Funding

Banks’ liabilities grew by around 1% YoY, reaching EUR 26.1 tn as of Q2 2024. Within liabilities, debt securities issued increased the most, by around 8% YoY, reaching a share of 20% in total liabilities (18.7% as of Q2 2024). Customer deposits from NFCs showed the second highest YoY increase in banks’ funding instruments of nearly 5%. Their share in EU/EEA banks’ total liabilities reached 16.7% as of Q2 2024. Customer deposits from households represent the largest share of total liabilities, accounting for approximately 31%, with a YoY increase of around 3%. Other deposits, including those from credit institutions, rose by around 2% YoY. Conversely, other liabilities, which include central bank funding, significantly declined by nearly 16% on a yearly basis. This confirms previously identified trends indicating that banks have effectively reduced their reliance on central banks funding, predominantly substituting it with market-based funding. Regarding the liability mix, dispersion among countries has remained wide. Whereas certain Eastern and Baltic banks, as well as Cypriot, Greek, Maltese and Portuguese banks heavily rely on household deposits, banks from other countries have a higher dependency on market-based funding (Figure 25).

Source: EBA supervisory reporting data

Despite several instances of spikes in market volatility, banks have remained active in primary markets

Market data indicates that EU/EEA banks have remained highly active in primary funding markets over the last 2 years, except for periods of significant volatility. This has resulted in an increase of the proportion of market-based funding in banks’ total liabilities. Issuance activity and volume has also been very volatile throughout the course of the year, with several periods of low or no activity in primary markets. This was not least the case at the time of events related to the New York Community Bancorp and Japanese Aozora Bank earlier this year, when French snap parliamentary elections were announced in the summer, as well as end of July / beginning of August when financial markets’ volatility spiked amid the events related to the unwinding of Yen carry trades. Although banks managed to make use of their windows of opportunities, issuance volumes were found to be below last year’s volumes for the majority of seniorities. Issuance volumes of covered bonds were also marginally below 2022 volumes. Only the volume of issued AT1 and T2 bonds was higher than in the last 2 years (Figure 26).

Source: Dealogic

(*) Cut-off date for this chart was 30 September 2024.

In the context of falling interest rates, banks have experienced a reduction in their expenses associated with market-based funding on an annual basis. This was generally supported by lower yield curves, but also a decline in spreads (see Chapter 1 on the interest rate environment). The contraction in spreads was observed for all seniorities of bank debt, albeit with some volatility during this year. However, none of these occurrences saw spreads reaching the levels recorded during the Silicon Valley Bank and Credit Suisse induced events in spring last year. It may be reasonably assumed that these rather muted moves of spreads helped banks to comfortably place their debt last and this year. However, the decline in overall yields might not least be the main reason of heightened interest in subordinated instruments. It is possible that investors searched for rather high-yielding instruments in a time of rate reductions, leading to the YoY increase in issuance volumes of these instruments (Figure 27).

Source: Bloomberg

Source: IHS Markit*

(*) With regard to IHS Markit in this chart and any further references to it in this report and related products, neither Markit Group Limited (‘Markit’) nor its affiliates nor any third-party data provider make(s) any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. Neither Markit nor its affiliates nor any data provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the Markit data, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom.

Greenium of banks’ issued debt on a declining trend

A frequently debated topic in funding is the potential impact of ESG aspects in pricing. There are ongoing discussions about whether bonds classified as ‘green’ could have lower funding costs. There is no clear proof for this, and any analysis in this respect bears the risk of being incomplete. Based on EBA calculations using a sample of pairs of green and non-green (conventional) bonds one might for instance observe that covered bonds consistently have a very small, but rather constant ‘greenium’ over time, i.e. the funding costs of green covered bonds tended to be slightly cheaper than those of conventional covered bonds during the analysed period^[1]. In contrast, senior preferred bonds’ ‘greenium’ is much more volatile. Their greenium also spiked during the Silicon Valley Bank and Credit Suisse induced events, indicating that investor demand for such green instruments might have been higher than for other instruments. In recent months the ‘greenium’ declined and even temporarily reached negative territory, i.e. green senior preferred bonds’ funding costs were even higher than those of conventional ones, before rising again recently. The decline below zero might reflect a trend of a maturing market in which green issuances are no more ‘scarce’ as it had been in the past, but it might also be potentially waning interest in ESG and green investments, which might have reverted again^[2]. Another driver is that green bonds are becoming more mainstream products, leading investors to focus more on what these bonds specifically finance. They might be less likely to pay a premium solely for the green label, driven due to growing concern about greenwashing (see Box 10 on greenwashing risk). The development of the senior preferred greenium can also be affected by the supply side and overall market trends^[3]. Issuance data shows that the relevance of senior preferred green bonds was higher than last year (Figure 26). The ‘greenium’ of non-preferred senior instruments also showed elevated volatility, with values occasionally dropping below zero on in the considered period. These were periods of elevated volatility, and investors might have preferred to invest in potentially more standardised conventional instruments in this range of the seniority of bank bonds (Figure 28). At the same time supply of green bonds as share of total non-preferred issuances declined YtD compared to 2022 (Figure 26).

Customer deposits have remained an attractive funding instrument for banks

With a share of nearly 50% in banks’ total liabilities, customer deposits from NFCs and households are the most important funding instruments. Despite periods of elevated uncertainty, banks have managed to increase their deposit base. This comes despite a flattening in the increase in the cost of deposits. Data indicates that rates for household deposits continued to rise until the first quarter this year, although this was from a very low base, and stayed flat afterwards. Rates for NFC deposits rose more than those for household deposits and while they remain notably higher, they have not yet flattened, even though their growth rate seems to decelerate in recent quarters. This confirms a general observation that deposit betas tend to be higher for NFC deposits than for household ones^[4]. Country-level analysis shows that, on a YoY basis, the higher rise in costs for NFC deposits vs household ones is similar across the board. It also shows that in Member States that started their interest rate cuts earlier, deposit rates have already started to decline. In the case of Hungary, for example, data indicates that interest rates significantly declined for household deposits, whereas those for NFC deposits remained relatively stable. However, data for Poland does not confirm this view, as the decline in deposit rates was more pronounced for NFCs than for households (Figure 29)

Declining relevance of central bank funding – asset encumbrance ratio further decreasing

Central bank funding significantly declined during this year, mainly driven by further repayments of the ECB’s TLTRO. Whereas the outstanding amount stood at around EUR 400 bn in the beginning of this year, the remainder is now at around EUR 29 bn. This will need to be repaid by December 2024, when the programme will end. Furthermore, the outstanding amount of the ECB’s LTRO was around EUR 11 bn, and of the main refinancing operations (MRO) around EUR 12 bn as of September 2024^[5]. In comparison to total liabilities, these are rather insignificant amounts. In addition to the end of the TLTRO, the ECB’s asset purchase programmes are also being phased out. This is expected to affect market liquidity, which may in turn have an impact on banks’ funding. Furthermore, this could also affect other areas of banking activity, such as trading, and other areas that might be impacted by potential heightened market volatility.

In parallel to the decrease in central bank funding, the EU/EEA banks’ asset encumbrance ratio has also further declined recently. The ratio stands at 24.2% as of Q2 2024, down from 25.4% one year ago. This compares with levels of nearly 30% in the preceding years. There is a considerable dispersion between countries. Countries with rather higher asset encumbrance ratios tend to be those with banks that make more use of covered bonds as part of their funding mix, for instance^[6].

Household deposits focus area for bank funding going forward

Looking forward, EU/EEA banks expect that retail deposits will be a key focus area in their funding mix for the next 12 months, based on RAQ results. Senior preferred bonds represent the second most important funding instrument, whereas NPS bonds and instruments issued from HoldCo have continued their declining trend already observed in previous RAQ editions. The latter is presumably reflecting that most EU/EEA banks meet their MREL subordination requirements. Future issuances in this segment will presumably be due to changes in those requirements or due to the replacement of respective outstanding debt (see also Chapter 3.2 for the MREL related analysis).

RAQ responses confirm expectations that, subsequent to their repayments, there are clearly no plans for banks to increase their central bank funding again. However, this would always constitute a potential source of funding to resort to if needed, for instance, during market upheaval amid materialising geopolitical risks or similar situations. The decline in asset encumbrance ratios indicates that banks have also room to potentially use the new unencumbered assets for the purposes of respective funding, assuming they fulfil the related requirements for collateral. RAQ results also show that around 50% of EU/EEA banks intend to decrease their rates for household deposits, and the share of banks planning to do so for NFC deposits is even slightly higher. Decreasing deposit rates is a natural result in times of interest rate cuts by central banks.  However, this might present challenges for those who plan to increase retail deposits. Nevertheless, around 40% of banks aim to keep their rates for retail deposits stable. Furthermore, according to the RAQ results, there are no plans to increase fees for deposits and current accounts by most of the banks. There are neither major differences between responses in the various regions for this question.

Regarding the cost of market-based funding, RAQ results also show that more than 50% of the banks expect stable spreads in the next 12 months for nearly all instruments. This view is mainly driven by banks in the Southern and Western European countries and supported by banks from the Northern region. In the Eastern region the share of banks expecting stable spreads is between around 20% and 30% for the majority of instruments. Depending on the region, there are partially up to 20% of banks expecting a contraction in spreads, which is particularly driven by banks from the Eastern region. About 10% or less of the banks expect an increase. The percentage increases for NPS/HoldCo instruments, for which around 15% of the banks anticipate a widening of spreads.

Minimum requirement for own funds and eligible liabilities

MREL shortfalls are nearly bridged, refinancing needs appear manageable, resolution planning is still evolving

In the EU/EEA, banks with a resolution strategy other than liquidation represent about 80% of the total assets of the banking sector. Resolution strategies ordinarily entail a MREL above minimum capital requirements, requiring banks to build loss-absorbing capacity, which generally involves the issuance of eligible instruments. From 1 January 2024, all resolution banks with an MREL requirement should disclose their MREL requirement and resources unless they benefit from an extended transition period. The most recent EBA MREL Dashboard^[7] provides a list of the entities in question.

According to the EBA’s latest MREL Dashboard as of June 2024, the majority of resolution banks are in compliance with current requirements set by their respective authority. Nevertheless, 21 banks still in their transition period report a shortfall against their target totalling EUR 6.1 bn, or 0.1% of RWAs of the sample – of which EUR1.1bn is due over the next 12 months. This reflects the fact that under certain conditions institutions may be granted a longer transition period. In terms of stock, on average, MREL-eligible resources including own funds reached 33.6% of RWAs for G-SIIs, 37.2% of RWAs for Top Tier (TT) and fished banks,^[8] and 28.4% of RWAs for other banks, of which 27.8%, 29.2%, 21.9% of RWAs are subordinated, respectively.

On top of any outstanding shortfall, banks in the sample reported EUR 220 bn of MREL instruments other than own funds, which will become ineligible at the latest by the end of June 2025 as they will fall below the 1 year remaining maturity criterion. This is outstanding MREL funding that banks need to refinance over the next 12 months to keep their MREL levels (ceteris paribus). Overall, this represents 18.6% of the total MREL resources other than own funds. These figures show that, although most reporting banks already met their post-transition period MREL requirements by the end of 2023, issuance needs of MREL-eligible instruments continue to be significant, when taking the maturity criterion for eligibility into account.

Of the total EUR 220 bn, EUR 68 bn relates to G-SIIs (15.7% of their total MREL resources other than own funds), EUR 133 bn to TT and fished banks (20.7% of their total other than own funds) and EUR 18.6 bn to other banks (18.3% of their total other than own funds) (Figure 32).

While those refinancing needs – assuming that banks indeed aim to refinance them as such (calibration and RWAs could impact fundings up or downwards) – are significant, banks have presumably reflected them in their funding plans. Considering EU/EEA banks’ YtD primary market activity, which reached nearly EUR 250 bn senior preferred and NPS issuances as of Q3 2024, it seems reasonable to assume that they should once again be in a position to place similar volumes of instruments over the next 12 months, assuming no major deterioration in the market (see Chapter 3.1.).

Liquidity positions

At the end of the year 2023, EU banks recorded an average weighted LCR of approximately 168%. Although there has been a decline in LCR since then, banks' available liquidity remains substantial and is higher compared to that observed at the same period last year. Key liquidity indicators continue to exceed regulatory minimums, thereby underscoring the robust liquidity position of EU/EEA banks. As of June 2024, the LCR was at 163.2% (+2.6 percentage points YoY), while the NSFR stood at 127.6% (+1 percentage points YoY).

Market volatility caused an increase in net outflows which drive LCR lower

The temporary increase in LCR, as reported in the second half of 2023, was mainly due to an expansion in available liquid assets and, to a lesser extent, a reduction in net outflows. The former was primarily driven by an increase in banks’ Level 1 securities liquid assets, despite the reduction in cash and central bank reserves. The decline in the LCR in the first half of 2024 was primarily attributable to a notable rise in net outflows, amounting to 0.4 p.p. of assets. The increase in net outflows in the first half of 2024 is partially explained by the fact that the growth rate of deposits exempted from the calculation of the outflows decelerated. This was due to the lower migration of retail deposits from demand to term deposits, which are exempted from the outflows calculation. At the same time, liquid assets saw only a modest increase of 0.1%. As of June 2024, liquid assets accounted for 20.8% of total assets (20.7% as of December 2023), with net outflows standing at 12.7% (12.3% as of December 2023) (Figure 36).

Source: EBA supervisory reporting data

The rise in gross outflows between December 2023 and June 2024 is mainly due to higher outflows from other liabilities and non-operational deposits. The market turbulence in April 2024, which was triggered by weaker-than-expected U.S. first-quarter GDP figures, led to a decline in asset prices and heightened volatility (see Box 2). In this context, the increase in outflows from derivatives (classified under ‘other liabilities’) was primarily driven by negative market values resulting from elevated market volatility. Moreover, outflows from secured funding transactions (classified under ‘secured lending’) rose, as counterparties likely demanded additional collateral to mitigate valuation risk (Figure 37).

The slight rise in liquid assets from June 2023 to June 2024 (+0.4% YoY) was attributed to an expansion in government assets, Level 1 covered bonds and Level 2B assets, despite the decline in cash and central bank reserves. Further withdrawals of deposits could exert additional pressure on cash and reserves. Notwithstanding these changes, cash and central bank reserves continued to represent the largest share of High-Quality Liquid Assets (HQLA), accounting for 52% (70% and 60% in June 2022 and 2023 respectively). Conversely, government assets and Level 1 covered bonds saw an increase in their share of total liquid assets, reaching 33% and 6% respectively by June 2024, up from 26% and 4% in June 2023 (Figure 38).

To maintain their liquidity buffers, EU/EEA banks are modifying their HQLAs by bolstering their holdings of government assets and Level 1 covered bonds. During the year 2023, the issuance of covered bonds reached multi-year highs, with banks being one of the primary investors in other banks’ covered bonds. This brought the share of covered bonds in HQLA up. Banks also increased their holdings in sovereign exposures, not least to lock in higher rates (see Chapter 2.1). The rising volume in sovereign bonds held by EU/EEA banks also provides them with the possibility of using those as collateral in repo funding. For the EA, this would accordingly be reflected in an uptick in bank activity within the repo markets. In July 2023, the ECB lowered the remuneration rate on minimum reserve requirements (MRR) from the deposit facility rate to 0%. This might have provided an additional incentive for EA banks to reduce their central bank deposits, besides the TLTRO-related repayments.

Weighted average LCRs for USD is below 100%

Although the weighted average LCR for EU/EEA banks remains well above regulatory minimum levels, there are significant variations across currencies. On a yearly basis, the average EUR LCR exhibited an upward trend with values close to the overall LCR (EUR LCR of 156% as of June 2023 and 157% as of June 2024). Conversely, other major currencies were reported to be considerably lower. For example, GBP LCR value was reported at 131% in June 2024 (121% in June 2023). The USD LCR was reported even lower. As of June 2024, the USD LCR stood at 110%, a figure that compares favourably with previous quarters, when it was reported to be below 100%. A number of banks continue to report a USD LCR below 100%. The mismatch is particularly evident for some of the larger institutions. Low levels of LCR in one or several foreign currencies may create vulnerabilities in periods of high volatility, as the possibility for banks to raise funding in other currencies or to cover the risk of FX on markets may be undermined (Figure 39).

The NSFR shows a comfortable position for banks in all jurisdictions

As of June 2024, the weighted average NSFR of EU/EEA banks stood at 127.6%, representing a marginal increase from the previous year (126.6%). The reported ratio was well above regulatory minimum for all banks and countries. In fact, several countries reported an average of more than 150% (Figure 40).

The period of Central banks’ accommodative monetary policies was supportive for banks in securing stable funding sources and complying with the NSFR. The gradual repayment of ECB’s TLTRO-3 facilities and the comparatively higher costs associated with traditional funding sources - due to higher interest rates being passed on to deposit rates and higher yields in secured and unsecured bank debt markets - contributed to an initial decline in NSFR from June 2022 to June 2023. As a consequence of banks substituting part of their TLTRO funding with market-based funding, the reported NSFR began to increase in the second half of 2023 and continued to rise throughout the first half of 2024.

Despite the move towards market-based funding, the principal components of the NSFR have remained largely unchanged over the past year. In the numerator, retail deposits form the largest share of bank's ASF, representing 48.1% of the total. Liabilities with unspecified counterparties constitute 14.8% of the total ASF. Capital accounts for 12.9%, funding from non-financial customers represents 12.4%, and funding from financial customers and central banks makes up 8%. With regard to the denominator, loans remained the primary component, representing 78.8% of the total required stable funding. (Figure 41).

Figure 41a: Components of the NSFR (ASF), Jun-2024

Source: EBA supervisory reporting data

Source: EBA supervisory reporting data

Abbreviations and acronyms