The European Systemic Risk Board (ESRB) held its September meeting, with discussions centering on key systemic risks in the European Union and the key policy priorities to address these risks. The Board noted reduced risk of COVID-19 crisis causing severe instability in the financial system and that the countercyclical capital buffer and other measures were being activated in a few EU countries to mitigate the cyclical and real estate risks to financial stability. ESRB also published an updated risk assessment via a risk dashboard for this quarter.
The General Board decided that the ESRB Recommendation on the restriction of distributions during the COVID-19 pandemic should lapse at the end of September 2021. The General Board was of the view that the COVID-19 crisis continued to exacerbate the challenges for profitability and solvency positions in the banking, insurance, and pensions sectors in the low interest rate environment. Better-than-expected financial results in 2021 were largely driven by shrinking credit provisions and higher trading income, but the expected deterioration in asset quality was weighing on the profitability outlook for banks. Most notably, while the non-performing loan ratio for EU banks had declined further in the first half of 2021, inflows into IFRS stage 2 and 3 assets and the share of forborne loans in total loans continued to rise, suggesting that credit risk may increasingly be materializing. The General Board also welcomed the two recent reports on the macro-prudential policy stance. The General Board noted that operationalizing the macro-prudential policy stance framework would support policymakers in assessing how appropriate the macro-prudential policy instruments are for addressing systemic risk. In the longer run, this would also foster communication of policy decisions to the general public and increase accountability. The reports, which are due to be published over the coming months, provide examples of how to assess the macro-prudential policy stance. A testing phase will help refine the specific methods and approaches.
Keywords: Europe, EU, Banking, COVID-19, Systemic Risk, CCyB, Stress Testing, Dividend Distribution, Risk Dashboard, Risk Dashboard, Macro-Prudential Policy, NPLs, Asset Quality, Credit Risk, Financial Stability, ESRB
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