The General Board of the European Systemic Risk Board (ESRB) issued an updated risk assessment via the quarterly risk dashboard, released a warning on vulnerabilities of financial sector, and held its September meeting, with discussions focusing on key systemic risks in the European Union and the key policy priorities to address these risks. Meanwhile, the European Central Bank (ECB) published nineteenth issue of Macroprudential Bulletin while the European Commission (EC) published reports on the functioning of Securitization Regulation and activities of the IFRS Foundation and certain other entities (EFRAG and PIOB).
Below are the key highlights of these recent updates:
- At the meeting, the General Board concluded that risks to financial stability in the European Union and the probability of tail-risk scenarios materializing have increased. The assessment identified financial stability risks stemming from a (possible) sharp asset price correction and noted the implications, of certain ongoing developments, for asset quality. The General Board also discussed two reports prepared by the Advisory Scientific Committee that will be published in the coming months. The first report will be focused on enhanced lending operations and direct interventions involving purchases of illiquid financial instruments while the second report will analyze whether bank capital requirements can be an effective tool for reducing carbon emissions and dealing with prudential risks arising from climate change.
- In its warning on vulnerabilities, the General Board calls for both micro- and macro-prudential authorities to preserve or enhance resilience to facilitate the financial sector to continue to support the real economy if and when financial stability risks materialize. Given the increase in systemic risks to financial stability, ESRB considers it necessary for private-sector institutions, market participants, and relevant authorities to continue to prepare for materialization of tail-risk scenarios. The General Board also calls for close coordination between relevant authorities and prudent risk management practices across all financial sectors and market participants, as these remain key to addressing vulnerabilities effectively, while avoiding market fragmentation and negative externalities for other Member States. The General Board stresses that financial stability risks beyond the banking sector should also be addressed. This requires tackling vulnerabilities and increasing the resilience of non-bank financial institutions and market-based finance.
- ECB Macroprudential Bulletin. The bulletin provides insight into the ongoing work of ECB in the field of macro-prudential policy. The bulletin includes articles on key macro-prudential topics covering the analytical toolkit for the assessment of residential real estate vulnerabilities, transmission and effectiveness of macroprudential policies for residential real estate, and insights on link between commercial real estate and financial stability. The Bulletin also discusses the drivers of house price changes, the supply and demand of housing market risks, the impact of higher interest rates on households, the implications of whether shocks to real estate collateral affect lending, and the risk-weight policies and capital buffers.
- Report on Securitization Regulation. The report concludes that the European Union securitization framework has been working well, even though dynamic market growth has not yet materialized. The report focuses on the functioning of the risk retention requirement, the due diligence and transparency requirements, the rules and definition for private securitizations, the case for an STS equivalence regime, a regime for sustainable securitization, the function of the third-party verification of simple, transparent, and standardized (STS) securitizations, and the case for establishing a system of limited-license banks to replace the current structure of true-sale securitization built around securitization special purpose entities. It provides guidance on certain areas of the Securitization Regulation—for example, the jurisdictional scope—and invites the European Supervisory Authorities (ESAs) to revise technical standards dealing with transparency obligations. The report also includes an overview of the ongoing and upcoming work on the prudential treatment of securitization.
- Report on Activities of IFRS Foundation, EFRAG, and PIOB. The report summarizes the activities of the International Financial Reporting Standards (IFRS) Foundation on the development of IFRS, the European Financial Reporting Advisory Group (EFRAG), and the Public Interest Oversight Board (PIOB) in 2021. The information in this report serves to promote efficient capital markets; to protect the interest of members, investors and other providers of capital to companies; and to promote corporate social responsibility including sustainability. The report also notes that, in 2021, EFRAG took important steps to adapt its structure for the development of European Sustainability Reporting Standards in line with the Corporate Sustainability Reporting Directive (CSRD) proposal.
- ESRB Meeting Summary
- ESRB Risk Dashboard (PDF)
- ESRB on Financial System Vulnerabilities (PDF)
- ECB Macroprudential Bulletin
- EC Report on the Functioning of Securitization Regulation
- EC Report on Activities of IFRS, EFRAG, and PIOB
Keywords: Europe, EU, Banking, Systemic Risk, Risk Dashboard, Lending, Basel, Non Bank Financial Institutions, Securitization Regulation, CSRD, EFRAG, Macroprudential Bulletin, Macro Prudential Policy, Reporting, ESRB, ECB, EC
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