After the 2007-08 financial crisis and ensuing liquidity crunch in the global banking sector, regulators have put more stringent rules in place to make bank balance sheets healthier. Measures such as Basel III and the Capital Requirements Directive IV set strict requirements for capital buffers for European banks. The institutions have worked hard to increase capital buffers and crank up Tier 1 capital.
As a result of their efforts, over the past five years the average end-point common equity Tier 1 (CET1) ratio at the EU global systemically important banks (GSIBs) went up from 9.9% at the end of 2013 to 13.1% by the end of 2018. This is well above the levels required by Basel III, but 2018 marked the first time since the Association for Financial Markets in Europe started tracking these parameters that there was a year-on-year decline in both CET1 and Tier 1 capital ratios. They went from 13.4% and 15.1% in 2017 to 13.1% and 14.9% in 2018, respectively.
Aside from bank-specific factors, there are two overarching reasons for the lower solvency ratios: the implementation of the new accounting standard (IFRS9) and an increase in risk-weighted assets (RWAs). IFRS9 contributed a weighted average negative 24 basis points, the same impact as an increase in RWAs by seven of the 12 banks in the data set.
At the same time, European banks pulled back strongly, raising capital, putting an end to the huge bank rights issues that defined much of 2014-17. A mere €22bn was raised in 2018, mostly via contingent convertibles, which was the lowest volume over the past decade.
Instead, European banks continue to prepare for the implementation of minimum total loss-absorbing capacity and minimum requirement for own funds and eligible liabilities requirements. They have ramped up the issuance of senior non-preferred bonds as a form of ‘bail-inable’ debt. By September 2017, EU GSIBs had issued a cumulative €26.4bn of this type of loss-absorbing debt, which has ballooned to €110.4bn by the end of the first quarter of 2019.
