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European banks strengthen capital position, says EBA

The "repair process" in the European bank­ing system since 2011 has led to a major strengthening of banks’ capital position but they still face important challenges and vulnerabilities remain, the European Banking Authority (EBA) has said.08 Jul 2015

The EBA published its seventh six-monthly report on the risks and vulnerabilities in the EU banking system this week, with the caveat that the report is based on data from December 2014 and does not cover the current challenges caused by the situation in Greece.

Private and public debt remains high compared to gross domestic product and there is a risk of instability caused by political, economic and financial uncertainties in some countries, the EBA said. It said banking regulators across the EU are also worried about opera­tional risks including litigation and IT risks.

There are some signs of growth in total assets and loan volumes, the EBA said, but supervisors see credit and counterparty risk as a concern.

Financial markets remain "fragile and volatile", the authority said, and EU banks still face "important challenges in profitability".

The EBA expressed concern about the sustainability and viability of some banks' business models, saying it is unclear how they can return to adequate levels of profit and called for EU countries to harmonise their approach and underlying methodologies to bank supervision, to restore confidence in the single market where "segmentation … persists".

In referencing the situation in Greece, the EBA said that the financial risks non-Greek banks are exposed to are "very limited, at less than $20 billion".

"The EBA has also been working with relevant competent authorities to monitor the cur­rent situation, coordinate information flows, and facilitate cooperation on contingency ac­tions. Based on the direct exposure data and the pre-emptive actions taken the risks of direct contagion from the Greek situation appear to be somewhat limited," it said.

However, the Greece situation could still affect funding costs, asset prices, market liquidity, and counterparty credit quality elsewhere in the EU, the EBA said. Cooperation and coordination of supervisory actions across all authorities is needed to manage the crisis, it said.

The EBA issued an update to its regular 'dashboard' on risk in the EU banking sector in June.