EBA Warns of Rising Geopolitical Risks for EU/EEA Banking Sector

The European Banking Authority (EBA) released its spring 2024 risk assessment report on July 2, highlighting elevated geopolitical risks and economic uncertainties facing EU/EEA banks. The comprehensive report, which for the first time combines the EBA's common risk assessment with analysis of banks' asset encumbrance and funding plans, paints a complex picture of the current banking landscape. This edition marks the resumption of the semi-annual publication of the Risk Assessment Report (RAR), following its common structure but also including the analysis of asset encumbrance and funding plan data, previously published in two separate reports.

Findings from the report include:

1. Increased Geopolitical and Economic Risks: Banks are facing heightened geopolitical tensions coupled with economic and interest rate uncertainties.
2. Loan Exposure and Non-Performing Loans: While banks plan to gradually increase their loan exposures, non-performing loan (NPL) ratios have risen across all segments. The report notes that loan growth of EU/EEA banks has been negatively affected by macroeconomic and monetary conditions, and NPL volumes in the commercial real estate (CRE) segment rose by more than 12% in 2023.
3. Commercial Real Estate Exposure: EU/EEA banks hold more than €1.4 trillion in commercial real estate loans, a significant exposure that warrants close monitoring. This exposure accounts for less than 100% of banks’ capital on average, yet several smaller banks are particularly vulnerable to downturns in this market.
4. Funding Strategies: Banks are planning to significantly increase long-term market-based funding and have bolstered their collateral availability for future funding needs. Deposits remained the most important source of funding in 2023, with central bank funding decreasing amid targeted longer-term refinancing operation (TLTRO) repayments.
5. Capital Adequacy: CET1 headroom above overall capital requirements and Pillar 2 Guidance remains at comfortable levels, indicating resilience in the sector. Liquidity positions continued to be strong in 2023, although the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) are expected to see fluctuations in 2024.
6. Profitability: Banks have seen increased profitability due to rising net interest income, though this trend is expected to level off in the near future. Following a stabilization of net interest income (NII) in mid-2023, some profitability indicators have shown the first signs of a decline.
7. Operational Risks: The importance of operational risk has grown, with a notable increase in cyber-attacks, including successful ones. Cyber risks and data security rank highest among operational risks, followed by conduct and legal risks, and fraud.
8. Non-Bank Financial Intermediaries: NBFI activity has increased both in the EU/EEA and globally over the past decade, potentially introducing new interconnected risks. EU/EEA banks’ exposures to NBFIs reached 9.2% of their total assets in 2023, with funding through deposits, repos, etc., amounting to 10.3% of banks’ total balance sheet.

This RAR was prepared by the Economic and Risk Analysis Department, benefiting from input and comments from other EBA departments and committees. The report includes dedicated chapters on EU/EEA banks' CRE exposures and their interconnections with NBFIs, providing deeper insights into these areas of concern.

This comprehensive assessment comes at a time of global economic uncertainty and geopolitical tensions, underscoring the need for continued vigilance and robust risk management in the banking sector. The EBA's decision to publish the report in a digital format aims to increase accessibility and transparency of the data, allowing for easier analysis by stakeholders.

As the European banking landscape continues to evolve, the EBA's risk assessment serves as a crucial tool for policymakers, regulators, and financial institutions to navigate the complex challenges ahead and maintain the stability and effectiveness of the European financial system.

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