The establishments were able to count this time on solid capital positions and better quality of the assets, estimates the European Banking Authority.
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The European banking sector had increased its capital reserves at the end of December 2019 which enabled it to tackle the COVID-19 crisis “in a stronger position” than during the financial crisis of 2008-2009, according to the Banking Authority European (ABE).
“The data confirms that the European Union’s banking sector has entered the crisis with solid capital positions and better asset quality,” the institution said in a note published on Monday.
This publication compiles the different levels of bank solvency as well as the proportion of bad debts recorded at the end of 2019 by the banking sectors of 27 European countries, including in the United Kingdom.
On average, the total capital ratio (“CET1 fully loaded”) of the European banking sector – i.e. the banks’ capital reserve compared to assets held, weighted by their risk level – reached 14.8% in the fourth quarter of 2019.
This ratio increased by about 40 basis points (0.4%) more than in the third quarter of 2019, specifies the EBA.
In detail, three-quarters of the banks reported a total solvency ratio greater than 13.4% and all of the banks had a ratio greater than 11%, “well above regulatory requirements”.
“This trend has been supported by the increase in equity capital, but also by the decrease in the amounts of risk exposure,” analyzes the institution responsible for harmonizing banking regulations in the EU.
Because over the years, banks have improved the quality of their assets, notes the authority, noting that they have reduced the share of bad loans in their credit portfolios.
In the fourth quarter of 2019, the weighted average bad debt ratio in the European Union fell to 2.7%, 20 basis points (0.2%) lower than in the third quarter of 2019.
This represents the lowest level of bad debts since the EBA introduced “a harmonized definition of bad debts in European countries”.
However, this average ratio of bad debts hides great disparities between the different countries. The rate of bad debts thus represented 35.2% of credits in Greece or 19.3% in Cyprus at the end of December 2019 against 0.5% in Sweden, 1.3% in the United Kingdom or 2.5% in France.
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