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Report on financial structures details structural changes in the euro area financial sector

27 October 2016
  • Consolidation in the banking sector continued in 2015
  • Median CET 1 ratio increased to 14.6% from 14% in 2014 and profitability of the euro area banking sector improved
  • In 2015 the median NPL ratio of banks, although still elevated, declined for the first time since 2008
  • The banking system increased its reliance on deposit funding and became less dependent on wholesale and central bank funding
  • Insurance companies and pension funds are starting to adjust structurally to the low-yield environment
  • The non-bank financial sector (including insurance corporations and pension funds, other financial intermediaries and money market funds) has continued to expand over the past year

The euro area banking sector consolidated further in 2015, according to the ECB’s 2016 Report on Financial Structures, which is published today. The report also finds that banks’ capital ratios improved and that non-performing loan (NPL) ratios fell across the sector for the first time since the financial crisis, although they remained persistently high or increased further in some countries.

The report finds that banking sector consolidation in 2015 was driven by continued pressure to contain costs, deleverage and restructure. The number of credit institutions in the euro area declined to 5,475 at the end of 2015, from 5,614 at the end of 2014. Total assets of the euro area banking sector, including foreign subsidiaries and branches, declined by 1.3% since end-2014 and stood at €27.7 trillion on a consolidated basis at the end of 2015.

In 2015 the euro area banking system increased its reliance on deposit funding, while it became less dependent on wholesale and central bank funding. Capital increases led to higher solvency ratios and lower leverage ratios. The median phased-in common equity Tier 1 (CET1) ratio increased to 14.6% in 2015 from 14.0% in 2014.

Banks’ overall NPL ratio declined in 2015 for the first time since 2008. However, the persistence of NPL ratios well above 10% in Slovenia, Portugal, Ireland, Italy, Cyprus and Greece highlights the need to take additional measures to tackle this problem in order to free up bank capital and allow credit growth to support the economic recovery.

Euro area banks face increasing challenges to sustaining profitability. Banks are continuing their cost-cutting efforts. Structural developments in the euro area banking system continued to differ across countries in 2015. Banking sectors of those euro area countries most strongly affected by the financial crisis also tended to experience the most pronounced structural changes.

Altogether, these developments indicate a continuing trend towards a more traditional banking business – a phenomenon that has already been observed for a couple of years now. The legacy of the crisis is still visible in structural deficiencies.

Turning to structural developments in euro area insurance corporations and pension funds (ICPFs), the financial assets of this sector continued to grow in 2015 and remained strongly concentrated in a relatively small number of countries. While the overall size of the insurance sector grew further, the number of firms continued to shrink. In the current low-yield environment, ICPFs have partially reversed the long-term trend of de-risking their portfolios and life insurers have recently increased sales of unit-linked products. This makes them less vulnerable to a prolonged low-yield period. Still, non-unit-linked products and defined-contribution pension products constitute the bulk of the policies on the balance sheets of life insurers and pension funds.

The profitability of the insurance sector, and in particular the life insurance sector, has been constrained in recent years by the low-yield environment and weak macroeconomic conditions. The solvency positions of the life and non-life insurance sectors are, however, well above the solvency requirements of Solvency I, which was in place until end-2015. Thereafter, the Solvency II regime, which is a harmonised, more fair value-based and more risk-sensitive supervisory regime for EU insurance companies, came into force.

The non-bank financial sector in the euro area – composed of ICPFs, other financial intermediaries (OFIs) and money market funds (MMFs) – has continued to expand over the past year. Last year’s growth was driven mainly by ICPFs and the remaining other financial institutions (i.e. other than MMFs, investment funds and financial vehicle corporations), while growth in the (non-MMF) investment fund sector, which had previously been strong, has stalled since the first quarter of 2015. This was mainly due to a slowdown in net inflows and declining asset valuations, including through exchange rate effects. The share of assets invested outside the euro area declined somewhat, also due to a weakening of the euro vis-à-vis other currencies. Expansion of euro area MMFs slowed, following stronger growth in 2014. Euro area financial vehicle corporations continued to shrink in 2015, owing to further weak securitisation activity by euro area credit institutions.

For media queries, please contact Peter Ehrlich, tel.: +49 69 1344 8320.


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