EBA欧洲银行-Joint-Committee-Autumn-2019-Risk-Report_14页_1mb

Summary of the Joint Committee Report on Risks and Vulnerabilities in the EU Financial System (Autumn 2019)

Core Content

This report outlines the key risks and vulnerabilities facing the EU financial system, focusing on three main areas: the implications of a no-deal Brexit, the impact of the low interest rate environment, and the risks associated with sustainable finance and ESG factors. It also provides policy recommendations for financial institutions and supervisors to mitigate these risks.

Main Risks and Vulnerabilities

1. Risks Related to the UK's Decision to Withdraw from the EU

• No-deal Brexit Scenario: The postponement of the Brexit date to 31 October 2019 has not reduced the risk of a no-deal Brexit. Financial institutions are advised to continue contingency planning to ensure business continuity.
• Supervisory Actions: ESMA has issued recognition decisions for UK central counterparties (CCPs) and central securities depositories (CSDs) to ensure they remain recognized in the absence of a Brexit agreement. The EBA has also been working on cooperation agreements with UK authorities.
• Contingency Measures: EIOPA has recommended national competent authorities to manage residual insurance business and protect policyholders in a no-deal scenario. The existing MoUs between UK and EU authorities aim to reduce cliff-edge risks.

2. Risks Related to the Low Interest Rate Environment

• Impact on Profitability: Persistently low interest rates are a key driver of low bank profitability and pose significant challenges for insurance and pension fund sectors.
• Search for Yield: The low interest rate environment has led to increased search for yield strategies, which can result in higher risk-taking and investment in less liquid and more leveraged assets.
• Liquidity Concerns: Investment funds, especially UCITS, have experienced large outflows and liquidity issues. The report highlights the importance of liquidity management and stress testing in this context.
• Market Developments: Bond spreads have narrowed, indicating a return to search for yield strategies. The share of BBB-rated corporate bonds has increased significantly, while AAA-rated bonds have decreased.
• Investment Fund Stress Testing: ESMA has published guidelines on liquidity stress testing for UCITS and AIFs, and MMF stress testing. These aim to promote convergence in supervision and assess the resilience of investment funds to severe outflows.

3. Sustainable Finance and ESG-Related Risks

• Climate Change Impact: Climate change poses risks to the financial system, particularly for institutions with high exposure to climate-sensitive sectors. A disorderly transition to a low-carbon economy could disrupt financial stability.
• Need for Resilience: Financial institutions are advised to incorporate climate risks and other ESG factors into their risk management frameworks and policy decisions.
• Role of Supervisors: The ESAs are developing tools such as scenario analysis and stress testing to incorporate sustainability considerations into risk assessments.
• Taxonomy Development: The European Commission is working on a taxonomy of green activities, which could help investors identify sustainable assets and support the transition to a low-carbon economy.

Key Policy Actions

1. Contingency Planning: Financial institutions and supervisors should continue preparing contingency plans for a no-deal Brexit, with implementation by 31 October 2019.
2. Low Interest Rate Environment: Supervisors and institutions should take into account the "low-for-long" interest rate scenario and its implications for profitability, liquidity, and risk-taking.
3. Addressing Unprofitable Banks: Further efforts are needed to enhance the resilience of banks and their business models, including investments in fintech and sector consolidation.
4. Leveraged Loan and CLO Risks: There is a need to explore and identify risks in the leveraged loan market and Collateralized Loan Obligations (CLOs), particularly regarding transparency and risk pricing.
5. Sustainable Finance Integration: The ESAs should take a proactive stance in sustainable finance, including the development of tools to assess climate-related risks and the integration of ESG factors into regulatory and supervisory frameworks.

Conclusion

The report emphasizes the importance of preparedness, resilience, and proactive supervision in the face of multiple risks, including no-deal Brexit, low interest rates, and climate-related exposures. It calls for coordinated action across the EU and with the UK to ensure financial stability and sustainable growth.