Non-performing loans (NPLs), volatile market risk, shifts in IT outsourcing and cyber attacks as well as sovereign/political uncertainty and the low interest-rate environment are some of the high or medium risks face by EU banks, according to the European Banking Authority's (EBA's) report on risk indicators in Q4 2016. The report identifies some of the main risks and vulnerabilities in the EU banking sector as follow:

• Credit risk/NPLs (high but stable): NPL ratios remain systemically high in the EU and banks are reducing their NPL legacy assets slowly due to structural impediments such as slow judiciary and slow loan recovery processes.
• Market risk/financial market volatility (high but stable): Volatility and valuation risk on financial markets remains high and there a high risk of sudden decrease in market liquidity. This is expected to persist in the uncertain political environment.
• Operational risk/IT outsourcing & cyber attacks (high but stable): Risks from IT outsourcing remain high as dependence on third-party providers and cyber connectivity continues. The need for investment in fragmented systems and developing technology means some banks are at risk from cyber attacks.
• Sovereign & political risk (high but stable): Sovereign and political risks are high due to increased political uncertainty.
• Fragmentation (high but stable): Fragmentation of asset quality and profitability remains high.
• Reputational and legal risk (high but stable): Reputation and legal risks arise from continuing scope for cases of misconduct and lengthy settlement processes for banks. Incurring conduct costs are not abating, and volumes of compensation and redress payments are expected to remain high.
• Concentration risk/low interest rate (medium but increasing): Interest income remains under pressure in an environment of low interest rates. However, if/when interest rates rise, banks with high levels of NPLs could be at increased risk.
• Funding risk (medium risk): Access to funding and funding structure remain a medium risk because banks have attained increasing volumes of unsecured funding, while volumes of secured funding have decreased.
• Regulatory and legal environment (medium risk): Regulatory uncertainty remains a medium risk as the uncertainty on coordination of international financial regulation continues, with an emerging potential for regulatory arbitrage.

For more detail on risk in the EU banking sector, see the EBA's risk dashboard report.