Financial Stability Review November 2019 - 20/11/2019 Press briefing
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Financial Stability Review
November 2019
Press briefing
20/11/2019
www.ecb.europa.eu ©November 2019 FSR
Structure and contents
Overview Infographic and main messages
5 chapters Macro-financial environment
Financial markets
Banking sector
Non-banks
Macroprudential policy implications NEW!
8 boxes Including on bond valuations, bank misconduct costs, climate
risk-related disclosures and fund portfolio rebalancing
2 special features Euro area bank profitability: where can consolidation help?
Assessing the systemic footprint of euro area banks
2 www.ecb.europa.eu ©Signs of asset mispricing suggest Growing challenges from cyclical
Yield curve headwinds to bank profitability
potential for future corrections
75%
• Very low yield environment • Eroding interest margins
of significant
• Robust risk appetite banks have • Slightly rising cost of credit risk
• Valuations contingent on low yields return on equity • High cost inefficiencies
of below 8%
• Safe-haven asset inflation • Plateauing capital positions
Lingering private and public Increased risk-taking by non-banks
Non-liquid may pose risks to capital market
debt sustainability concerns
45% assets financing
• Weaker growth prospects • Profitability and solvency challenges
of all rated market-
• Releveraging of high-yield firms based corporate debt • Higher credit and duration risk
• Rising property prices is rated BBB • Pockets of illiquidity
• Low interest payment burdens • Growing real economy financing
The financial stability environment
remains challenging…
…but euro area banks are adequately
capitalised, with a 14.2% CET1 ratio. Pronounced
systemic vulnerability
All euro area countries have activated
Moderate
macroprudential measures… systemic vulnerability
…even so, more active use of Potential
macroprudential policies could be systemic vulnerability
appropriate to contain
3 vulnerabilities. www.ecb.europa.eu ©Private debt: pockets of vulnerability in non-financial corporations;
exuberant real estate markets in some countries
Outstanding euro area corporate debt by issuer rating and Real residential property price and mortgage lending
changes since 2007 growth in the euro area
(2007, 2018, € trillions, percentages) (Q3 2015-Q2 2019, 4-year annual percentage change)
10
Borrower-based measures
RWs on RRE exposures
4-year annual real residential real estate price
PT Both measures
IE
8 No measures
A and BBB LV
above 0.95 1.2 Downgraded
NL
0.70 0.54 37.5% LU
6
DE
SI MT
ES AT SK
LT
growth
New entrants 4
2007 (since 2007)
EE
29.7%
2
FR BE
GR
0.1 Unchanged
28.3% 0 CY FI
0.48 IT
2018
-2
HY Upgraded -6 -3 0 3 6 9 12 15 18
4.6%
4-year annual real mortgage lending growth
Sources: S&P Global Market Intelligence and ECB calculations. Sources: ECB and ECB calculations. Note: RWs: risk weights.
Note: HY: high-yield.
4 www.ecb.europa.eu ©Non-banks: increased exposure to riskier assets
Breakdown of debt securities held by euro area investment Breakdown of debt securities held by euro area
funds by credit rating investment funds by liquidity bucket
(Q4 2013-Q2 2019, share of total debt securities holdings) (Q4 2013-Q2 2019, € trillions)
AAA-A B
BBB Lower than B
BB No rating
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Q4/13 Q4/14 Q4/15 Q4/16 Q4/17 Q4/18
Source: ECB Securities Holdings Statistics by Sector (SHSS). Source: ECB SHSS.
5 www.ecb.europa.eu ©Non-banks: higher credit and liquidity risks for investment funds
Cash and liquid holdings for all types of bond funds by
credit risk profile
(percentage of total assets)
Search for yield in investment funds High-rated 2012-13 Low-rated 2018-19
High-rated 2018-19 BBB 2012-13
• Strong inflows into bond and money Low-rated 2012-13 BBB 2018-19
market funds globally have continued 70
60
• Riskier holdings 50
Liquid holdings
40
• Increased liquidity mismatch
• Stress episodes in UCITS funds 30
illustrating risk of large-scale 20
outflows 10
0
• Leverage can add to procyclical investor 2 3 4 5 6 7
Cash holdings
behaviour and accelerate outflows Sources: Refinitiv and ECB Centralised Securities Database.
6 www.ecb.europa.eu ©Banks: profitability expected to remain weak
ECB forecasts for banks’ return on equity in 2019-21 under Contribution of core revenues and impairments to
the baseline scenario changes in euro area banks’ return on equity
(percentages, weighted average, interquartile range) (percentage points)
9 impairments
core revenues
8 2.0
7
1.5
6
1.0
5
0.5
4
0.0
3
-0.5
2
-1.0
1
-1.5
0
2016 2017 2018 Q2 2019
2019 2020 2021
Sources: Individual institutions’ financial reports, European Banking Authority, ECB Sources: ECB supervisory statistics and ECB calculations.
and ECB calculations.
7 www.ecb.europa.eu ©Banks: structural cost issues persist
Euro area banks’ aggregate cost-to-income and cost-to- Banks’ stock returns by bank funding structure
assets ratios (percentages)
(2009-Q2 2019, percentages)
Cost-to-income ratio Cost-to-assets ratio Banks with lower share of deposits in total funding
10-year average 10-year average Banks with higher share of deposits in total funding
68 1.55 30
1.50 20
66
1.45
10
64
1.40
0
62 1.35
-10
1.30
60 -20
1.25
58 -30
1.20
-40
56 1.15
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Q2 2019
Q2 2019 -50
2014 2015 2016 2017 2018 2019
Source: ECB consolidated banking statistics. Source: Bloomberg.
8 www.ecb.europa.eu ©Banks: solvency solid even under adverse scenario
Capital ratio change under the baseline and adverse
• Under baseline case, euro area scenarios
banks are able to build up capital (Common Equity Tier 1 ratio, percentages)
ratios (meeting new regulatory
requirements) 16
• Adverse scenario is a tail event 15
+0.9 ppt
consistent with main risks
materialising over next two years 14
including: 13
o Deterioration of global macro conditions -3.1 ppt
12
o Fall in euro area GDP (by ca. 1.7% in 2021)
and corporate earnings, rise in
11
unemployment (to 10% in 2021)
o Steepening of yield curve (long rates rise) 10
2018 Baseline 2021 Adverse 2021
Source: ECB calculations.
9 www.ecb.europa.eu ©Macroprudential policy implications
The CCyB is still only a tiny fraction of euro area • While the overall level of capital is considered
banks’ capital requirements
appropriate, a higher CCyB may be merited in a few
countries
• A higher share of releasable buffers within overall capital
requirements would strengthen macroprudential policy
support in a downturn
• Further measures could counter risks from RRE and CRE
markets in some countries
• Unintentional barriers to banking sector consolidation
should be examined
• Need for faster progress on macroprudential tools for non-
banks
• Climate risk monitoring requires better disclosures
Sources: ECB, Eurostat and ECB calculations.
Note: CCyB: countercyclical capital buffer.
10 www.ecb.europa.eu ©You can also read
