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

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    News

    SEC Extends Comment Period on Climate Risk Disclosures

    The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.

    May 09, 2022 WebPage Regulatory News
    News

    APRA Reduces Committed Liquidity Facility, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.

    May 09, 2022 WebPage Regulatory News
    News

    CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks

    The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.

    May 06, 2022 WebPage Regulatory News
    News

    PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down

    The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.

    May 06, 2022 WebPage Regulatory News
    News

    EBA Updates Standards for 2023 Benchmarking of Internal Approaches

    The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.

    May 06, 2022 WebPage Regulatory News
    News

    EIOPA Responds to Stakeholder Views on Blockchain in Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.

    May 06, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8172