The Joint Committee of the ESAs published its Autumn 2017 report on risks and vulnerabilities in the financial system in EU. The report highlights the challenges arising from fintech developments, along with the potential financial stability risks arising from the withdrawal of the UK from the EU.
Uncertainties around the terms of withdrawal of the UK from the EU have the potential to expose the EU27 and the UK to economic instability and to weaken market confidence. Such a situation could cause disruptions to the legal framework for financial services and the continuity of financial contracts between parties in the EU27 and the UK. As passport arrangements enabling the EU and UK-domiciled financial entities to operate in each other’s jurisdictions will expire, business continuity planning is essential. Additionally, the report highlights that rapid developments in the area of fintech are raising new opportunities and challenges for financial institutions and final users. Data privacy issues, potential client discrimination, vulnerability to cyber-crime, and associated legal issues are among the key risks to consumers and financial institutions. The report also presents regulatory and supervisory initiatives to monitor and mitigate the identified risks.
Persistent low profitability of banks and insurers also remains a major challenge. Still high levels of nonperforming loans, or NPLs, and the need to adapt business models, including the need for substantial investment in technological infrastructures, aggravate profitability challenges. The combination of low yields, low economic growth and low asset quality in some countries continues to affect EU insurers, as both life and nonlife insurers are largely exposed to interest-rate-sensitive assets, and business models may encompass interest-rate-sensitive product lines. The Joint Committee had earlier published a report identifying risks and vulnerabilities in the EU financial sector in April 2017.
Keywords: Europe, EU, Banking, Insurance, Brexit, Passporting Regime, NPLs, Fintech, ESAs
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