EBA Long Report - European Banking Authority - Europa

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3. Business models and banks’ internal drivers Risk appetite and the operating model EU banks continue to embrace risk-averse strategies which came into being at the height of the financial crisis. The pre-crisis market premium on risk taking and aggressive leverage has long been replaced with a more risk-adequate view. Spurred by both new, tighter regulations and increased market scrutiny, banks have been avoiding material risk-taking, both in credit and market activities. Strategies have focused on boosting conservative funding – primarily customer deposits – and limiting asset growth or even deleveraging. The banks’ aversion to risk has also been underpinning their focus on building ample liquidity positions – e.g. via deposits with the ECB for euro zone banks – and (for some banks) avoiding cross-border interbank lending. There is still a risk that the persistence of the banks’ cross-border risk aversion may have an impact on the banks’ key role of efficiently providing credit to the real economy at home and abroad. Banks continue to move away from excessive reliance on high-risk high-return activities. One example is the continuing retrenchment from large-scale investment banking and trading, also linked to regulatory developments. Several banks with previously large investment banking books have been moving towards a more balanced approach to balance sheet growth, with an emphasis on retail activities. Related to both reduced risk appetite and scarcer and more expensive wholesale funding (especially in USD) is the gradual withdrawal of large EU banks from global finance – trade finance, cross-border leasing, etc. As a sector, EU banks were on aggregate by far the largest participants in these activities. The current retrenchment trend is unlikely to reverse itself in the foreseeable future, which may have an impact on international trade financing (as the place left vacant by EU banks may not be taken at full capacity by other international banks – e.g., from North America or the Asia-Pacific region). Figure 2 shows the RAQ respondents’ views on changes to business models and the scaling down of business lines. Page 10 of 37
You envisage making material changes to your bank’s business model going forward. a. Your business model has been witnessing some material adjustments in recent years, both due to the initial financial crisis and to the … 1. Secondary markets: i. Changes in market structure and dynamics. 2. Investment banking/trading across the board. ii. Regulatory changes (e.g., Basel 2.5/CRD 3). 3. Trade finance. iii. National supervisory recommendations. 4. Other wholesale lending (international leasing, shipping, etc.). iv. Funding challenges. 5. Non-domestic activities outside the EU. v. Capital constraints. 6. Non-domestic activities within the EU. vi. Earnings pressure. 7. Project finance/public sector. vii. Some or all the above. 8. Domestic: Figure 2: Changes to business model (source: RAQ) 25 Material changes to business model and business lines to scale down 20 15 10 5 0 Agree or somewhat agree There are several factors underpinning this trend: (i) new regulations (e.g., Basel 2.5, transition towards Basel 3) that lead to increased capital charges and funding/liquidity constraints; (ii) reduced opportunities for new entrants and second-tier participants in investment banking and trading; (iii) heightened investor scepticism regarding the quality and sustainability of earnings from trading and investment banking, as figure 3 below shows: Figure 3: Business model adjustments (source: RAQ) 25 24 23 22 21 20 19 18 Business model adjustments and reasons Agree or somewhat agree Page 11 of 37
Page 1 and 2: Risk Assessment of the European Ban
Page 3 and 4: Executive summary Since the publica
Page 5 and 6: 1. Introduction Purpose of the repo
Page 7 and 8: Policies and political commitments
Page 9: progress in this direction. The SSM
Page 13 and 14: Your bank can operate on a longerte
Page 15 and 16: Figure 6: Trends in reputational ri
Page 17 and 18: Your bank will have to to rely more
Page 19 and 20: Asset deleverage is an element of y
Page 21 and 22: You see threats to your retail depo
Page 23 and 24: exercise led to an increase in bank
Page 25 and 26: Figure 15: Coverage ratio (specific
Page 27 and 28: a. Residential mortgages. b. Consum
Page 29 and 30: practices for loans in arrears, unc
Page 31 and 32: The leverage of CfDs consists in al
Page 33 and 34: Appendix: Samples Below we list the
Page 35 and 36: Annex Descriptive statistics from t
Page 37: Balance Sheet Structure KRI Descrip

EBA Long Report - European Banking Authority - Europa

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