ESRB released the 31st quarterly risk dashboard at its April Board meeting. The risk dashboard provides a set of quantitative and qualitative indicators of systemic risk in the financial system in EU. The overview note accompanying the risk dashboard summarizes the recent development of indicators and contains two annexes describing the methodology and the covered risk indicators. This issue of risk dashboard highlights that market-based indicators of systemic stress in EU have increased sharply after the outbreak of the COVID-19 while the banking sector capitalization stood broadly unchanged and the reduction of non-performing loans improved slightly. At the April meeting, the Board discussed the impact of the COVID-19 pandemic on the financial system in EU.
The risk dashboard shows that the debt levels remain elevated across countries and sectors in EU, although most countries have somewhat deleveraged over the last few years. Credit to the private sector continued to grow robustly in many EU member states until the outbreak of the COVID-19 crisis. The cost of borrowing for the private sector also remained low before the COVID-19 outbreak, reflecting low refinancing costs for banks and low risk pricing. Residential real estate prices continued to rise considerably in all but one EU member state. However, profitability of banks in EU decreased while the median ratio of common equity tier 1 to risk-weighted assets remained broadly stable at 15.6% in the fourth quarter of 2019. The median ratio of non-performing loans to total gross loans and advances fell by 10 basis points over the previous quarter and was nearly 2.6% in the fourth quarter of 2019. Additionally, the median solvency ratio in the insurance sector in EU deteriorated by nearly 10 percentage points, to roughly 185% while the liquidity profile of assets deteriorated slightly for some insurers.
The ESRB, at its April meeting, highlighted that the EU bodies, along with the governments, central banks, and supervisory and resolution authorities, have taken unprecedented actions to mitigate the negative impact on the real economy. ESRB published an overview of policy measures take in response to the COVID-19 crisis and plans to update this regularly. It decided to focus on five priority areas:
- Implications for the financial system of guarantee schemes and other fiscal measures to protect the real economy
- Market illiquidity and implications for asset managers and insurers
- Impact of procyclical downgrades of bonds on markets and entities across the financial system
- System-wide restraints on dividend payments, share buybacks, and other payouts
- Liquidity risks arising from margin calls
- Press Release
- Risk Dashboard (PDF)
- Overview Note (PDF)
- Annex I (PDF)
- Annex II (PDF)
- Overview of Policy Measures
Keywords: Europe, EU, Banking, Insurance, Securities, Systemic Risk, Risk Dashboard, Residential Real Estate, NPLs, Credit Risk, Procyclicality, COVID-19, Liquidity Risk, ESRB
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Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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