ESAs Assess Risks While EBA Publishes Risk Retention Standards

The joint risk assessment report highlights the increasing vulnerabilities across the financial sector as well as the rise of environmental and cyber risks. The report indicates that the European Union economy’s strong recovery from COVID-19 pandemic in 2021 have been hindered by emerging risks such as new waves and variants of the virus, inflation risk, rising commodity prices, and heightened geopolitical risks. Also, financial markets remain vulnerable to changes in market sentiment, particularly if financial conditions tighten unexpectedly due to inflation pressures. In the real estate sector, persistent price increases and higher borrowing by households have increased risks. The financial sector is increasingly exposed to environmental risks and risks stemming from digitalization. In light of the above-mentioned risks and uncertainties, the joint committee advises the ESAs, national competent authorities, financial institutions and market participants to take the following policy actions:

• Financial institutions should be prepared for further potential negative implications stemming from geopolitical tensions and ensure compliance with the sanctions regimes put in place both at the European Union and at global levels.
• Financial institutions and supervisors should prepare for a possible deterioration of asset quality in the financial sector.
• The impact of further increases in yields and sudden reversals in risk premia on financial institutions and investors should be closely monitored.
• Retail investors are of particular concern, and supervisors should monitor risks to retail investors seeing that their participation in financial markets has increased substantially in recent years.
• Financial institutions should further incorporate Environmental, Social and Governance (ESG) considerations into their business strategies and governance structures. Financial institutions should continue to develop methodologies and approaches to test their long-term resilience against ESG factors and risks;.
• Considering the elevated level and frequency of cyber incidents, financial institutions should strengthen their cyber resilience and prepare for a potential increase in cyberattacks.

Standards on risk retention for securitization transactions. EBA published the final draft regulatory technical standards specifying the requirements for originators, sponsors, and original lenders related to risk retention, as laid down in the Securitization Regulation. The regulatory technical standards aim to provide clarity on the risk retention requirements ensuring a better alignment of interests and reducing the risk of moral hazard, thus contributing further to the development of a sound, safe, and robust securitization market in the European Union. These regulatory technical standards carry over a substantial part of the provisions on risk retention set out in the previous standards adopted by EBA in 2018, with some modifications. The modifications were introduced due to the Capital Markets Recovery Package (CMRP) focus on the modalities of risk retention in non-performing exposure securitizations and the impact of fees payable to retainers on the risk retention requirement. The modifications aim to facilitate the securitization of non-performing exposures and are part of the broader work on supporting the functioning of the secondary markets for non-performing exposures. In addition, the standards provide further clarity on the application of the risk retention requirement to re-securitizations as well as the treatment of synthetic excess spread as a possible form of compliance. The new Securitization Regulation will replace the existing 2014 Commission Delegated Regulation (No 625/2014) and contains transitional provisions regarding the application of the existing Delegated Regulation to those securitizations whose securities were issued before its application date. The regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.

Related Links

• Press Release on Risk Assessment Report
• Risk Assessment Report (PDF)
• Press Release on Standards on Risk Retention
• Standards on Risk Retention (PDF)

Keywords: Europe, EU, Banking, Basel, ESG, Climate Change Risk, Risk Retention, Securitization, Regulatory Technical Standards, Risk Assessment Report, Covid-19, Cyber Risk, Governance, EBA, ESAs