ESRB published the ninth annual report, which details its achievements and activities between April 01, 2019 and March 31, 2020. This annual report includes the ESRB assessment of risks up to June 2020 and reflects the new systemic risks that have emerged as the European economy has endured an extraordinary macroeconomic shock due to COVID-19 pandemic. ESRB has progressively reviewed and updated its systemic risk assessment to account for the new risk landscape resulting from the pandemic. The identified risks include widespread defaults in the private sector as a result of a deep global recession; the challenging macroeconomic environment for banks, insurers, and pension schemes; the re-emergence of sovereign financing risk; and instability and pockets of illiquidity in financial markets.
The risk assessment of ESRB also includes threats originating from a system-wide cyber incidents, disruption to critical financial infrastructure, and climate change and transition risks, all of which remain critical for longer-term financial stability. Out of the seven identified key systemic risks, one has been assessed to be a severe systemic risk, four have been assessed to be elevated systemic risks, and two have been assessed to be systemic risks. The assessment takes into account policy measures taken at the EU and national levels to mitigate the effects of the COVID-19 pandemic. Prior to the start of the COVID-19 pandemic, ESRB had issued warnings and recommendations on medium-term residential real estate sector vulnerabilities to competent ministers in eleven of its member jurisdictions. In addition, it had amended an earlier recommendation on closing real estate data gaps. Other key achievements of ESRB during the year are as follows:
- Provided an opinion to the Council, EC, and Finland, noting that an extension of a stricter national measure by Finland is deemed necessary for the effective mitigation of the systemic risks and the threats deriving from the Finnish housing market.
- Applied the reciprocity framework and recommended reciprocation of national flexibility measures for residential real estate exposures in Belgium, Estonia, and the Netherlands.
- Contributed to ensuring resilience of the banking sector by considering the macro-prudential implications of financial instruments that are measured at fair value and classifying them as Level 2 or Level 3 instruments for accounting purposes and by contributing to the EU-wide stress test of EBA.
- Considered policy options to mitigate the procyclicality of margins and haircuts in derivatives markets and securities financing transactions; ways to strengthen the recovery and resolution of central counterparties; and ways to enhance the macro-prudential aspects of the Solvency II rules for insurers.
- Noted changes arising from coming into effect of the revised ESRB Regulation, including changes to its governance and enhancements of its accountability framework.
- Held its annual meeting with the Committee of European Audit Oversight Bodies and statutory auditors of EU-based global systemically important financial institutions (G-SIFIs). The meeting focused on the implementation of IFRS 9, the valuation of complex financial instruments, preparatory work for IFRS 17, the European macroeconomic environment, anti-money laundering and fraud, and key audit matters.
- Held the fourth Annual Conference wherein the participants exchanged their experiences of macro-prudential policies and discussed the role of non-banks in the economy and the financial system, cyber-security and its potential implications for systemic risk, and whether the regulatory reforms of the financial system had been completed.
Related Link: Annual Report (PDF)
Keywords: Europe, EU, Banking, Insurance, Securities, Macro-Prudential Policy, Systemic Risk, Stress Testing, COVID-19, Climate Change Risk, ESG, Solvency II, IFRS 9, IFRS 17, Annual Report, Cyber Risk, ESRB
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.