The Joint Committee of the European Supervisory Authorities has published a report on the risks and vulnerabilities in the EU financial system. Overall, the report found that in the past six months, risks affecting the EU financial system have not changed in substance, but have further intensified.

In summary the report also notes:

  • feeble economic prospects for the EU cautiously improved in early 2015;
  • low interest rates and remaining uncertainties about the economic recovery adversely affected the outlook for the financial industry;
  • higher valuation and market liquidity risk raised concerns about the outlook for financial entities’ stability in the event of reversals in interest rates and asset prices;
  • low profitability is motivating financial institutions and other investors to search for yield;
  • concerns about misconduct and IT risks remain high; and
  • the European Commission’s plan for achieving a Capital Markets Union, including the facilitation of funding channels complementing traditional channels through the banking system, is expected to provide a valuable stimulus for economic activity in the future.

The report also recommends additional supervisory measures. In particular that:

  • bank regulators should continue to assess business model viability and promote consistency in the risk-weighting of assets;
  • efforts to improve the insurance industry’s asset-liability and risk management deserve further attention in the transition to Solvency II;
  • restructuring in financial entities’ business models should be monitored;
  • adequate inclusion of misconduct costs in future stress tests, further progress towards benchmark reforms, and appropriate application of supervisory instruments would be desirable; and
  • regulators’ and industry’s awareness of IT risk rose, but systematic integration of IT risk in overall risk management still needs to progress.

View ESAs – main risks to EU financial market stability have intensified, 5 May 2015