EBA's Q1 2023 Risk Dashboard: Assessing Key Risks in the Banking Sector

Subdued Economic growth and high Inflation 

The EU is experiencing subdued economic growth, with the Euro area entering a technical recession in Q1 2023. High inflation rates are expected to persist, which can negatively impact the banking sector.

Liquidity Challenges 

The liquidity coverage ratio (LCR) has declined from 164.6% to 163.7%, and the net stable funding ratio (NSFR) has risen slightly from 125.6% to 126%, both on a quarterly basis.

Issuance Activity 

As of the end of May, banks have issued more instruments across all debt classes than year to date in the previous two years, but a limited number of banks still face shortfalls. The EBA MREL information shows that the overall MREL shortfall is EUR 29.1bn, corresponding to 1.2% of the required issuance. Resolution authorities are carefully monitoring the situation and are, in some instances, granting more extended transition periods to individual banks.

Stagnant Lending Growth 

Macroeconomic uncertainty, subdued loan demand, and banks tightening credit standards have resulted in stagnant lending growth. Banks' risk appetite has decreased, leading to stable outstanding loans for households and non-financial corporations (NFCs). Many banks intend to reduce their exposure to real estate and consumer credit.

Asset Quality and Non-Performing Loans (NPL’s) 

Non-performing loans have remained stable, but nuances exist across portfolios and countries. NPLs in household lending increased marginally, driven by mortgages and consumer credit loans. Some countries, such as Greece and Cyprus, still report high NPL ratios. Banks expect asset quality to deteriorate in the next 12 months.

Increased Bank Profitability 

Banks' profitability, as measured by the return on equity (RoE), has risen by around 13% QoQ and 23% YoY mainly due to higher net interest income (NII) from rising interest rates. The cost-to-income ratio has improved, but challenges remain, including increasing deposit betas, higher market funding costs, wage inflation, and rising impairments.

Capital Ratios 

EU/EEA banks' capital ratios have continued to increase, supported by rising profitability. The Common Equity Tier 1 (CET1) ratio reached 15.7%, benefiting from higher capital and relatively flat risk-weighted assets (RWA).

Operational Risks 

Cyber risk is identified as the key driver for operational risks. On AML related aspects, the EBA’s EuReCa data shows that EU competent authorities reported 463 serious deficiencies, or ‘material weaknesses’, in 152 institutions between 31 January 2022 and 31 May 2023.