The European Banking Authority (EBA) recently published its annual update on EU banks’ funding plans, which helps EU supervisors assess the sustainability of banks’ main sources of funding. The results of the funding plans assessment show the impact the pandemic had on EU banks’ funding composition. The plans point to a gradual ‘normalisation’ of banks’ sources of funding over the next three years. This implies in particular a partial replacement of central bank funding with market-based funding.
160 banks submitted their funding plans for a forecast period of three years (2021 to 2023). Banks’ total assets increased by 8% in 2020, mainly driven by a surge in cash balances at central banks because of central bank support measures introduced in response to the pandemic. While loan growth was sluggish in 2020, banks expect loans to non-financial corporates (NFCs) and to households to grow by 4% per year over the forecast period 2021 – 2023.
In 2020, client deposits surged and by the end of the year represented 73% of banks’ total funding sources. Banks’ reliance on public sector sources of funding (such as the ECB’s TLTRO programme) increased significantly, and as of December 2020 contributed almost 7% to banks’ total funding. While deposits will continue to be the main source of funding, banks plan to focus on issuing more debt instruments (mostly unsecured instruments) in the coming years, to make up for an expected decline in central bank funding but equally to comply with MREL requirements.
Data also shows that the spread between interest rates for client deposits and for loans to clients declined in 2020 and is expected to decline further in 2021. Despite the market turbulence in the first half of 2020, banks reported a decline in their market-based funding costs in 2020. In 2021, most banks expect funding conditions to remain very benign and costs to decline even further.