Huw Jones

LONDON, (Reuters) – Banks across the European Union have increased their capital buffers over the last year and increased profitability, but banks must be careful not to pay bonuses or dividends due to market volatility, said the banking watchdog of the bloc.

According to the European Banking Authority, (EBA), it monitors banks’ exposure to London clearinghouses. It also recommends that lenders assess whether sufficient capital is available to protect environment, social, and governance risks (ESG).

EBA released a statement saying that, “Given COVID-19-related uncertainty,” banks should continue to have prudent capital distribution practices.

Last year, EU regulators slashed bank payments as they evaluated the economic impact of COVID-19 locksdowns. But lenders now have the upper hand.

While the aggregate capital level is high, some banks may not be meeting minimum requirements. However, pandemic fallout will be mitigated by central banking funding.

EBA stated, “Banks should refrain from pursuing overly generous dividend and buy-back policies even though supervision recommendations regarding capital distribution are expired.”

EBA stated that supervisors and regulators need to clarify how banks are supposed to replenish buffers that they had tapped in the event of a pandemic.

A “transparency Exercise” was also released by the watchdog for this year. It provides data on 10,000 banks across the bloc, allowing analysts to do comparisons and number crunch.

EBA also stated it was monitoring concentration risks from large exposures EU banks have to clearing house in London. These are equivalent to 9.5% global over-the-counter derivatives clearanced in the second-half of last year.

According to the bloc, temporary authorization will be granted to banks for clearing derivatives in London after June next year. In addition to providing incentives to shift clearing to EU countries,

EBA reported that Britain’s decision to leave the bloc last year has created more legal uncertainty. The EU is becoming increasingly dependent on UK rules regarding handling troubled situations.