ESRB Publishes Risk Dashboard in June 2020

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 during the first months of the COVID-19 crisis. The cost of borrowing for the private sector remained low in April, reflecting low refinancing costs for banks and low risk pricing. Overall, the EU banking sector capitalization was robust before the onset of the COVID-19 crisis, but it suffered challenges related to profitability, and in some cases, to asset quality due to legacy assets. Profitability of banks in EU remained steadily low in the fourth quarter of 2019. The median ratio of common equity tier 1 (CET1) to risk-weighted assets remained broadly stable at 15.6% in the fourth quarter of 2019. At the same time, the median ratio of non-performing loans to total gross loans and advances was around 2.6% in the fourth quarter of 2019. 

ESRB, at its June 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 of COVID-19 pandemic on the real economy. It was also highlighted that the General Board continued its COVID-19-related work in the five priority areas that were identified earlier this year. The following are the key highlights of the June Board meeting:

• An ESRB working group has been set up to facilitate the implementation of the ESRB Recommendation on monitoring the financial stability implications of debt moratoria, public guarantee schemes, and other measures of a fiscal nature taken to protect the real economy in response to the COVID-19 pandemic. The working group held its first meeting on June 17, 2020. The General Board emphasized that it is important for macro-prudential authorities to monitor the implications of support measures at the national level and, in particular, for ESRB to monitor any cross-sector and cross-border issues that may arise. The templates to support this monitoring were published on June 25, 2020. The General Board will discuss the results of the monitoring exercise in the second half of 2020.
• The General Board agreed on the follow-up to the ESRB Recommendation and report on liquidity risks arising from margin calls. In this regard, ESRB will analyze the structure of the clearing market in Europe from a financial stability perspective and its resilience in times of stress. This work will focus on interconnectedness and concentration in the provision of clearing services by central counterparties and clearing members. Furthermore, ESRB will analyze developments in non-centrally cleared markets, including the anti-procyclicality performance of the ISDA’s Standard Initial Margin Model.
• The General Board exchanged initial views on the stress test scenario for the EBA 2021 EU-wide stress test. The Advisory Scientific Committee contributed to this discussion with a note providing insights on reforming bank stress testing in EU. An Advisory Scientific Committee Insight note will be published in the coming weeks.
• The General Board appointed Enrico Perotti, Professor of International Finance at the University of Amsterdam, as a member of the Advisory Scientific Committee.

Related Links

• Press Release
• Risk Dashboard (PDF)
• Overview Note (PDF)
• Annex I to Dashboard (PDF)
• Annex II to Dashboard (PDF)
• Overview of Five Priority Areas

Keywords: Europe, EU, Banking, Insurance, Securities, COVID-19, Systemic Risk, Risk Dashboard, Procyclicality, NPLs, Credit Risk, Liquidity Risk, Loan Moratorium, Guarantee Scheme, Stress Testing, EU-Wide Stress Test, ESRB