On 11 September 2018, the Joint Committee of the European Supervisory Authorities (the Joint Committee), comprised of EIOPA, ESMA and the EBA, published a report on the risks and vulnerabilities in the EU financial system (the Report).

In the Report, the Joint Committee assesses risk concerning (i) valuations, repricing of risk premia and increasing interest rates; (ii) contagion risks if valuation risks materialise; and (iii) the UK’s  decision to withdraw from the EU. The key findings of the Report are:

  • risks that abruptly increasing yields generate substantive asset price volatility and lead to losses across asset classes have remain both imminent and high;
  • risks related to the repricing of risk premia and increasing interest rates directly affect financial institutions and retail consumers;
  • the need to prepare for the UK’s withdrawal from the EU without a withdrawal agreement, including preparing for the risk of reduced access to market infrastructures and contract continuity issues, have become critical for firms.

In consideration of their findings, the Joint Committee recommends:

  • the developing of further stress test exercises across all sectors. To assist in this, the European Securities and Markets Authority is developing guidelines for stress testing carried out by money market funds as well as guidelines for asset managers on liquidity stress testing;
  • for banks to accelerate addressing their stocks of NPLs and adapt business models to sustainably improve profitability;
  • macro and micro prudential authorities to continue the monitoring of lending standards; and
  • financial institutions and their counterparties, as well as investors and retail consumers, should plan appropriate mitigating actions in a timely manner, to prepare for the UK’s withdrawal from the EU – addressing the risk of a ‘no deal’ scenario.