ESAs published a joint committee report on risks and vulnerabilities in the EU financial system. The report, for the second half of 2017, outlines sudden reprising of risk premia (as witnessed by the recent spike in volatility and the associated market corrections), uncertainties related to the terms of the withdrawal of the UK from the EU, and cyber-attacks as potential sources of instability. The report also reiterates the warning to retail investors investing in virtual currencies and raises awareness about climate-change risks and the transition to a lower-carbon economy.
In light of the ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key. Therefore, ESAs recommend the following policy actions by European and national competent authorities as well as financial institutions:
- Against the backdrop of the potential for sudden risk premia reversals, supervisory stress testing is a crucial tool for the management of systemic risk. The stress tests are intended to ensure that systemically relevant sectors and players—such as insurance and occupational pensions sectors, central counterparties (CCP), banks, and, in the future, asset managers—are safe to withstand market shocks.
- ESAs recommend EU financial institutions and their counterparties, as well as investors and retail consumers, to consider timely mitigation actions to prepare for the withdrawal of the UK from the EU—including possible re-locations and actions to address contract continuity risks.
- ESAs encourage financial institutions to improve fragile IT systems and explore inherent risks to information security, connectivity, and outsourcing. To support this, ESAs will continue to address cyber risks for securities, banking, and insurance markets and to monitor firms' use of cloud computing and potential build-up of cyber risks.
- ESAs recommend financial institutions to consider sustainability risk in their governance and risk management frameworks and to develop responsible, sustainable financial products. Moreover, supervisors should enhance their analysis of potential risks related to climate change (for the financial sector and financial stability).
Keywords: Europe, EU, Banking, Securities, Insurance, Cyber Security, Brexit, Stress Testing, Systemic Risk, ESAs
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