European banks can expect more political uncertainty in 2018, but their relatively strong capitalization should put them in a robust position to handle risks, according to analysts at S&P Global Ratings.
German politicians remain in negotiations over a new governing coalition following elections in September, while Britain and the EU continue to haggle over Brexit, and Italy prepares to go to the polls in March 2018. Yet banks in both the U.K. and elsewhere in Europe are well-positioned thanks to recent efforts to shore up their balance sheets, S&P analysts said.
"We've seen banks in Western Europe strengthen their balance sheets this year," said Elena Iparraguirre, Madrid-based director for financial institutions, in presenting the agency's 2018 global financial services outlook.
"We believe that a strengthening of U.K. balance sheets has put them in a better position to deal with risks associated with Brexit," added Brendan Browne, New York-based senior director for financial institutions.
Iparraguirre also said European banks will be more affected than peers elsewhere by the latest standards from the Basel Committee on Banking Supervision because of their greater reliance on internal, rather than standardized, models for calculating the riskiness of assets. Under the finalized package of Basel III rules announced Dec. 7, banks will be subject to a cap on the extent to which the results from internal modeling can vary from those of a standardized approach.
Browne added, however, that the finalization of Basel III "should be a high-water mark" for capital regulation, saying: "The regulatory story has plateaued now."
S&P said shortly after the rules were announced that it expected any adverse effect on banks to be mitigated by several factors, including the slow implementation foreseen for the new rules, pre-emptive management actions such as asset sales, and the likelihood that national or regional regulators may see the rules as an opportunity to ease up on the approach to banks they supervise.
Central banks in Western Europe will start to normalize monetary policy in 2018 and 2019 after many years of low or subzero interest rates, but this will happen at a gradual pace, Iparraguirre added.
"We don't expect big changes in monetary policy, certainly not in 2018," she said.
The Bank of England and the European Central Bank both announced Dec. 14 that they were leaving benchmark rates unchanged. Their decisions were announced one day after the U.S. Federal Reserve raised its benchmark rate and said its policymakers envisioned three further hikes in 2018.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.