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European banks continue to improve capital positions

European banks' capital positions continued to improve in the first half of 2016, with a total average Common Equity Tier 1 (CET1) ration of 12.8% at the end of June, the European Banking Authority (EBA) has said.01 Mar 2017

The CET1 capital ratio is a measurement of a bank's core equity capital or CET1 divided by its total risk-weighted assets, and is a measure of a bank's financial strength.

The impact of the global banking regulatory framework known as Basel III is monitored semi-annually by the Basel Committee on Banking Supervision (BCBS) at the global level and by the EBA at the European level, using data provided by banks on a voluntary basis.

The EBA has now published its twice-yearly report for the six months to June 2016, based on a survey of 164 banks, including 44 larger 'Group 1' banks with capital of €3 billion or more, and 120 smaller 'Group 2' banks.

On average, European banks largely fulfil the future regulatory capital requirements, with only a very small number of banks exhibiting potential capital shortfalls, the EBA said.

"The shortfall amounts constitute only a very minor fraction of the amounts observed at the beginning of the monitoring period in mid-2011, and the difference between the current and full implementation capital ratios has been shrinking continuously, albeit recently this trend has been slowing down," it said.

All banks in the sample comply with future regulatory capital requirements and are likely to meet the full-implementation minimum CET1 requirement, it said.

The average leverage ratio (LR) for the sample of banks is 4.6% for Group 1 banks and 5.2% for Group 2, the EBA said.

The LR refers to the minimum level of capital banks have to hold as a proportion of their total assets without weighting for risk and is one of the measures of bank capital reporting required of global banks under the Basel III international regulatory regime.

"Conceptually, the LR has been developed to serve as a backstop against unduly low risk-adjusted capital levels and to prevent the excessive build-up of leverage, both over the financial cycle and across credit institutions. The analysis contained in this report indicates that the LR is indeed constraining for a significant proportion of institutions in the sample," the EBA said.

The average Liquidity Coverage Ratio (LCR) ratio as of the end of June 2016 was 127.7% and 165.5% for Group 1 and Group 2 banks, respectively, the EBA said.

Basel III's LCR is one of the Basel Committee's reforms to strengthen global capital and liquidity regulations. It promotes short-term resilience by ensuring that a bank has an adequate stock of high-quality liquid assets, such as Treasury bonds, that can be converted into cash easily and immediately in private markets. It is designed to make sure that a bank could survive a 30-day stress period.

In the total sample, 95.4% of the banks show an LCR above 100%, while 98.5% of the banks have an LCR above the 70% minimum requirement of January 2016.

Basel III also includes a longer-term structural liquidity standard, the Net Stable Funding Ratio (NSFR) which will become a minimum standard by 1 January 2018. This requires banks to ensure that available stable funding matches required stable funding.

Available stable funding is measured by considering a bank's liabilities and giving high 'weight' to stable sources of funding, like retail deposits and capital, and lower weight to volatile funding like short-term borrowing.

"In absence of a finalised EU definition", the EBA said, the report monitors the NSFR compliance with the current Basel III standards. The analysis shows an overall average ratio of 107.8% with an overall shortfall in stable funding of €158.7 billion.

"Compared with previous periods, there has been a continuous increase in banks' NSFR, which is mainly driven by the increasing amount of available stable funding (ASF) for both groups. Currently, around 80.6% of participating banks already meet the minimum NSFR requirement of 100%," it said.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com said: "With calls now increasing from other jurisdictions to relax various aspects of these capital requirements, it will be interesting to see the extent to which they are adhered to globally."