1. 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

2. 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Global institutions have withdrawn to some extent from host markets and national authorities have responded with ring-fencing strategies, but cross border activities have now largely stabilised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

3. 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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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 Q 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

11. 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

12. 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