The European Union’s (EU) securities, banking and insurance sectors continue to face a range of risks, the latest report on risks and vulnerabilities in the EU financial system by the Joint Committee of the European Supervisory Authorities (ESAs) shows. The autumn 2018 ESA report highlights the following risks as potential sources of instability:
- abrupt yield increases could generate substantive asset price volatility and lead to losses across asset classes;
- repricing of risk premia and potentially increasing interest rates could affect financial institutions and may bring with them a risk of contagion between different sectors; and
- uncertainties around the terms of the UK's withdrawal from the EU and the need to prepare for a no-deal scenario, as well as trade policy uncertainties and wider geo-political risks.
In light of the ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key. Therefore, the ESAs advise the following policy actions by European and national competent authorities as well as financial institutions:
- Stress tests – should be conducted and developed further across all sectors. Rising interest rates and the potential for sudden risk premia reversals should be included in the scenarios, as is the case for both the EIOPA 2018 insurance stress test and the EBA 2018 EU-wide bank stress test exercise. In addition, ESMA is progressing in developing its approach to stress testing in the asset management industry;
- Risk appetite – supervisory authorities need to pay continued attention to the risk appetite of all market participants. Banks should accelerate addressing their stocks of non-performing loans (NPLs) and adapt business models to sustainably improve profitability, while financial institutions need to carefully manage their interest rate risk. Similarly, retail investors should carefully consider the risk attached to moving into higher yield leveraged products;
- Contagion risks – macro- and micro prudential authorities should contribute to addressing possible contagion risks, including continuing their efforts in monitoring lending standards; and
- Brexit – it is crucial that EU financial institutions and their counterparties, as well as investors and retail consumers, plan appropriate mitigating actions to prepare for the UK’s withdrawal from the EU in a timely manner, including the risks associated with a no-deal scenario.
The Joint Committee is the forum for cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the European Supervisory Authorities (ESAs). Through the Joint Committee, the three ESAs cooperate regularly and closely to ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board (ESRB). Further information:
Communications Officer European Securities and Markets Authority (ESMA)
Tel: +33 (0)1 58 36 43 27