That Shrinking Feeling Tracing the changing shape of the EU banking industry Six years after the onset of the global financial crisis, EU banks are still busy shoring up their balance sheets to meet regulatory demands But to what extent have the Basel III rules — announced in 2010 — already changed the way EU banks business? Banks are slimming down EU banks are less bloated with assets than they were previously In 2013, mean total assets at the largest EU banks have fallen by 11 1,097 1,156 1,211 1,196 1,064 EUR bn % 2009 2010 2011 2012 2013 2009=100% Breakdown of assets at EU banks, 2009-2013 210 190 • Cash and cash equivalents 170 The decline has been led by the shrinking of net loans and trading books 150 130 • Investment securities available for sale • Interest bearing deposits at banks • Net loans • Trading account assets 110 90 2009 2010 2011 2012 2013 For more information, please visit www.pwc.com/riskminds An infographic from The Economist Intelligence Unit Banks have reduced their risk exposures In tandem with decreasing their assets, since 2011 banks significantly cut their exposure to adverse market movements Trading book/market risk, 2011-2013 EUR mn 30000 25000 20000 15000 10000 5000 2009 2010 2011 2012 2013 150 Canada & Australia 140 130 120 110 US 100 90 Japan EU The value of mean risk-weighted assets in Europe has been trending downwards 2009=100% Mean risk-weighted assets EU banking industry’s mean credit risk in risk-weighted assets, 2011-2013 Corporate lending Most striking is the reduction in riskier corporate lending and the corresponding rise in government bonds, most of which are safer and more liquid sovereign bonds Government bonds 160,000 9,000 150,000 140,000 8,000 2011 Corporate lending 2012 2013 Government bonds Banks have improved their liquidity position EU banks not only have smaller, less risky balance sheets resting on firmer capital foundations, they are also in a much stronger position to meet a liquidity crunch EU banks increased their holdings of cash and cash-equivalent assets by no less than % 2009 2013 EU banks reduced their short-term borrowings by 38% EU banks lowered the ratio of liquid assets to non-liquid assets A springboard for change? This combination of reduced leverage, increased capital quality and a stronger liquidity position has led to a fitter and leaner banking industry EU banks have already been given the all clear by regulators with average Tier Capital ratios well above Basel III requirements of 4.5% for Common Equity Tier and 6% for Tier Capital ratios (mean), 2009 to 2013 Capital ratio Tier Capital ratio % 14 EUR bn 500 12 2010 2011 2012 2013 2009 2010 2011 2012 421.110 425.862 421.057 454.238 411.677 12 13.4 11.3 13 10 11.8 9.2 11.6 8.4 10.7 2009 100 462.448 200 403.073 462.823 300 367.771 443.334 400 10 Mean net loans and mean total deposits, 2009 to 2013 Net loans Total deposits 2013 At the same time business models are changing, with banks turning away from more volatile activities The past few years have seen some lenders move more towards a deposits-driven business Similarly, commercial loans – many of which are believed to be unsecured – are shrinking faster than consumer loans 2009=100% Value of EU bank loans, 2009-2013 120 110 100 Consumer loans Net loans 90 80 70 Commercial loans 2009 2010 2011 Having passed their preliminary health check, EU banks are now in a stronger, more stable position, which will have more appeal to shareholders The journey to full health, though, is just beginning 2012 2013 ... crunch EU banks increased their holdings of cash and cash-equivalent assets by no less than % 2009 2013 EU banks reduced their short-term borrowings by 38% EU banks lowered the ratio of liquid... 140 130 120 110 US 100 90 Japan EU The value of mean risk-weighted assets in Europe has been trending downwards 2009=100% Mean risk-weighted assets EU banking industry s mean credit risk in risk-weighted... This combination of reduced leverage, increased capital quality and a stronger liquidity position has led to a fitter and leaner banking industry EU banks have already been given the all clear by