The resilience of European banks further improved in 2018, but operational risks, including money laundering, have also increased, notes the European Banking Authority (EBA) in its annual report on risks in the EU banking sector, published on Friday 14 December.
The banking sector continued to benefit from positive macroeconomic developments in most European countries, the EBA points out. Since June 2017, the Common Equity Tier 1 (CET1) have increased slightly from 14.3% to 14.5% and the average ratio of non-performing loans (NPL) has continued its downward trend, from 4.4% in June 2017 to 3.6% in June 2018.
Nevertheless, the report notes an increase in operational risks in EU banks over the past year. Cyber attacks are one of the main threats to the EU banking sector, according to the report.
Legal risks, including breach of European anti-money laundering regulations, are on the rise (see EUROPE 12102). Ineffective internal controls, weak governance, complex processes and risk appetite are all key factors, according to the EBA.
“Several cases of apparent AML failings by banks indicate that AML conduct risks have materialised in a number of EU jurisdictions, pointing to a potentially more widespread need for enhanced and consistent AML supervision in the EU,” the report notes.
These operational weaknesses could erode profits and investor confidence, and even threaten the resilience of banks' capital, the EBA warns.
Brexit. The future exit of the United Kingdom from the EU remains identified as a major geopolitical risk for European banks. These should be prepared for an unfavourable outcome of the Brexit negotiations, says the EBA, which nevertheless points out that the report was drafted before the withdrawal agreement was concluded.
In her view, financial institutions should not rely on public sector solutions. And competent authorities should continue to monitor and follow up on financial institutions' contingency plans. (Original version in French by Marion Fontana)