To advance towards banking union it is necessary to reduce systemic risk, and the quality not just the level of capital is ever more important. The most important risks associated with the banking sector remain the volumes of non-performing loans and the exposure to sovereign debt.
The banks have made significant efforts to improve the quality of their assets, and the analysts at Morgan Stanley estimate an NPL ratio in Europe in 2020 of around 30%. The next step is to analyse the sovereign debt portfolios, for those which still don´t have a risk rating agreed, although it is key to creating a pan-European deposit guarantee system.
The experts at Morgan Stanley have reviewed different hypothetical scenarios in which additional capital requirements could be applied depending on the concentration of sovereign risk. In this way the banks would incentivised to hold a wider diversification. The estimated impact would ne 20bp in the CET1, with a particular impact on medium sized Italian and Spanish banks (between 50 and 80bp). The NII of these latter could suffer negative impacts of -4%/-6%, especially relevant for Unicaja, Bankia, Banco BPM and MPS.
The implementation of these measures is expected to be gradual and over the long term, which would allow the banks to adjust their portfolios of sovereign debt and optimise the impact.