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
Previous ArticleIFSB to Include IFSB-17 in the FSB Compendium of Standards
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.