The Joint Committee of ESAs published its report on the risks and vulnerabilities in the EU financial system. The report concludes that securities, banking, and insurance sectors continue to face a range of risks. In light of the ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key.
ESAs advise the following policy actions by European and national competent authorities as well as financial institutions:
- Stress tests should be conducted and developed further across all sectors. Rising interest rates and the potential for sudden risk premia reversals should be included in the scenarios, as is the case for both the EIOPA 2018 insurance stress test and the EBA 2018 EU-wide bank stress test exercise.
- Supervisory authorities need to pay continued attention to the risk appetite of all market participants. Banks should accelerate addressing their stocks of nonperforming loans and adapt business models to sustainably improve profitability, while financial institutions need to carefully manage their interest rate risk.
- Macro- and micro-prudential authorities should contribute to addressing possible contagion risks, including continuing their efforts in monitoring lending standards.
- EU financial institutions and their counterparties, in addition to investors and retail consumers, must plan appropriate mitigating actions to prepare for the withdrawal of the UK from the EU in a timely manner, including the risks associated with a no-deal scenario.
Keywords: Europe, EU, Banking, Insurance, Securities, Risks and Vulnerabilities, Stress Testing, Brexit, ESAs
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