EBA: Banks plan more debt issues to counterbalance declining central bank funding

• Banks’ total assets increased by 1.3% in 2022. Strong loan growth to households and non-financial corporates (NFCs) was offset by a decline in cash balances, related to the Targeted Longer-Term Refinancing Operations (TLTRO) repayments.
• Banks’ reliance on public sector sources of funding is set to fall in 2023, due to TLTRO funds reaching maturity. Most banks have cash and cash balances at central banks that exceed the maturing TLTRO amounts.
• Deposits grew by 4.4% in 2022, and by the end of the year represented 75% of banks’ total funding sources. In 2023, deposit growth is expected to slow down to 2.8% for deposits from households and NFCs.
• Banks plan to issue more debt instruments in the coming years to make up for an expected decline in central bank funding but equally to comply with minimum requirement for own funds and eligible liabilities (MREL) requirements. In 2023, banks plan to increase market-based funding by 5.5%, with a focus on senior unsecured instruments and covered bonds.
• The difference between interest rates for loans to clients and client deposits has increased significantly in 2022 and banks expect it to increase further.

The European Banking Authority (EBA) today published its annual funding plans Report, covering 159 banks that submitted their funding plans for a forecast period from 2023 to 2025. The plans show banks’ intentions to increase market-based funding over the forecast period. As extraordinary long-term central bank funding matures, banks plan to shift to short-term and long-term debt securities instead. This changing funding composition is particularly relevant in 2023 and 2024 when high amounts of central bank funding mature (TLTRO) and MREL targets become applicable. The Report highlights a sizable increase in banks’ interest margin, with interest rates for loans rising faster than for deposits.

Central bank rate hikes and the rise in spreads for market-based funding instruments have contributed to higher funding costs. The figures included in the Funding Plans Report are based on a sample of 159 banks as of December 2022, covering more than 80% of the EU/EEA banking sector by total assets.