The Joint Committee of the European Supervisory Authorities (ESAs) has published its third bi-annual report on the risks and vulnerabilities in the EU financial system. The report highlights the differences in risks presented by the EU financial system since it published its last report and comments on the following areas:
- the search for yield in a protracted low-interest-rate environment. The ESAs are concerned that market participants are seeking higher yields in various ways including investing in riskier and less liquid assets and investing through off-balance-sheet investment vehicles;
- a sudden increase in global bond yields and credit spreads;
- renewed tensions in emerging market economies. The ESAs are concerned by the risks posed by the European financial systems’ significant aggregate exposure to emerging market economies. These risks have been highlighted by developments in recent months relating to political uncertainties, economic slowdown and foreign exchange volatility;
- risks from the deteriorating conduct of business of financial institutions, such as the impact of redress costs and settlement payment on firms’ profitability. The ESAs recommend that firms should enhance their risk management and compliance functions and that further efforts be undertaken to improve consumers’ financial literacy; and
- operational risks from IT infrastructures. The ESAs recommend that firms should reinforce internal controls related to IT systems with particular attention to IT security and cyber-resilience and focus on developing sound IT governance practices within their risk management framework.