ESMA published the risk dashboard for the third quarter of 2020. The dashboard shows that financial markets in EU continued their recovery in the third quarter of 2020 but remain highly sensitive, as the recent volatility spikes around COVID-19 developments and uncertainties around the US election outcomes show. Credit rating downgrades have been slowing and investment funds recorded inflows across asset classes, especially for bond funds. Looking ahead, ESMA sees a prolonged period of risk to institutional and retail investors of further, possibly significant, market corrections and see very high risks across the whole of ESMA’s remit. The low-for-long interest rate environment is also expected to weigh on the profitability and solvency of banks and insurers.
During the third quarter of 2020, EU financial markets continued their recovery and equity market valuations edged up further. There are increasing signs of strong geographical and sectorial differentiation across financial markets, with fixed-income markets seeing large-scale valuation increases across various segments such as emerging markets, investment grade, and high yield. These developments, taken together, highlight the ongoing risk of decoupling between asset valuations and economic fundamentals. Thus, the potential for a sudden reversal in investor’s risk assessment is the key risk currently seen for EU financial markets and ESMA maintains its risk assessment. The extent to which the identified risks will further materialize will critically depend on three drivers:
- Economic impact of the pandemic
- Market expectations on monetary and fiscal support measures
- Any occurrence of additional external events in an already fragile global environment
Keywords: Europe, EU, Banking, Securities, Risk Dashboard, COVID-19, Credit Ratings, Credit Risk, Market Risk, ESMA
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleBCBS Publishes Details on G-SIB Assessment for 2020
The European Banking Authority (EBA) published the final draft regulatory technical standards on disclosure of investment policy by investment firms, under the Investment Firms Regulation (IFR).
The European Banking Authority (EBA) published version 5.1 of the filing rules for supervisory reporting.
The European Central Bank (ECB) Guideline 2021/1829 on the procedures for the collection of granular credit and credit risk data has been published in the Official Journal of European Union.
The Australian Prudential Regulation Authority (APRA) published the prudential practice guide CPG 511 to assist banks, insurers, and superannuation licensees in meeting requirements of CPS 511, the new prudential standard on remuneration.
The Office of the Comptroller of the Currency (OCC) published a bulletin that provides an updated self-assessment tool for banks to evaluate their preparedness for cessation of the London Interbank Offered Rate (LIBOR).
The Financial Stability Board (FSB) published a report that examines the progress made toward disclosures aligned with recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The Basel Committee on Banking Supervision (BCBS) published the progress report on adoption of the Basel III regulatory framework in member jurisdictions.
The French Prudential Supervisory Authority (ACPR) has implemented, in its information system, updates linked to the Data Point Model (DPM) version 3.1.
The European Banking Authority (EBA) published a thematic note that aims to identify and raise awareness of the transition risks of benchmark rates, as the London Interbank Offered Rate (LIBOR) and the Euro Overnight Index Average (EONIA) are close to being phased out.