Box 2: Achievements of the post-GFC regulatory reform in the banking sector

15 years after the GFC, much progress has been made in reforming the financial rulebook. The broad agenda set by the international regulatory community has given rise to new standards that have contributed to a more resilient financial system – one that is less leveraged, more liquid, better supervised and able to allow an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy. The final implementation of the Basel III framework has led to new requirements that apply to EU/EEA institutions from 1 January 2025. All Member States now have macroprudential authorities and tools with which to oversee and contain risks to the whole financial system. Furthermore, bank supervision has been intensified, especially at large banks, and stress testing has been widely adopted to assess risks for the banking sector. Finally, bank resolution regimes and deposit guarantee schemes have been improved – providing additional safeguards for depositors and taxpayers.

Banks’ capital positions and capital ratios have increased significantly since the GFC. The volume of equity held by EEA banks has almost doubled since 2008 and the ratio of equity to total assets (a proxy of the leverage ratio to overcome changes in regulatory definitions over time) increased by 50% during the same period^[41]. Banks are thus better prepared to absorb shocks and to continue operations during periods of financial distress, increasing financial stability overall.

The introduction of the Bank Recovery and Resolution Directive (BRRD), which aims, together with the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Scheme Directive (DGSD), to create a comprehensive framework for dealing with failing banks without resorting to taxpayer-funded bailouts, has led to a rise in liabilities that can be bailed in if needed. As of June 2024, the average MREL requirement has reached 28.5% of total RWA for G-SII banks and 28.3% of total RWA for top tier and fished banks, both of which are typically subject to bail-in as the preferred resolution strategy^[42]. These requirements compare to average MREL-eligible resources of 33.6% of total RWA for G-SII banks and to 37.2% of total RWA for top tier and fished banks. The progress made since the BRRD was introduced in 2015 is also visible in the stock volume of MREL-eligible debt instruments. As of December 2024, EEA banks have in total raised EUR 1,005 bn in senior non-preferred and senior HoldCo debt, in addition to EUR 388 bn of AT1 and Tier 2 instruments.

The DGSD ensures that depositors are protected by national deposit guarantee schemes (DGSs), which guarantee that deposits up to EUR 100 000 will always be repaid even if the bank holding them fails. For that purpose, there is EUR 79 bn available in the EU to guard depositors against bank failures. To achieve that, banks in the EU have been contributing to the build-up of these deposit guarantee funds over the past ten years, with the deadline for the funds to reach the minimum required target level of (usually) 0.8% of covered deposits for the first time in July 2024. The data for the end of 2024 shows that all 33 EU DGSs had reached that target level or held even more funds than legally required^[43]. In total, the DGSs protect EUR 8.6tn of covered deposits. In December 2023, the EBA assessed that the minimum target level is still accurate to protect depositors and financial stability. Since 2014, the funds have already been used more than 100 times to protect depositors. If DGSs need more means than directly available in the funds, they have in place additional arrangements to require credit institutions to make additional contributions to the fund and/or to make additional short-term funding available. However, fully built-up DGS funds reduce the likelihood that banks will need to provide ad hoc short-term funding when other banks fail.

Box 3: EU/EEA banks’ rising usage of SRTs

Banks’ usage of SRTs has continuously increased in recent years^[46]. EU/EEA banks’ SRTs are slightly more than half of their total securitisation of around EUR 1 tn (here and in the following, considering securitised exposure as volume). RAQ results similarly confirm the wide usage of SRTs by banks: more than half of the banks have so far made use of SRTs and around three quarters of them aim to continue doing so going forward. Around 20% of SRT users are not yet sure about future usage, whereas approximately 5% no longer want to make use of SRTs. Around 20% of banks that have never made use of an SRT aim to issue one in the future. Compared to other jurisdictions, EU/EEA banks have a comparatively big share in worldwide SRT markets, with some analysis estimating their share at around 50%^[47]. At EU/EEA banks, SRT exposure volume corresponds to around 2% of total credit exposure amounts (excluding retention). Nearly three quarters of SRTs’ underlying exposures are related to corporates, including SMEs and CRE financing (Figure 53).

[*] As for the text in this box, the volumes show securitised exposures. The chart on origination years is cut off at 2017; the previous years are smaller in volumes and not shown.

SRTs are not least a means of banks to expand their lending: through securitising exposures, banks can free up capital for new deployment and, for example, to extend new loans. This is of benefit for the economy, as it enables banks to expand lending without for example raising new capital. One of the questions related to SRTs is how much capital is actually ‘freed up’ through them. This can, for instance, be estimated through the implicit capital relief that these transactions provide. High level calculations indicate that there is a wide range of the CET1 capital relief by banks, ranging from around small single digit bps to more than 100 bps. Considering an average CET1 ratio of around 16.0%, the relief thus seems to be limited. One of the risks related to SRTs is if they mature at a similar time, as such creating a kind of ‘maturity wall’ at which the capital relief would suddenly end from banks’ point of view, and assuming that similar volumes of exposures do not mature at the same time. Banking sector-level supervisory reporting data do not indicate any such maturity wall. It remains important that this risk is also properly managed by banks going forward, not least amid their rising SRT usage: if these newly issued SRTs have similar maturities, it can quickly happen that a maturity wall is built up in future (Figure 54).

[*] The CET1 relief calculation is indicative. Several assumptions and simplifications are applied in its calculation, such as the usage of banks’ average risk density for the relief in RWA volumes from their SRTs.

The credit risk of SRTs’ underlying exposures is transferred to investors (protection providers). Amid rising SRT volumes, a key question is who the investors are. It is also important to understand whether these investors are sustainable in nature and will possibly be able to invest in new SRT transactions going forward. RAQ data indicate that private credit funds are the main investors in relative terms (around a third), followed by other investment funds (18%), insurance companies (14%) and pension funds (13%), which shows the interlinkages in the financial sector. Even though the investor base is not evenly distributed, it is still well distributed between different kinds of investors. This might also help to facilitate that, going forward, SRT investors will be available (Figure 55).

Source: EBA Risk Assessment Questionnaire

It remains paramount to understand whether banks are, for instance, investing in private credit funds or other NBFIs that then invest in banks’ SRTs. Such investments of banks could for instance be through lending to private credit funds or NBFIs, potentially contributing to these funds’ / NBFIs’ leverage (on banks’ interconnections with NBFIs see Box 1, which shows, for example, the loan and repo funding from banks to NBFIs). This could create certain ‘circles of risks’, as in the end a private credit fund’s SRT investment would become an implicit risk for a bank that invests – e.g. through providing repo-based or other funding – in that fund (see coverage on NBFIs in the Box 1 above, and more broadly in the July 2024 edition of the EBA’s Risk Assessment Report).