What Is the European Banking Authority (EBA)?

The European Banking Authority (EBA) is a regulatory body that works to maintain financial stability in the European Union’s (EU) banking industry. It was established in 2010 by the European Parliament and replaced the Committee of European Banking Supervisors (CEBS).

The Basics of the European Banking Authority (EBA)

The EBA is tasked with developing regulatory technical standards and making rules for financial firms in the EU internal market such as lending institutions, investment firms, and credit institutions.

These rules are designed to maintain the integrity of the financial sector; safeguard public values by ensuring market transparency; stabilize the financial system; monitor the quality of new instruments issued by institutions; protect consumers, investors and depositors; and regulate the supervision of financial institutions. The European Central Bank (ECB) supervises banks and ensures that they follow the rules set by the EBA.

In its bid to ensure a stable financial market, the EBA runs annual transparency exercises and stress tests on over a hundred banks in the EU. The transparency exercises include information on a bank’s capital, risk-weighted assets (RWA), recorded profits and losses, market risk, and credit risk. The EBA’s stress tests on financial institutions are carried out to determine whether each institution would stay solvent in the event of a crisis.

Fast Facts

  • The European Banking Authority (EBA) was established in 2010 by the European Parliament.
  • It replaced the Committee of European Banking Supervisors (CEBS).
  • It was formed as part of the European Supervisory Authority (ESA).

Real World Example

The 2016 stress test carried out on 51 banks from 15 EU and European Economic Area (EEA) countries revealed that only one bank, Banca Monte dei Paschi di Siena (MPS) in Italy, had inadequate capital reserves – measured by common equity Tier 1 (CET1) – to withstand a three-year economic shock. Following the results, MPS turned to a strategy of dumping some of its non-performing loans from its balance sheet in order to increase its capital level to the required threshold.

Background on the EBA

The EBA was formed as part of the European Supervisory Authority (ESA), which also includes the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA). The EIOPA is responsible for protecting insurance policyholders, pension members, and beneficiaries. ESMA seeks to protect participants such as investors, traders and exchanges in the securities markets; it is solely responsible for supervising credit rating agencies.

The Effectiveness of Bank Operations

The 2008 financial crisis and European sovereign debt crisis have brought to light numerous shortcomings in the way banks operate. Following the collapse of the U.S. mortgage bubble and Greece's revelation that its deficits were vastly larger than previously thought, eurozone states such as Portugal, Ireland, Spain and Greece itself were faced with soaring debt-servicing costs and had to seek bailouts from international institutions. 

Fiscal austerity measures designed to allow these countries to exit bailout programs have contributed to a slowdown in European economic growth. At the same time, the introduction of negative interest rates by the ECB and other central banks has squeezed banks' margins.

These factors, combined with increased regulation and poor management, have led to worries about European banks' sustainability. The Italian banking sector, in particular, is struggling under the weight of €360 billion ($400 billion) worth of non-performing loans, around 25% of the country's GDP. MPS is particularly vulnerable, leading to worries that its failure could spark financial contagion and threaten the global banking system. The EBA's purpose is to monitor and improve the operations of the EU banking system.