The European Banking Authority (EBA) published today two reports on EU banks’ funding plans and asset encumbrance respectively. The reports aim to provide important information for EU supervisors to assess the sustainability of banks’ main sources of funding. The results of the assessment show that banks plan to match the asset side increase in the forecast years by a growth in client deposits as well as market based funding.
159 banks submitted their plans for funding over a forecast period of 3 years (2018 to 2020). According to the plans, total assets are projected to grow, on average, by 6.2% by 2020. The main drivers for asset growth are loans to households and to non-financial corporates.
Over the forecast period, banks expect to increase client deposits and long-term debt funding while short-term debt and repo funding are expected to fall. The projected data shows a concentration of debt securities issuances in 2019 and 2020. Most likely, these issuances are driven by the conjunction of the maturities of central bank funding and the nearing timeline for G-SIBs to comply with the total loss absorption capacity requirements (TLAC) and the progress in the implementation of the minimum requirements for eligible liabilities (MREL).
Data also shows that the spread between interest rates for client deposits and for loans to clients declined in 2017 and most banks expect the spread to decline even further in 2018. On the cost of funding, banks seem optimistic as they assume their costs of long-term market-based funding in 2018 will remain at 2017 levels. Amid higher competition and a fading support by central banks, the evolution of banks’ interest spread and market-based funding costs should be closely monitored, in particular for those banks that are under pressure to increase profitability or without access to market-based funding at reasonable rates.
The asset encumbrance report shows that in December 2017 the overall weighted average asset encumbrance ratio stood at 27.9%, compared to 26.6% in 2016. The modest increase of the encumbrance ratio is not an issue of immediate concern in the funding structure of EU banks, as it is mostly driven by a reduced volume of total assets as opposed to an increase in encumbered assets. The report shows a wide dispersion across institutions and countries, which is consistent with what was observed in the previous report.
Besides repos, covered bonds and over-the-counter derivatives are among the main source of asset encumbrance. Banks in countries that were more affected by the sovereign debt crisis still have high levels but have shown a decrease in the volume of encumbrance, which could reflect a general improvement in the funding situation in these countries.