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    ESRB Discusses Key Systemic Risks in Securitization Market in EU

    July 01, 2022

    The General Board of the European Systemic Risk Board (ESRB) held its June meeting, with discussions centring on key systemic risks in the European Union and the key policy priorities to address these risks. ESRB also published an updated risk assessment via the risk dashboard for this quarter. Additionally, ESRB published a report setting out a monitoring framework that focuses on systemic risks in the European Union securitization market.

    At the meeting, the General Board noted that the risk of an abrupt and broad-based fall in asset prices remains a severe risk to financial stability and welcomed the third joint ECB-ESRB report on the financial stability implications of climate change. The report expands the risk metrics, enhances the scenario analysis, and outlines initial considerations for potential macro-prudential tools. The General Board also exchanged views on the financial stability implications arising from crypto-based products and decentralized finance and noted that, while potential systemic implications stemming from these market segments currently seem limited, systemic risks could materialize quickly and suddenly. The General Board reaffirmed its support for a quick adoption and implementation of the Markets in Crypto-Assets Regulation and decided that the ESRB should focus its efforts on:

    • considering the need for additional regulatory measures and identifying policy steps to address the potential threat to financial stability
    • making proposals on how to ensure a European and global regulatory standard is developed
    • identifying systemic implications of the crypto-market for the EU financial system, including legal recourse considerations
    • regularly monitoring financial market exposures to crypto-based products and decentralized finance

    The report on securitization market provides macro-prudential oversight of the European Union securitization market and focuses on traditional (that is, off-balance sheet) securitizations. The report shows that the European Union securitization market is small compared with that of the United States. The securitization market is concentrated in a few member states, with banks as the main holders of securitizations. The report mainly focuses on residential mortgage-backed securities (RMBSs) as they are the largest segment of the European Union securitization market, representing more than 60% of the total outstanding securitizations in the European Union at the second quarter of 2021 as residential mortgages represent a major part of bank lending. The report sets out a monitoring framework that focuses on systemic risk, in particular owing to excessive leverage and interconnectedness. The findings show that ESRB does not found any substantial systemic risks emanating from European Union residential mortgage-backed securities, though analysis of other asset classes or types of securitizations not covered in this report could reveal sources of risk. To ensure that emerging risks to financial stability are identified early, ESRB welcomed the actions taken by the European Securities and Market Authority (ESMA) to enhance the quality of European Union securitization reporting. ESRB will also develop its monitoring framework to cover other classes and types of securitization, including collateralized debt obligations (CDOs) such as collateralized loan obligations (CLOs).


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    Keywords: Europe, EU, Banking, Systemic Risk, Risk Dashboard, Financial Stability, Credit Risk, Climate Change Risk, Scenario Analysis, Crypto Assets, Decentralized Finance, Residential Mortgage Backed Securities, Regtech, Basel, Collateralized Loan Obligations, MiCA Regulation, ESRB

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