ESAs publish autumn report on risks and vulnerabilities in the EU financial system

The Joint Committee of the European Supervisory Authorities (ESAs) published its latest report on the risks and vulnerabilities in the EU financial system (JC 2018 34).

The autumn report highlights the following risks as potential sources of instability:

  • abrupt yield increases could generate substantive asset price volatility and lead to losses across asset classes;
  • repricing of risk premia and potentially increasing interest rates could affect financial institutions and may bring with them a risk of contagion between different sectors; and
  • uncertainties around the terms of Brexit and the need to prepare for a no-deal scenario, as well as trade policy uncertainties and wider geo-political risks.

In light of the ongoing risks and uncertainties, the report also contains the following policy actions by European and national competent authorities as well as financial institutions:

  • stress tests to be carried our across all sectors;
  • supervisory authorities should pay continued attention to the risk appetite of all market participants;
  • macro- and micro prudential authorities should contribute to addressing possible contagion risks, including continuing their efforts in monitoring lending standards; and
  • it is crucial that EU financial institutions and their counterparties, as well as investors and retail consumers, plan appropriate mitigating actions to prepare for Brexit in a timely manner, including the risks associated with a no-deal scenario.