Banks from the United Kingdom were the surprising stragglers in the European Banking Authority’s (EBA’s) stress tests of 48 of the European Union’s (EU’s) most systemically important lenders. Although no bank failed the tests, which measured the ability of banks to withstand market shocks such as a chaotic Brexit or a sharp economic contraction, Barclays and Lloyds were among the three worst performers. The “extreme scenario” capital ratios recorded for the two banks of 6.37 percent and 6.8 percent respectively were relatively poor due to their exposure to riskier credit, according to the EBA. This is primarily due to increased competition and low interest rates, which have forced banks into pursuing riskier business opportunities.
Small German savings institutions behind several big regional lenders are considering merging in what could produce the country’s second-largest bank, with nearly €700 billion in assets. The move is being driven by Helmut Schleweis, the head of Germany’s savings banks association DSGV (Deutscher Sparkassen-und Giroverband), and could mark the beginning of a badly needed process of consolidation within the German banking sector. The plan would first see landesbanks Helaba and NordLB combine, before merging with the asset manager for savings bank DekaBank as well as another landesbank, LBBW (Landesbank Baden-Württemberg), at a later date.
Spanish banks have been given a reprieve by the Supreme Court after it voted to exempt lenders from paying stamp duty on mortgages. Banks were initially put under pressure after being handed the ruling that they must pay a one-off tax of around 1 percent on mortgage loans that was previously being passed to customers. As such, Spanish households could have potentially gained substantially from the decision, with Budget Minister María Jesús Monterocalculating that bank liability for four years of retroactive mortgage taxes could have cost them €5 billion.
With the standoff between Italy and the European Union over the government’s budget plans intensifying, the country’s leaders have been exploring options to protect the troubled banking sector. The government is currently challenging EU rules by ramping up borrowing to jumpstart its economy. With public debt soaring, however, the banking system is being put under increasing pressure as funding costs rise. Senior government official Giancarlo Giorgetti recently acknowledged that the sale of government bonds over recent months has weighed heavily on bank reserves and could well induce another banking crisis.
PKO Bank Polski and Bank Pekao SA have both shown strong resilience in the event of a hypothetical shock to the economy within the EBA’s stress-test results. The results indicated that Pekao’s consolidated CET1 (common equity Tier 1) ratio in 2020 would be 16.5 percent in the base-case scenario and 15.47 percent in the extreme scenario. As for PKO Bank Polski, the ratio in 2020 would respectively be 17.3 percent and 15.93 percent for the two scenarios.
Concerns over the Polish banking sector remain, however, especially in the wake of Polish debt collector GetBack going into default earlier in the year and several members of its senior management being arrested on fraud charges.
The central banks of both Hungary and Poland have recently become the first EU central banks to buy gold since the start of the century. And in Hungary’s case, the central bank bought its first gold since 1986, boosting its reserves by tenfold to 31.5 tons. The reason for the move seems to be partly as a way to increase financial stability and also partly to continue the growing global trend among central banks of boosting gold holdings.
Hungary’s government has also decided recently to scrap state subsidies for home savings-bank deposits. The assistance was initially provided to encourage new home construction, but the government has deemed it too costly and inefficient. As such, banks that sell subsidized savings products could be affected, including Hungarian leader OTP Bank and Fundamenta-Lakáskassza Zrt. A major impact on earnings is not expected, however.
The Czech central bank implemented tougher income requirements for mortgage borrowers from October 1 onwards in a bid to prevent the country’s buoyant housing market from overheating. Czech housing prices have been among the fastest rising in the European Union this year, especially in capital city Prague, as supply is constrained by bottlenecks in construction permits. As such, the country’s lenders are now expecting to tighten their credit to households during the final quarter of the year, having applied more stringent home-loan conditions in the previous quarter. Banks are expecting demand for mortgages to slow and corporate loans to rise, according to a recent central-bank lending survey.
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