Joint Committee report on risks and vulnerabilities in the EU financial system

On 11 September the Joint Committee of the European Supervisory Authorities published a report on the Risks and Vulnerabilities in the EU Financial System.

The key conclusions of the report are:

  • the financial markets experienced a return of market volatility in the first half of 2018 with episodes of sharp equity price declines and a sizable widening of sovereign and corporate bond spreads. These developments might reflect a return to normality, following an extended period of ultra-low interest rates. There is potential for further market volatility stemming from investment repositioning of both participants and portfolio reallocations which this remains a key source of concern;
  • the risks related to the re-pricing of risk premiums and increasing interest rates directly affect both financial institutions and retail consumers and can be contagious;
  • doubts around the terms of the UK’s withdrawal from the EU may expose the EU27 and the UK to economic and financial instability, leading to weakened market confidence. 
The ESA’s recommend the following policy actions:
  • given the backdrop of rising interest rates and the potential for sudden risk premium reversals, it remains crucial to conduct and develop further stress test exercises across all sectors;
  • supervisory authorities need to pay continued attention to the risk appetite of financial institutions;
  • prudential authorities should contribute to further address possible contagion risks through monitoring lending standards and asset quality;
  • EU financial institutions and their counterparties continue plan for and mitigate the risks arising from the UK’s withdrawal from the EU. The plans should address the relevant risks that  any inconclusive agreements on withdrawal terms might pose.
Q&A on regulation

On 17 September EIOPA published new sets of questions and answers on:
  • answers to (EU) No 2015-35 supplementing Directive 2009-138;
  • answers to (EU) No 2015-2450 - templates for the submission of information to the supervisory authorities;
  • answers to (EU) No 2015-2451 - templates and structure of the disclosure of specific information by supervisory authorities;
  • answers to guidelines on valuation of technical provisions.

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