ESMA published the first trends, risks, and vulnerabilities (TRV) report of 2020. In addition to the level of risks in EU, the report also takes an in-depth look at three specific issues via articles on the implications of bigtech for the financial sector, the short-termism pressures from financial markets, and the risk exposure of EU funds to potential bond downgrades. As per the report, risks in markets under the remit of ESMA remained high, particularly in securities markets and for consumers.
The report shows that market risk remained very high in the second half of 2019, amid continued geopolitical uncertainties, including Brexit and US-China trade relations. Credit risk and liquidity risk also remained high. Credit risk, in particular, remains elevated with deteriorating corporate debt quality and increasing risks of fallen angels (bonds being downgraded to below BBB) as the share of BBB-rated debt grows. The report also discusses structural market developments in the areas of securities markets, market-based finance, sustainable finance and financial innovation, with focus on the implications and challenges associated with the entry of bigtech firms into the financial sector.
This article on the implications of bigtech for the financial sector looks at the increasing presence of bigtech firms that take advantage of their vast customer networks, data analytics, and brand recognition. However, the growth of bigtech financial services varies by region, reflecting differences in the existing financial services provision and regulatory frameworks. The high level of market concentration typically observed in bigtech may get carried into financial services, with potentially adverse impacts on consumer prices and financial stability. The analysis considers the impact these firms could have and concludes that regulatory cooperation is needed to manage the financial stability risks that could arise as bigtech firms increase market concentration. Although bigtech firms typically devote huge resources in the form of advanced technology and specialist expertise to cyber-security, this feature could make them an attractive target for cyber-attacks and increase the detriment to individuals in the event of a data breach.
The report highlights that regulators and supervisors are well-positioned to gain insights about business propositions from initiatives such as innovation facilitators (including regulatory sandboxes). Development of innovative suptech tools may provide further information about market developments, helping authorities to mitigate potential risks and set appropriate supervisory expectations. To this end, ESMA continues to facilitate and coordinate sharing of information on financial innovation among its national competent authorities. Innovation facilitators across the financial sector are a valuable source of market intelligence. The importance of sharing such information among authorities at the EU level is reflected in the recent establishment of the European Forum for Innovation Facilitators (EFIF) by EC and ESAs. There may be value in continuing to deepen cooperation at national, European, and international levels among financial sector regulators and supervisors and other authorities, such as those responsible for data protection.
Keywords: Europe, EU, Banking, Securities, TRV, Credit Risk, Liquidity Risk, Sustainable Finance, Market-Based Finance, Bigtech, Suptech, Cyber Risk, ESMA
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.