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EU Banks Shrink Assets By US$1.1t As Capital Ratios Rise
Perspective | 19 December 2013

European Union banks have shed more than US$1.1 trillion of assets since the end of 2011 in a shift away from risky investments such as asset-backed debt as regulators push lenders to shore up their balance sheets.

Lenders reduced assets weighted for risk by EUR817 billion (US$1.1 trillion) between December 2011 and June 2013, the European Banking Authority (EBA), the bloc’s top banking regulator, said in a report released on 17 December. Banks’ core Tier 1 capital ratios, a measure of how well they can absorb losses, rose to 11.7 percent from 10 percent over the time period.

The EBA, set up in 2011 to harmonise banking rules across the 28-member EU, released more than 700,000 data points submitted by 64 lenders on 17 December, detailing how much capital lenders have and where they invest. The agency scrapped its annual stress test in favour of a review next year of banks’ asset quality led by the European Central Bank, which will become the euro area’s chief banking supervisor in 2014.

“Reliable and comparable information on EU banks fosters the trust of investors, as well as the proper functioning of the market,” Andrea Enria, chairman of the London-based EBA, said in an e-mailed statement. “It puts all market participants in a better position to understand the situation of EU banks.”

The reduction in assets comes mostly from banks shedding securitisations and cuts in trading activity, the EBA said. Banks’ holdings of sovereign debt issued by EU countries remained steady at a total of EUR1.7 trillion. Lenders sold 9.3 percent of their sovereign bonds in 2011, and increased them afterwards by 9.5 percent.

Worsening Credit
The quality of EU retail and corporate debt on banks’ books has worsened since 2011, during a period of government cutbacks and an economic contraction of 0.4 percent in 2012. Defaulted assets as a percentage of total holdings rose to 3.8 percent from 3 percent overall, the EBA said, with private companies hitting a bad debt ratio of 6.9 percent.

ECB President Mario Draghi will preside over a three-stage review of banks’ assets and their vulnerability to economic shocks, known as the Comprehensive Assessment.

Draghi has said he won’t hesitate to fail lenders if needed, signalling a determination to prove the central bank can spot weaknesses before it becomes the euro area’s single bank supervisor in November.

Lenders have been told that the stress test will have a basis scenario and an adverse-conditions scenario that covers a three-year horizon. Details on how hard government bonds will be stressed and how much capital will be required of banks after the imagined negative scenario will be published in January.

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