Featured Product

    ESMA Assesses Trends, Risks, and Vulnerabilities in Financial Sector

    September 02, 2020

    ESMA published the second trends, risks, and vulnerabilities report for 2020. The report analyzes the impact of COVID-19 on financial markets during the first half of 2020 and highlights the risk of a potential decoupling of financial market performance and underlying economic activity, which raises the question of the sustainability of the current market rebound. In context of the impact of pandemic, the report also discusses securitization market, including collateralized loan obligations (CLOs), and developments in the areas of ESG (environmental, social, and governance) and cyber risks.

    As highlighted in the report, in terms of the initial impact of COVID-19 on financial markets, ESMA saw the financial market go through three stages. First stage was a liquidity and volatility period (mid-February to end-March) where markets, investment funds, and infrastructures faced high levels of stress. Then, in the rebound period (early to end-April) markets grew swiftly on the back of policy actions and, finally, in the differentiation stage (starting early May), where credit and solvency risk came to the fore, investors started to differentiate between issuers and asset classes amid ongoing deterioration of economic fundamentals. During the recovery, there have been signs of differentiation across sectors. As of end-June, EU banking sector index is still 30% below its early January level, against 11% for the EU aggregate index. Bank lending increased by almost 10% with respect to the previous quarter and the increase in bank loans is linked to government guarantee schemes for new loans, which are granted by financial institutions to non-financial corporates so that they can support their businesses throughout the crisis. 

    As the market environment remains fragile, ESMA sees a prolonged period of risk, to institutional and retail investors, of further—possibly significant—market corrections and sees very high risks across the whole of the ESMA remit. The extent to which these risks will further materialize will critically depend on two drivers: the economic impact of the pandemic and any occurrence of additional external events in an already fragile global environment. The impact on EU corporates and their credit quality, and on credit institutions, are of particular concern, as are growing corporate and public indebtedness, along with the sustainability of the recent market rebound. The report also contains an article that explores the approaches to modeling CLO credit risk adopted by the three main Credit Rating Agencies. The article emphasizes that benefits of securitization depend on its ability to effectively engineer and limit credit risk, in addition to discussing the differences and limitations in approaches and how these might potentially affect credit rating accuracy.

    The report highlights that ESG-oriented assets such as benchmark equity indices and funds have outperformed their non-ESG peers again in the first half of 2020. Investor appetite for ESG funds remained high, with net inflows in the first half of 2020 compared with large net outflows for the rest of the equity fund industry. The green bond market continued to expand, even as some agency and supranational issuers shifted their focus to social bonds to tackle the socio-economic consequences of COVID-19 pandemic. Green bond liquidity is improving despite a deterioration in corporate bid-ask spreads in March and April, in line with the broader bond market developments. Additionally, COVID-19 lockdowns are expected to accelerate digitalization of financial services. While positive from an efficiency perspective, this may accentuate risks, such as cyber risk, high market concentrations among data service providers, and fragilities in the fintech sector. Crypto assets were not spared from the COVID-19 turmoil and “global stablecoins” continue to be under close scrutiny by central banks and regulators.

     

    Related Links

    Keywords: Europe EU Banking Insurance Securities COVID-19 Credit Risk Market Risk Fintech Cyber Risk Collateralized Loan Obligations, ESG, Sustainable Finance, ESMA

    Featured Experts
    Related Articles
    News

    APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness

    APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).

    December 02, 2021 WebPage Regulatory News
    News

    EC to Review Macro-Prudential Rules while ESRB Assesses Policy Stance

    The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).

    December 01, 2021 WebPage Regulatory News
    News

    FSB Sets Out Good Practices for Crisis Management Groups

    The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.

    November 30, 2021 WebPage Regulatory News
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Updates Timeline for Implementation of Certain Basel Rules

    Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.

    November 29, 2021 WebPage Regulatory News
    News

    EC Defers Adoption of Regulatory Standards for Disclosures Under SFDR

    EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.

    November 29, 2021 WebPage Regulatory News
    News

    FCA Releases MIFIDPRU Application Forms and Third Set of Rules on IFPR

    The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Capital Adequacy Standards for Banks

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.

    November 29, 2021 WebPage Regulatory News
    News

    CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.

    November 29, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7751