Featured Product

    ESA Report Highlights Risks of No-Deal Brexit in EU Financial System

    September 12, 2019

    ESAs published a Joint Committee report on risks and vulnerabilities in the EU financial system. The 2019 Autumn report highlights certain risks, such as the uncertainties around Brexit, low interest rate environment risk, and climate change risks, as potential sources of instability. The need to prepare for the impact of a no-deal Brexit on financial activities continues to require attention from the public and private sector in light of the postponement of the Brexit date to October 31, 2019. Although there seems to be a “Brexit fatigue” in the financial sector, supervisors continue to encourage institutions to prepare contingency plans for a no-deal Brexit and have themselves set further steps in motion to minimize the negative impact of Brexit on financial markets.

    In light of the ongoing uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key. Therefore, ESAs call for the following key policy actions by European and national competent authorities as well as financial institutions:

    • Contingency planning. Financial institutions and supervisors should continue their work on contingency planning and assurance of business continuity in the case of a no-deal Brexit. Contingency plans should be implemented by October 31, 2019 at the latest. Considering the variety of measures undertaken by ESAs and national supervisory authorities and other competent authorities, the EU financial sector should be well-informed and prepared to manage risks from a micro-perspective. ESAs will continue to closely monitor the ongoing political and market developments and will consider the need for further communications on that basis.
    • Low-for-long interest rate scenario. Supervisors and financial institutions should continue taking into account a "low-for-long" interest rate scenario and the associated risks. Low interest rates are an important driver of low bank profitability and remain the main risk for the insurance and pension fund sectors. They contribute to the further buildup of valuation risks in securities markets as well as to a move into less liquid and more leveraged investments through search-for-yield strategies. 
    • Bank profitability. There is a need to further address unprofitable banks and their business models to increase the resilience of institutions to a more challenging economic environment. Further investments into financial technologies and exploring opportunities for bank sector consolidation are among responses to low profitability. Transparency and a consistent application of common prudential requirements and supervisory rules across jurisdictions are the preconditions that could contribute to the use of opportunities that cross-border consolidation may offer.
    • Leveraged lending market. Risks related to the leveraged loan market and collateralized loan obligations (CLOs) in the financial sector should be further explored and identified. There is a lack of clarity about the total volume of leveraged loans outstanding and about the ultimate holders of risks of many CLO tranches. Supervisors have raised concerns about a possible under-pricing of risks.
    • Sustainable finance and Environmental, Social, and Governance (ESG) risks. Supervisory authorities and financial institutions should continue their work on identifying exposures to climate related risks and facilitate access of investors to sustainable assets. Scenario analysis and stress testing are important tools that can be implemented by supervisors, with a goal to incorporate sustainability considerations into risk assessment. Financial institutions should incorporate climate risk and other ESG factors into their risk management framework and should play a stewardship role by taking into account the impact of their activities on ESG factors. Going forward, ESAs should take a proactive stance in fulfilling mandates on sustainable finance, including on how ESG considerations can be incorporated into the regulatory and supervisory framework of EU financial institutions.


    Related Links

    Keywords: Europe, EU, Banking, Insurance, Securities, Pensions, Brexit, Interest Rate Risk, Climate Change Risks, ESG, ESAs

    Related Articles
    News

    APRA Finalizes Guidance on Management of Climate Change Risks

    The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.

    November 26, 2021 WebPage Regulatory News
    News

    European Council Adopts Position on Digital Finance Package Proposals

    The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).

    November 25, 2021 WebPage Regulatory News
    News

    PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window

    The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.

    November 25, 2021 WebPage Regulatory News
    News

    EC Proposes New Measures Under Capital Markets Union Package

    The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.

    November 25, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR

    The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).

    November 24, 2021 WebPage Regulatory News
    News

    FED Outlines Lending Conditions and Supervisory Activities in H1 2021

    The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.

    November 24, 2021 WebPage Regulatory News
    News

    APRA Expects Boards to Strengthen Ability to Oversee Cyber Resilience

    The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.

    November 23, 2021 WebPage Regulatory News
    News

    FSB Updates List of Global Systemically Important Banks

    The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.

    November 23, 2021 WebPage Regulatory News
    News

    FASB Proposes Improvements to Credit Losses Standard

    The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.

    November 23, 2021 WebPage Regulatory News
    News

    US Agencies Issue Statement on Crypto-Asset Policy Initiatives

    US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.

    November 23, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7733