Featured Product

    ESA Report Points to Elevated Credit and Cyber Risks in Wake of Crisis

    September 08, 2021

    The Joint Committee of European Supervisory Authorities (ESAs) published its second 2021 joint risk assessment report for the financial sector. In the report, ESAs note that COVID-19 crisis has acted as a catalyst for digital transformation, highlight risks in phasing out of the crisis measures, and call on financial institutions to adapt to increasing cyber risks. The assessment also focuses on risks related to the increased risk-taking behavior evident from the rising prices and volumes traded on crypto-assets and the continued concerns about the sustainability of current market valuations. ESAs note that policymakers, regulators, financial institutions, and supervisors can start reflecting on lessons learned from the COVID-19 crisis.

    The report highlights concerns related to credit risk and notes that a wide range of policy responses were introduced in response to the crisis to provide breathing space to struggling borrowers and businesses. In the banking sector, these include public guarantee schemes on loans and moratoria on loan repayments. As these schemes are temporary only, banks need to withstand possibly increasing credit risk losses upon their expiry. The increased interconnectedness between the financial sector, corporates, and governments might be a further concern, enforced by a potentially uneven recovery across sectors and regions. In the banking sector, the previously expected increase in credit losses has not yet materialized, though asset quality indicators of loans under support measures additionally show a deteriorating trend. This may indicate risks of asset quality deterioration and increasing credit losses still to come and may require banks to increase provisioning levels, especially since uncertainties on the further course of the pandemic and the economic environment remain. Meanwhile, cyber risk is noted by the financial institutions and supervisors as an important operational risk and, in this context, the report discusses various regulatory initiatives underway in financial sector in European Union to address this risk. It also notes that the costs of cyber incidents coupled with a tightening in data protection regulation worldwide could boost cyber insurance demand.

    In light of these risks and uncertainties, in the report, ESAs advise national competent authorities, financial institutions, and market participants to take the following policy actions:

    • Supervisors should continue to closely monitor asset quality and provisioning in the banking sector, in particular of assets under support schemes; this includes identifying possible practices of under-provisioning. Such monitoring is an important prerequisite when coordinating the unwinding of the various support measures.
    • As the economic environment gradually improves, focus should shift to allow a proper assessment of the consequences of the pandemic on lending books of banks and banks should adequately manage the transition toward the recovery phase. Banks and borrowers experiencing financial difficulties should proactively work together to find appropriate solutions for their specific circumstances; this should include not only financial restructuring, but also a timely recognition of credit losses.
    • Disorderly increases in yields and sudden reversals of risk premia should be closely monitored in terms of their impacts for financial institutions as well as for investors. Supervisors, policy makers, and financial institutions should also continue to develop further actions to accommodate a “low-for-long” real interest rate environment and risks its entails against the background of rising in inflation. This includes addressing overcapacities in the financial sector.
    • Financial institutions and supervisors should continue to carefully manage their information and communication technology and cyber risks. They should ensure that appropriate technologies and adequate control frameworks are in place to address threats to information security and business continuity, including risks stemming from increasingly sophisticated cyber-attacks. The report notes the importance of conducting resilience testing in proportion to the risks faced and of swiftly putting in place a European Union-wide common framework for digital operational resilience, including the proper management of risks around outsourcing.

     

    Related Links

    Keywords: Europe, EU, Banking, Insurance, Securities, Risk Assessment Report, Cyber Risk, ICT Risk, COVID-19, Credit Risk, NPLs, Lending, Credit Loss Provisioning, Loan Moratorium, Public Guarantee Schemes, ESAs

    Featured Experts
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    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.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    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.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    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.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    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.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    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.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    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

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    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.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494