Adam Farkas – Executive Director, EBA 28 November 2017

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Presentation transcript:

Adam Farkas – Executive Director, EBA 28 November 2017 Challenges of the Financial Sector in the World of Globalization AFCA CEE Financial Summit Forum, Budapest Adam Farkas – Executive Director, EBA 28 November 2017

Global Financial Resilience Improved by New Standards Internationally active banks have historically served the fundamental purpose of allocating financial resources from regions with excess savings to regions with excess investments With the global financial turmoil: Interconnections across global banks proved to be one of the channels of contagion and international banking experienced significant disruptions Global institutions have withdrawn to some extent from host markets and national authorities have responded with ring-fencing strategies, but cross border activities have now largely stabilised International standards are an essential common yardstick to support safe and sound cross-border banking on a global scale, while avoiding the fragmentation of financial markets across regional lines; AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Post-Crisis Reform of Banking Standards Quality of capital Definition of capital: focus on common equity Better loss-absorbency capacity for any given amount of regulatory capital Quantity of capital Min CET1 raised to 4.5% Capital conservation buffer Countercyclical capital buffer G-SIB surcharge Higher loss-absorbency, also reflecting the systemic risk build-up and institutions’ contribution to systemic risk Risk coverage New securitisation framework Fundamental Review of the Trading Book Review of the Counterparty Credit Risk framework Bank exposures to central counterparties The calculation of risk-weighted assets becomes more risk-sensitive Liquidity Liquidity Coverage Ratio Nest Stable Funding Ratio Institutions ready to withstand liquidity stress in the short-term and working under a stable funding model in the medium-term Leverage Leverage Ratio Minimum loss-absorbency irrespective of risk-weighting. Backstop metric against leverage build-up Accounting & disclosure Pillar 3 disclosure IFRS reform Increased market discipline Timely and forward-looking provisioning against losses Remuneration Remuneration policy (EU) Remuneration to shape correct incentives to risk management Resolution Bank recovery and resolution framework TLAC Standards, Minimum Own Funds and Eligible Liabilities (MREL) in EU Orderly resolution and mitigation of externalities on taxpayers AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Global Overview Today Improved banking sector resilience in benign macroeconomic and financial environment Additional strengthening of the capital position Improvement of profitability and asset quality Accommodative monetary policy continued to support funding conditions offering more leeway to banks to build-up their loss-absorbing capacity However, downside risks still persists Geopolitical risks Uncertainties over the pace of the normalisation process of monetary policies in a context of high-indebtedness Volatility remains very low and search for yield could build up on excessive risk-taking behaviour AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Strengthening Capital Position of Global Banks Source: IMF, Oct 2017 Global banks are better capitalised AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Strengthening Capital Position of EU Banks EU Banks’s total capital ratio had increased by 80 bps since June 2016, reaching a new high of 18.6% AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Global Bank Profitability Source: IMF, Oct 2017 Overall improvement in profitability, but dispersed and CoE is not reached by some banking systems AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

EU Bank Profitability Return on Equity (Q2 2017) Source for all charts: EBA Risk Assessment report Overall improvement in profitability, RoE increased to 7.0 %, but widely dispersed among EU countries. Key drivers: a decrease of impairments, the increase of fees and commissions and the increase of trading profits AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Risk of Non-Financial Sector Indebtedness Source: IMF, Oct 2017 Uncertainties over the pace of the normalisation process of monetary policies in a context of high-indebtedness AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

EU Banks’ Asset Quality Challenge NPL ratio (weighted average). Country dispersion of NPLs (as of Jun. 2017) NPL ratio decreasing by 90 bps since June 2016 to 4.5% in Q2 2017 However, the level of NPLs still remains at a very high historical level (EUR 893 billion) and dispersion is wide as around one third of EU jurisdictions have NPL ratios above 10%. AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Operational Resilience is an Increasing Challenge RAQ banks: drivers of operational risk increase RAQ banks: expected litigation costs Source for all charts: Risk Assessment report. Operational risks are still an area of concern for EU banks, 55% of banks foresee an increase in operational risk Cyber risks and data security as key drivers. Accordingly, 42% of respondents identify cyber risk and data security as the main drivers for increasing operational risk; 16 % of respondents mention IT failures as an additional driver Compensation, litigation costs still heightened AFCA CEE Financial Summit Forum, Budapest – 28 November 2017

Conclusions Reform of global banking standards and their supervisory implementation has lead to a significant increase of overall financial strength of the global banking system Global cross border banking activity had reduced after the crisis, fragmentation had increased, but it has regained stability in the benign macroeconomic environment with improving growth prospects However, significant risks remain which calls for further macro- and micro-prudential policy attention AFCA CEE Financial Summit Forum, Budapest – 28 November 2017