03 October 2022
The European Banking Authority (EBA) today published a Report on the reliance of the EU financial sector on counterparties, operators, and financing originating from outside the Single Market. As of June 2021, 360 banks controlled by non-EU entities were operating in the EU representing 12% of the Union’s total banking assets. At the same time, EU banks had, on average, 19% of their total funding denominated in significant foreign currencies. These findings reflect the high degree of openness of the EU economy within the global financial system. While raising funding from non-EU sources brings opportunities, it may create vulnerabilities in some areas. Against this background, matching foreign currency assets with liabilities denominated in the same currency is generally considered prudent risk management.
The first part of the Report focuses on the role of non-EU entities in the EU banking sector. As of June 2021, their market share was 12.2% of total banking assets, 11.4% of loans, 6.6% of debt securities and 31.4% of derivatives. Non-EU entities active in the EU are most active in the wholesale banking activities, with EU credit institutions and other financial corporations as their main counterparties. This finding is partly explained by the presence in the sample of investment banks and of one large clearing house, which together represent more than half of the assets of all non-EU entities operating in the EU.
Concerning the use of EU banks of services provided by non-EU operators, 20% of EU banks’ total fees and commissions expenses were credited to operators residing outside of the EU. Payment services, clearing and settlement and custody services are among the most common types of activities that EU banks source from non-EU operators.
The Report also investigates the dependency of EU banks on foreign currency funding. As of June 2021, 19% of EU banks’ total funding was denominated in significant foreign currencies. When looking at the key liquidity metrics, EU banks reported strong overall liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) positions. However, for many banks these metrics drop in individual foreign currencies below the 100% threshold. Low levels of LCR or NSFR in several significant currencies may cause problems during stress periods when liquidity may be scarce and the FX swaps markets may become difficult to access.
Franca Rosa Congiu