EU banking sector stability

The European Central Bank (ECB) is today releasing a report on the stability of the EU banking sector. The report was prepared by the Banking Supervision Committee of the European System of Central Banks, which comprises representatives from the national central banks and banking supervisory authorities of the EU and the ECB. The report summarises the outcome of the Committee's regular monitoring of sources of vulnerability in the EU banking sector. This activity is based on a wide range of indicators drawn from different data sources as well as on an exchange of qualitative information and assessments by the Committee's member organisations. The main purpose of the report is to review the resilience of the EU banking sector and to provide an overview of potential threats to its stability. The report also contains some new data on the aggregate profitability and solvency of EU banks.

The main findings of the report can be summarised as follows:

Bank profitability has been declining significantly. The deterioration of global economic conditions and the difficulties faced by some industries have affected the quality of EU banks' international and domestic assets. As a consequence, they raised provisions markedly in 2001, which affected their results. The large banking groups continued to increase their provisions in the first half of 2002, and appear to have done so further in the latter part of the year. Bank profitability has also been affected by the weakened conditions in equity and other financial markets, as their income from investment banking and asset management activities has declined. Banks that focus on retail banking and have a strong competitive position in domestic markets have fared best in this environment.

The banking sector has remained stable. EU bank solvency levels remained strong in 2001, allowing them to withstand the shocks in their operating environment. The total regulatory capital ratio for the EU banking system as a whole stood at 12.0%, i.e. well above the required minimum level of 8%. The ratio also remained stable in 2002. This stability is partly due to the fact that the sector as a whole had relatively good profitability at the end of 2001 and into 2002 and to active capital management by the banks. There are reportedly no strong credit availability constraints in any Member State. EU banks seem to have appropriately tightened credit standards in line with increased risks, rather than become restrictive in lending because of capital shortages. The tightening of loan contract terms has resulted mainly from the introduction of more risk-driven approaches to lending.

Potential threats. The main sources of vulnerability in the EU banking sector in the near future stem from potential fragilities in the EU economy as well as possible shocks to the global economy and financial markets. Adverse macroeconomic developments could affect EU bank profits quite strongly through an increase in provisioning needs and a reduction in income from traditional retail banking. Provisions could continue to increase even if no further shocks materialised, owing to the time lag between the emergence of risks and their reflection in banks' balance sheets. However, the EU banking sector has the potential to withstand further shocks especially by enforcing strategies aimed at restoring profitability levels and maintaining adequate capital buffers.

The report can be downloaded from the Publications section of the ECB's website (http://www.ecb.europa.eu). Printed copies are also available free of charge from the ECB's Press and Information Division (fax: +49 69 1344 7404 or email: info@ecb.int).