ESMA published the first trends, risks, and vulnerabilities (TRV) report of 2020. In addition to the level of risks in EU, the report also takes an in-depth look at three specific issues via articles on the implications of bigtech for the financial sector, the short-termism pressures from financial markets, and the risk exposure of EU funds to potential bond downgrades. As per the report, risks in markets under the remit of ESMA remained high, particularly in securities markets and for consumers.
The report shows that market risk remained very high in the second half of 2019, amid continued geopolitical uncertainties, including Brexit and US-China trade relations. Credit risk and liquidity risk also remained high. Credit risk, in particular, remains elevated with deteriorating corporate debt quality and increasing risks of fallen angels (bonds being downgraded to below BBB) as the share of BBB-rated debt grows. The report also discusses structural market developments in the areas of securities markets, market-based finance, sustainable finance and financial innovation, with focus on the implications and challenges associated with the entry of bigtech firms into the financial sector.
This article on the implications of bigtech for the financial sector looks at the increasing presence of bigtech firms that take advantage of their vast customer networks, data analytics, and brand recognition. However, the growth of bigtech financial services varies by region, reflecting differences in the existing financial services provision and regulatory frameworks. The high level of market concentration typically observed in bigtech may get carried into financial services, with potentially adverse impacts on consumer prices and financial stability. The analysis considers the impact these firms could have and concludes that regulatory cooperation is needed to manage the financial stability risks that could arise as bigtech firms increase market concentration. Although bigtech firms typically devote huge resources in the form of advanced technology and specialist expertise to cyber-security, this feature could make them an attractive target for cyber-attacks and increase the detriment to individuals in the event of a data breach.
The report highlights that regulators and supervisors are well-positioned to gain insights about business propositions from initiatives such as innovation facilitators (including regulatory sandboxes). Development of innovative suptech tools may provide further information about market developments, helping authorities to mitigate potential risks and set appropriate supervisory expectations. To this end, ESMA continues to facilitate and coordinate sharing of information on financial innovation among its national competent authorities. Innovation facilitators across the financial sector are a valuable source of market intelligence. The importance of sharing such information among authorities at the EU level is reflected in the recent establishment of the European Forum for Innovation Facilitators (EFIF) by EC and ESAs. There may be value in continuing to deepen cooperation at national, European, and international levels among financial sector regulators and supervisors and other authorities, such as those responsible for data protection.
Keywords: Europe, EU, Banking, Securities, TRV, Credit Risk, Liquidity Risk, Sustainable Finance, Market-Based Finance, Bigtech, Suptech, Cyber Risk, ESMA
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.