The European Supervisory Authorities (the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority) have published their latest joint committee report on risks and vulnerabilities in the EU financial system.
The report notes that the main risks challenging financial stability in the EU are:
- the low interest rate environment and its impact on the profitability and business model sustainability of financial institutions;
- the continued search for yield by financial institutions and the associated mispricing of assets;
- political and economic risks due to residual uncertainty around Greece’s financial situation;
- financial market volatility and structural concerns about economic prospects of emerging market economies, in particular in China; and
- reductions in market liquidity.
The report also calls for further efforts by financial entities to clean-up balance sheets, to address legacy assets and non-performing loans – this includes assessing the sustainability of business models as a key supervisory concern. The report also notes valuation risks in illiquid markets and emphasises the transparent disclosure of risk exposures (for example as part of periodic financial reporting).