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Jargon Buster: EBA

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The financial world is chock-full of jargon with new terms and abbreviations appearing every year. That’s why Blanco’s Jargon Buster series endeavours to make the complex simple and clear those clouds of confusion so finance can be straightforward, relatable and accessible to everyone. This week, we’re diving into everything there is to know about the European Banking Authority (EBA).

What is the EBA?

The EBA is a regulatory body that helps to uphold financial stability across the European Union’s (EU) banking industry. It was established on 1 January 2011 by the European Parliament and took over the functions and responsibilities of the Committee of European Banking Supervisors (CEBS).

The EBA is an independent regulatory agency and has authority over national regulators in the EU. Its function, as the EBA states, is to ensure effective and consistent prudential regulation and supervision” of the banking sector. In other words, the EBA is responsible for harmonising the banking rules and regulations throughout the EU.

How the EBA works

The EBA uses a standardised set of rules to regulate and supervise banking operations across EU countries. They develop the regulatory technical standards and rules for financial institutions to follow. This helps to foster an efficient, transparent and stable single market for banking products and services within the EU.

The EBA is also responsible for market transparency and checks for quality control when new bank instruments are introduced. One of the key objectives of the EBA is to protect investors by overseeing lending institutions, investment firms and credit institutions.

The responsibilities of the EBA

The rules the EBA lays out are designed to meet these objectives:

  • Maintain financial sector integrity
  • Stabilise the EU financial system
  • Quality check new financial instruments
  • Supervise financial institutions
  • Promote cooperation between national authorities that supervise multinational banks
  • Mediate international disputes
  • Promote a simple, transparent and fair market for consumers
  • Ensure consumers, investors and depositors are protected and treated fairly
  • Ensure market transparency and safeguard public values

EBA stress testing and a real-world example

The European Central Bank (ECB) runs annual transparency and stress tests on over 100 EU banks to ensure they are following EBA regulations. This involves collecting data on a particular bank’s capital, profits and losses, credit risk and other metrics to analyse and determine the integrity and robustness of the financial institution, especially during a financial crisis.

In 2016, a stress test conducted on 51 banks revealed that one bank in particular, the Banca Monte dei Paschi di Siena (MPS) in Italy, lacked the appropriate capital reserves to survive a three-year economic shock.

The EBA’s powers are far-reaching and include the ability to overrule national regulators. Following the 2016 stress test, MPS was required to dispose of many non-performing loans from its balance sheet to strategically bolster its capital reserves and satisfy the required three-year threshold.

Stay tuned for our next article to keep busting that financial jargon!

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