to  rate  benchmark  set-
ting  processes,  to  taxation  and  further  is-
sues. The list of regulatory investigations and 
litigation cases is long and has already been 
costly for the banks concerned.

Incidences of detrimental business practices 
have  raised  wide  public  attention.  A  related 
increase of reputational risks has also been 
identified  by  the  respondents  of  the  RAQ. 
Growingly  negative  public  perception  of 
banks  has  several  undesirable  affects,  in-
cluding decreasing public willingness to sup-
port banks in distress, and may affect public 
support for banks in potential future distress 
situations,  as  recent  discussions  surround-
ing bank resolution indicated.

Supervisors and banks should therefore turn 
their attention to increasing legal and repu-
tational  risks  with  potential  consequences 
for  affected  banks  beyond  direct  losses. 
Potential  shortcomings  in  institutions’  risk 
management functions and compliance pro-
cedures  need  to  be  addressed,  appropriate 
contingency  reserves  should  be  made,  and 
disclosure  on  risks  should  be  transparent. 
Related  risks  should  also  be  adequately  re-
flected in the supervisory review process.

Business conduct of banks and 
prudential risk

There  are  indications  for  an  ongoing  aggra-
vation of reputational risks. In the responses 
to  the  RAQ,  76  %  of  respondents  identified 
an  increase  in  the  reputation/legal  risk  for 
the banking sector in general and a negative 
trend in banks’ public perceptions. This is an 
increase  compared  to  the  December  2012 
RAQ,  and  an  indication  that  risks  should  be 
carefully considered.

Business  practices  with  a  potential  detri-
mental impact on the European banking sec-
tor can be related to mis-selling of unwanted 
products,  to  fraudulent  behaviour,  and/or  to 
poor  risk  management.  Some  recent  exam-
ples illustrate the issue.

The mis-selling of unwanted or unrequested 
credit  insurance  (payment  protection  insur-
ance (PPI)) and other financial products made 
it necessary for some banks to set aside sub-
stantial  compensatory  provisions  that  have 
an impact on the profitability of these banks.

Financial market reference rates and respec-
tive calculation procedures have been under 
closer  public  and  regulatory  scrutiny  in  re-
cent years. Since June 2012 three large Euro-
pean financial institutions have been found li-
able for attempted manipulation of Libor, and 
Euribor by the UK and US authorities. Several 
authorities  around  the  world  have  investi-
gated  cases  of  alleged  misconduct  regard-
ing the Libor rate-setting, Euribor and other 

Figure 29:  Trends in reputational risk (source: RAQ)

You see an increase in the reputation/legal risk for the 
banking sector in general and also a negative trend in banks’ 
image with public opinion, media and the political spectrum

a. If yes:

i. You are aiming to adjust the culture and risk/conduct 
governance within the organisation

ii. You are building contingency reserves

 Jun 2013 — Agree 
or somewhat agree
 Dec 2012 — Agree 
or somewhat agree

The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

100 %

35

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMTHE EBA AND ESMA TAKE ACTION 
TO STRENGTHEN EURIBOR AND THE 
BENCHMARK RATE-SETTING PROCESSES

In January 2013, the EBA and ESMA published the results 
of their joint work on Euribor and proposed principles for 
benchmark rate-setting processes, namely:

•	 a review of Euribor’s administration and management 
and clear recommendations to the Euribor-European 
Banking Federation (EEBF) to improve the governance and 
transparency of the rate-setting process;

•	 formal EBA Recommendations to national authorities on the 
oversight of banks participating in the Euribor panel; and
•	 a joint ESMA–EBA consultation on principles for benchmark 
setting processes in the EU which establish a framework for 
the conduct of benchmark rate setting and the activities of 
participants in the process.

The proposed principles, which are aligned with ongoing EU 
and international work, will provide clarity to benchmark 
providers and users, and are an immediate step to be taken 
in advance of potential wider changes in the supervisory and 
regulatory framework for financial benchmarks. The prompt 
and full implementation of these recommendations is an 
important step towards ensuring that Euribor represents a 
transparent and reliable benchmark for financial transactions 
within the EU.

reference rates. Besides, the Commission is 
currently investigating several antitrust cas-
es which concern benchmark rates including 
Libor/Tibor  and  Euribor  and  in  relation  to  a 
number of currencies including inter alia the 
yen,  the  euro  and  the  Swiss  franc.  The  EBA 
and  the  European  Securities  and  Markets 
Authority (ESMA) have carried out joint work 
that  has  identified  significant  weaknesses 
and  insufficiencies  in  the  governance  of  the 
Euribor  rate-setting  mechanism  and  Eu-
ropean  competent  national  authorities  are 
also  conducting  legal  investigations.  The 
first  outcomes  of  the  investigations  at  na-
tional levels as well as a mounting number of 
private  litigation  cases  have  highlighted  the 
scope and scale of possible manipulations of 
reference  rate-setting  mechanisms.  Conse-
quently, a number of initiatives to reform ref-
erence  rate-setting  mechanisms  have  been 
launched across wide parts of the regulatory 
and supervisory communities as well as the 
financial markets.

These  recommendations  are  made  within 
the current legislative setting, while the need 
for  broader  structural  changes  is  being  as-
sessed by the European Commission.

36 

In  other  cases  European  banks  violated  US 
sanctions  and  regulatory  law  by  handling 
transactions  involving  companies  in  coun-
tries  under  US  sanctions  and  allegedly  ma-
nipulating the US electricity market. Further 
investigations are currently going on, in sev-
eral countries, of banks having allegedly fa-
cilitated  clients  to  evade  taxation.  Products 
of the Madoff Ponzi scheme were being held 
and sold by many banks to their clients. When 
the  fraudulent  nature  of  these  products  be-
came  evident,  write-downs  and  compensa-
tion payments had to be made.

Recent  major  disruptions  of  IT-systems  of 
several  banks  occurred,  where  in  some 
cases customers did not have access to their 
bank account up to several days.

Costs and prudential implications of 
banks’ business conduct

As for aggregated costs stemming from mis-
selling and other unfair past business prac-
tices  towards  bank  customers,  15  %  of  the 
banks responding to the RAQ have each paid 
to their customers amounts exceeding EUR 1 
billion  since  the  end  of  the  financial  year 
2007/08.  At  the  same  time,  57  %  of  the  re-
sponding banks have each paid to their cus-
tomers amounts between EUR 10 million and 
EUR  1  billion  in  the  form  of  compensation, 
redress, litigation and similar payments.

The  provisions  in  the  ongoing  financial  year 
set aside for costs of compensation, redress, 
litigation  and  similar  payments  to  consum-
ers  amount  to  between  EUR  10  million  and 
EUR 100 million in 38 % of banks in the RAQ 
sample;  in  12  %  the  amount  is  higher  than 
EUR 1 billion.

There  are  some  challenges  to  quantify  the 
aggregated  financial  impact  for  European 
banks  stemming  from  already  materialised 
redress costs and further contingent liabili-
ties,  not  least  since  accounting  treatment 
of  actual  and  potential  redress  costs  is  not 
always  consistent  between  institutions  even 
when  they  face  similar  risks:  according  to 
International  Accounting  Standards  (IAS)  37 
provisions have to meet certain criteria in or-
der to be recognised and thus have an impact 
on the income statement, notably that a reli-
able estimate can be made of the amount of 
the obligations. If this is not the case, a con-
tingent liability is set aside, with no effect on 
the income statement. However, information 
on contingent liabilities disclosed often lacks 
detail.  Both  the  classification  of  a  potential 
financial obligation (provisions or contingent 

EUROPEAN BANKING AUTHORITYFigure 30:  Payments to consumers since 2007 (source: RAQ)

Since the end of your ﬁnancial year 2007/08, your ﬁrm has paid out to consumers in the form of 
compensation, redress, litigation and similar payments (converted to EUR) an aggregate amount of:

a. Less than EUR 10 m

b. Between EUR 10 m and EUR 50 m

c. Between EUR 50 m and EUR 100 m

d. Between EUR 100 m and EUR 500 m

e. Between EUR 500 m and EUR 1 bn

f. More than EUR 1 bn

 Agree 

The length of the bars shows the percentage of respondents who agreed with the statement on the y-axis.

0 %

5 %

10 %

15 %

20 %

25 %

30 %

liabilities)  as  well  as  the  level  of  disclosure 
often leaves room for interpretation.

tional substantial redress costs is detrimen-
tal for banks’ ability to raise capital. 

Even though legal risk is covered by the oper-
ational  risk  framework,  Pillar  3  disclosures 
on this topic appear not very well developed. 
As  for  costs  stemming  from  reputational 
risks, explanations should mostly be found in 
Pillar 3 reports. However, the level of disclo-
sure differs significantly between institutions 
and information tends to be rather unspecific 
or  high  level  only.  Risks  are  often  generally 
acknowledged,  but  attempts  to  quantify  as-
sociated costs are rare.

While  fines  and  other  redress  costs  related 
to  past  business  practices  which  have  aris-
en to date affect banks’ profitability, they do 
not  substantially  affect  their  capital  posi-
tions. However, reputational damage coupled 
with  ongoing  uncertainties  stemming  from 
lengthy legal proceedings and potential addi-

Policy implications and possible 
measures

All  these  detrimental  incidents  indicate  that 
there  is  room  for  improvement  in  many  in-
stitutions’  risk  management  functions  and 
compliance  procedures  regarding  business 
conduct issues, and point to the need of fur-
ther  improvements  in  risk  cultures  and  risk 
appetites.  Compliance  with  internal  and  ex-
ternal  rules  for  risk  management  and  com-
pliance  functions  needs  to  be  ensured  and 
warrants  increased  supervisory  attention  in 
light of rising risks.

Even though most banks recognise that rep-
utational  risks  are  becoming  an  issue,  only 
38 % of the responses in the RAQ sample in-
dicated  that  contingency  reserves  are  being 

Figure 31:  Important risks for retail customers (source: RAQ)

Looking across the banking sector, you consider the most 
important risk for retail customers:

a. Lack of knowledge

b. Misleading marketing

c. Default of their bank

d. Deepening of the euro crisis

e. Mis-selling

f. Other

 Agree

The length of the bars shows the percentage of respondents who agreed with the statement on the y-axis.

0 %

20 %

40 %

60 %

80 %

37

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMbuilt in order to meet increased reputational 
and/or legal risk.

Supervisors  should  therefore assess if pru-
dential risks stemming from banks’ business 
practices  are  adequately  reflected  in  an  in-
stitution’s Internal Capital Adequacy Assess-
ment  Process  (ICAAP),  given  their  institu-
tion-specific  and  potential  wider  prudential 
implications.  Likewise,  supervisors  should 
ensure that risks stemming from potentially 
detrimental business practices of banks are 
adequately reflected in their supervisory re-
view and evaluation process (SREP). While an 
appropriate quantification of institution-spe-
cific  reputational  risks  might  be  difficult  to 
attain, further approaches of taking into ac-
count reputational risks should be explored.

In  order  to  get  a  more  accurate  picture  of 
legal and reputational risk, auditors and su-
pervisors should challenge situations where 
non-provisioning  for  related  risks  is  poorly 
substantiated  and  where  contingency  re-
serves  for  legal  or  reputational  risks  are 
lacking.

Further, a more general reassessment of the 
relationship between banks and their custom-
ers should be considered: when asked about 
most  important  risks  for  retail  consumers, 
76 % of the RAQ respondents specified lack of 
knowledge, 47 % mentioned the deepening of 
the euro crisis, and 44 % thought mis-selling 
to  be  the  most  important  risk  for  consum-
ers. Thus a lack of knowledge is considered 
being the predominant reason for materiali-
sation  of  risks  for  consumers.  With  respect 
to  existing  markets  in  financial  instruments 
directive (MiFID) provisions aimed to protect 
customers from buying products they do not 
understand,  the  conclusion  could  be  drawn 
that the relationship between banks and re-
tail  customers  needs  further  improvement. 
In  particular,  further  needs  for  educational 
efforts  for  both  banks  and  the  public  sector 
can be identified, as well as the need for sim-
pler and more transparent products offered 
to retail customers. In addition, other condi-
tions such as comprehensive disclosure and 
products,  conflict-of-interest-free  advice, 
measures  against  mis-selling,  alternative 
dispute resolution and a pro-active supervi-
sion of business conduct are key to improve 
the functioning of the retail financial markets 
for consumers.

38 

EUROPEAN BANKING AUTHORITYAppendix: Samples

Below we list the banks that made up the sample population for the risk assessment question-
naire (RAQ) and the key risk indicators (KRIs).

Risk assessment questionnaire

Bank name

Erste Group Bank AG

Raiffeisen Zentralbank

KBC Group

Marfin Popular Bank Public Company Limited

DZ BANK AG

Deutsche Bank AG

Commerzbank AG

Bayerische Landesbank

Danske Bank A/S

National Bank of Greece

Alpha Bank AE

Piraeus Bank

Eurobank Ergasias

Banco Santander SA

BNP Paribas

Crédit Agricole Group — Crédit Agricole

Société Générale

OTP Bank NYRT

Bank of Ireland

Allied Irish Banks plc

Gruppo UniCredit

Gruppo Bancario Intesa Sanpaolo

ABN Amro

ING Groep NV

Rabobank Group — Rabobank Nederland

DNB Bank ASA

Banco Comercial Portugues

Skandinaviska Enskilda Banken AB

Nordea Bank AB (publ)

Swedbank AB

Svenska Handelsbanken AB

Barclays plc

Lloyds Banking Group plc

HSBC Holdings plc

Royal Bank of Scotland Group plc (The)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

Home country

AT

AT

BE

CY

DE

DE

DE

DE

DK

EL

EL

EL

EL

ES

FR

FR

FR

HU

IE

IE

IT

IT

NL

NL

NL

NO

PT

SE

SE

SE

SE

UK

UK

UK

UK

39

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMKey risk indicators

Bank name

Erste Group Bank AG

Oesterreich Volksbanken

Raiffeisen Zentralbank

KBC Group

Dexia

Bank of Cyprus

Marfin Popular Bank Public Company Limited

DZ BANK AG

WestLB AG

Landesbank Baden-Württemberg

Deutsche Bank AG

Commerzbank AG

Norddeutsche Landesbank GZ

Bayerische Landesbank

Hypo Real Estate

Danske Bank A/S

National Bank of Greece

Alpha Bank AE

Piraeus Bank

Eurobank Ergasias

Banco Santander SA

Banco Bilbao Vizcaya Argentaria SA

La Caixa

Banco Financiero y de Ahorro

OP-Pohjola Group

BNP Paribas

Crédit Agricole Group — Crédit Agricole

Société Générale

Crédit Mutuel

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

Home country

AT

AT

AT

BE

BE

CY

CY

DE

DE

DE

DE

DE

DE

DE

DE

DK

EL

EL

EL

EL

ES

ES

ES

ES

FI

FR

FR

FR

FR

Bank name

Group BPCE

OTP Bank NYRT

Bank of Ireland

Allied Irish Banks plc

Gruppo UniCredit

Gruppo Monte dei Paschi di Siena

Gruppo Bancario Intesa Sanpaolo

Gruppo Banco Popolare

Bank of Valletta (BOV)

ABN Amro

ING Groep NV

Rabobank Group — Rabobank Nederland

DNB Bank ASA

PKO Bank Polski

Banco Comercial Portugues

Caixa Geral de Depositos

Espirito Santo Financial Group (ESFG)

Skandinaviska Enskilda Banken AB

Nordea Bank AB (publ)

Swedbank AB

Svenska Handelsbanken AB

Nova Ljubljanska Bank (NLB)

Barclays plc

Lloyds Banking Group plc

Standard Chartered plc

HSBC Holdings plc

Royal Bank of Scotland Group plc (The)

Nationwide Building Society

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

Home country

FR

HU

IE

IE

IT

IT

IT

IT

MT

NL

NL

NL

NO

PL

PT

PT

PT

SE

SE

SE

SE

SI

UK

UK

UK

UK

UK

UK

40 

EUROPEAN BANKING AUTHORITY 
 
2
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SOLVENCY

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fi

CREDIT RISK AND ASSET QUALITY

42 

EUROPEAN BANKING AUTHORITY 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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43

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEM 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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8
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(

BALANCE SHEET STRUCTURE

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R
K

44 

EUROPEAN BANKING AUTHORITY 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The KRI database 

The definitions used are consistent with the supervisory common reporting (COREP) and financial reporting frame-
work (FINREP).

Nr

Kri Code

KRI name

Numerator

Denominator

1

2

3

4

5

6

7

8

1

2

3

13

14

18

20

21

Tier 1 capital ratio

TOTAL ORIGINAL OWN FUNDS FOR GENERAL SOLVENCY 
PURPOSES

TOTAL CAPITAL REQUIREMENTS *12.5

Total capital ratio

TOTAL OWN FUNDS FOR SOLVENCY PURPOSES

TOTAL CAPITAL REQUIREMENTS * 12.5

Tier 1 ratio (excluding 
hybrid instruments)

Impaired loans and 
Past due (>90 days) 
loans to total loans

Coverage ratio (spe-
cific allowances for 
loans to total gross 
impaired loans)

TOTAL ORIGINAL OWN FUNDS FOR GENERAL SOLVENCY 
PURPOSES 
-Hybrid instruments in Minority interests 
- Hybrid instruments in 1.1.4.1a Hybrid instruments 
- (-) Excess on the limits for hybrid instruments

Row: Loans and advances 
Column: Net carrying amount of the impaired assets 
Row: Loan and advances 
Specific allowances for individually assessed financial assets 
and Specific allowances for collectively assessed financial 
assets 
Column: Closing balance 
Row: Loans & advances 
Columns: > 90 days ≤ 180days; > 180 days ≤ 1year; > 1year

Row: Loan and advances 
Specific allowances for individually assessed financial assets 
and Specific allowances for collectively assessed financial 
assets 
Column: Closing balance

TOTAL CAPITAL REQUIREMENTS * 12.5

Total loans advances (Rows: Loans and advances AFS, Loans and 
receivables, HTM) 
Row: Loan and advances 
Specific allowances for individually assessed financial assets and 
Specific allowances for collectively assessed financial assets 
Allowances for incurred but not reported losses on financial assets 
Column: Closing balance

Row: Loans and advances 
Column: Net carrying amount of the impaired assets 
Row: Loan and advances 
Specific allowances for individually assessed financial assets and 
Specific allowances for collectively assessed financial assets 
Column: Closing balance

Impaired financial as-
sets to total assets

Row: Total 
Column: Net carrying amount of the impaired assets

Total assets

Accumulated impair-
ments on financial 
assets to total 
(gross) assets

Impairments on 
financial assets 
to total operating 
income

Row: Loan and advances, Debt instruments and Equity 
instruments 
Specific allowances for individually assessed financial assets 
and Specific allowances for collectively assessed financial 
assets 
Allowances for incurred but not reported losses on financial 
assets 
Column: Closing balance

Impairment on financial assets not measured at fair value 
through profit or loss

Total assets 
Row: Loan and advances, Debt instruments and Equity instruments 
Specific allowances for individually assessed financial assets and 
Specific allowances for collectively assessed financial assets 
Allowances for incurred but not reported losses on financial assets 
Column: Closing balance

Total operating income: rows: Interest income; Interest expenses; 
Expenses on Share capital repayable on Demand; Dividend income; 
Fee and commission income; Fee and commission expenses; 
Realised gains (losses) on financial assets & liabilities not 
measured at fair value through profit or loss, net; Gains (losses) 
on financial assets and liabilities held for trading, net; Gains 
(losses) on financial assets and liabilities designated at fair value 
through profit or loss, net; Gains (losses) from hedge accounting, 
net;  Exchange differences, net; Gains (losses) on derecognition 
of assets other than held for sale, net; Other operating income; 
Other operating expenses

9

22

Return on equity

Total profit or loss after tax and discontinued operations 
(annualised)

Total equity (period average)

45

RISK ASSESSMENT OF THE EUROPEAN BANKING SYSTEMNr

10

11

12

13

14

15

16

17

18

Kri Code

KRI name

Numerator

Denominator

24

Cost-income ratio

Rows: Administration costs; Depreciation

Total operating income: rows: Interest income; Interest expenses; 
Expenses on Share capital repayable on Demand; Dividend income; 
Fee and commission income; Fee and commission expenses; 
Realised gains (losses) on financial assets & liabilities not 
measured at fair value through profit or loss, net; Gains (losses) 
on financial assets and liabilities held for trading, net; Gains 
(losses) on financial assets and liabilities designated at fair value 
through profit or loss, net; Gains (losses) from hedge accounting, 
net;  Exchange differences, net; Gains (losses) on derecognition 
of assets other than held for sale, net; Other operating income; 
Other operating expenses

Net interest income 
to total operating 
income

Net fee and commis-
sion income to total 
operating income

Net income to total 
operating income

Loan-to-deposit ratio

Rows: Interest income; interest expenses

Total operating income as above.

Rows: Fee and commission income; fee and commission 
expense

Total operating income as above.

Total profit or loss after tax and discontinued operations

Total operating income as above.

Total loans advances (Rows: Loans and advances held for 
trading, designated at fair value through profit or loss, AFS, 
Loans and receivables, HTM)

Total deposits (other than from credit institutions) (Rows: Depos-
its held for trading, designated at fair value through profit or loss, 
measured at amortised cost)

Customer deposits to 
total liabilities

Total deposits (other than from credit institutions) (Rows: 
deposits (other than from credit institutions) held for trading, 
designated fair value through profit or loss, measured at 
amortised cost)

Total liabilities

Tier 1 capital to (total 
assets - intangible 
assets)

Original own funds

Debt-to-equity ratio

Total liabilities

Off-balance sheet 
items to total assets

Loan commitments given, financial guarantees given, other 
commitments given to other counterparties

Total assets 
- Intangible assets

Total equity

Total assets

26

27

33

34

35

36

45

46

46 

EUROPEAN BANKING AUTHORITYEuropean Banking Authority
Risk Assessment of the European Banking System

Luxembourg: Publications Office of the European Union

2013 — 46 pp. — 21 × 29.7 cm

ISBN 978-92-95086-48-7
doi:10.2853/57493

D
Z
-
A
C
-
1
3
-
0
0
1
-
E
N
-
C

doi:10.2853/57493

EUROPEAN BANKING AUTHORITY

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