EBA assesses the market share of non-EU entities in the EU banking system and the dependency of EU banks on funding in foreign currencies

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.

Overview of the results

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.

Notes to the editors

• The identification of non-EU entities and operators was made based on the main assumption of control, which is the holding, either directly or indirectly, of more than 50% of the shares of the entity that operates in the EU.
• The term operator refers to both, financial institutions and non-financial corporations that may provide services to EU banks.
• The different analyses included in the Report rely on different data sources. The analysis on the role of non-EU entities in the EU banking sector is based on a dedicated data collection for non-EU branches and subsidiaries. The analysis on the dependency of EU banks on the provision of services by non-EU operators is based on an ad-hoc qualitative survey. The samples used for the different analyses are explained in the different sections of the Report and may vary from each other.
• Market share figures may represent a slight underestimation, as not all non-EU entities are subject to the same reporting requirements across the EU, and the market share is calculated only for those entities that submitted data. Moreover, the Report does not provide the full picture of the activity of third country entities in the EU because the direct provision of banking services by non-EU entities to EU customers is not captured.
• The analysis on dependency of EU banks on foreign funding shows results based on individual reporting and include data from EU based standalone banks and from EU-registered entities of EU banking groups. The results consider as foreign currency funding all funding denominated in currencies different to the domestic currency of each EU individual bank. For example, when looking at foreign currency funding from a cross-border banking group, no data at consolidated level is considered and each individual entity (parent and subsidiaries) is analysed separately. As a result, domestic currency funding of EU subsidiaries of EU cross-border banking groups is always considered as domestic. It should be noted that due to data limitations non-EU subsidiaries are not included in this analysis.