ESRB released the 33rd quarterly risk dashboard at its September Board meeting. The risk dashboard provides a set of quantitative and qualitative indicators of systemic risk in the financial system in EU. The overview note accompanying the risk dashboard summarizes the recent development of indicators and contains two annexes describing the methodology and the covered risk indicators. This issue of risk dashboard highlights that, during the third quarter of 2020, the indicators of systemic stress further decreased, following the trend from the previous three-month period. At the September meeting, the Board also discussed the impact of the COVID-19 pandemic on the financial system in EU and measures taken in response to COVID-19 pandemic.
The risk dashboard shows that the debt levels across countries and sectors in EU started to be influenced by the COVID-19 pandemic in the first quarter of 2020. The ongoing COVID-19 pandemic will lead to a significant increase in indebtedness owing to the significant private and public debt borrowing. The cost of borrowing remained low for the private sector in July, reflecting low funding costs for banks and low risk pricing. Bank profitability in EU decreased sharply in the first quarter of 2020. The levels of both banking sector capitalization and non-performing loans remained broadly unchanged. The median ratio of common equity tier 1 (CET1) capital to risk-weighted assets remained broadly stable at 15.6% in the first quarter of 2020. Meanwhile, the median ratio of non-performing loans to total gross loans and advances was around 2.6% in the first quarter of 2020.
At the September meeting, the Board received an update on the preliminary results of the monitoring exercise, which ESRB conducts in line with its recommendation on monitoring the financial stability implications of debt moratoria, public guarantee schemes, and other measures that are of fiscal nature and were taken to protect the economy in response to the COVID-19 pandemic. The Board continues its COVID-19-related work in the priority areas that it identified earlier this year. In a letter to EC and ESMA, ESRB suggested medium-term actions that could be taken with regard to the external credit ratings. The Board requested EC, in cooperation with ESMA, to assess the transparency of the methodologies of credit rating agencies.
Furthermore, the General Board discussed the adoption of the Legal Entity Identifier (LEI) in EU and noted that, in this regard, no uniform approach exists across markets. The Board underlined that a coherent implementation across all sectors of the economy would maximize the benefits arising from the use of the LEI and discussed the need for establishing a legal framework regulating the use of LEI in EU. The Board also stressed that, since establishing such a legal framework will take some time, it would be important that supervisory authorities, within their remits, encourage all supervised entities to obtain LEI as soon as possible and increase reliance on the LEI system for their reporting exercises. Finally, the Board approved the adverse scenario parameters that will be included in the money market fund stress testing guidelines of ESMA.
- Press Release
- Risk Dashboard (PDF)
- Overview Note (PDF)
- Annex I to Dashboard (PDF)
- Annex II to Dashboard (PDF)
- Letter to EC and ESMA (PDF)
Keywords: Europe, EU, Banking, Insurance, Securities, COVID-19, Systemic Risk, Risk Dashboard, NPLs, Credit Risk, Loan Moratorium, Guarantee Scheme, Stress Testing, Credit Rating Agencies, LEI, EC, ESMA, ESRB
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