EBA´s recommendations on windfall profit tax, loan moratoria and capital distributions plans on European banks

The European Banking Authority (EBA) published its annual risk assessment report of the European banking system warning about the impact of a deteriorating macroeconomic environment. The report also provides recommendations on several banking issues such as windfall taxes, forbearance measures, including loan moratoria, and capital distribution plans.

Main conclusions of the risk assessment report:

• Bank profitability has improved up to an average Return on Equity (RoE) of 7.8% in the second quarter of 2022 (from 7.4% one year ago). Despite these improvements, the average RoE still below the estimated cost of equity for many banks, which according to the report stands above 8% in many cases.
  
  
• Bank capital and liquidity ratios remain high but have declined slightly year on year. The average common equity tier 1 ratio has reached 15.0% while the liquidity coverage ratio 165.1%.
  
  
• Low level of non-performing loans (NPL) volumes, the average NPL ratio stand at 1.8% in the second quarter of 2022 (2.3% a year ago). However more than half of the banks expect a deterioration in asset quality for SMEs, large corporates and consumer credit portfolios.

The report contains among others the following recommendations:

• Newly introduced windfall taxes should not compromise long run viability of banks: According to the EBA, strong banks are a safeguard for financial stability in the long run. Thus, new taxes should not prevent banks’ capacity to attain an adequate return on capital to be viable over the long run.
  
  
• Forbearance measures should target truly vulnerable borrowers and not rely on one size-fits-all approaches: Banks should explore not only moratoria on loan repayments but also other measures, for instance related to interest payments, debt for equity swaps…
  
  
• Banks should pursue prudent capital distribution policies in order to safeguard their financial resilience: banks should carefully consider dividend, share buy-back or bonus policies.