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

    EBA Proposes Guidelines for Establishing Intermediate Parent Entities

    EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.

    January 15, 2021 WebPage Regulatory News
    News

    EC Adopts Financial Reporting Changes Arising from Benchmark Reforms

    EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.

    January 14, 2021 WebPage Regulatory News
    News

    BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk

    BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.

    January 14, 2021 WebPage Regulatory News
    News

    HMT Updates List of Post-Brexit Equivalence Decisions in UK

    HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Issues Erratum for Technical Package on Reporting Framework 3.0

    EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.

    January 14, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets

    APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.

    January 14, 2021 WebPage Regulatory News
    News

    EBA Publishes Risk Dashboard for Third Quarter of 2020

    EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.

    January 13, 2021 WebPage Regulatory News
    News

    ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro

    ECB concluded the public consultation on the introduction of a digital euro in EU.

    January 13, 2021 WebPage Regulatory News
    News

    ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro

    ECB concluded the public consultation on the introduction of a digital euro in EU.

    January 13, 2021 WebPage Regulatory News
    News

    ECB Finalizes Guide on Supervisory Approach to Bank Consolidation

    ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.

    January 12, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6432