EBA欧洲银行-Joint-Committee-Report-on-risks-and-vulnerabilities-in-the-EU-financial-system-Spring-2019-_16页_1mb

Summary of the Joint Committee Report on Risks and Vulnerabilities in the EU Financial System - Spring 2019

Core Content

This report from the Joint Committee outlines the key risks and vulnerabilities facing the EU financial system in the context of Brexit and a deteriorating macroeconomic environment. It emphasizes the importance of contingency planning, regulatory cooperation, and stress testing across all financial sectors.

Main Risks and Vulnerabilities

1. Brexit-Related Risks

• No Deal Brexit: A disorderly withdrawal without a ratified agreement could disrupt cross-border financial services and contractual obligations.
• Relocation of Financial Services: Financial institutions must prepare for the relocation of services to the EU27 and secure necessary authorizations.
• Derivative Contracts: The ESAs have taken steps to facilitate the novation of derivative contracts from UK to EU counterparties, including amendments to technical standards for clearing and bilateral margin requirements.
• Supervisory Cooperation: Memoranda of Understanding (MoUs) have been established between EU and UK authorities to ensure regulatory continuity and information exchange, especially in the event of a no-deal scenario.
• Deposit Protection: The EBA has called for EU deposit guarantee schemes to protect depositors in UK branches of EU credit institutions.

2. Asset Valuations and Risk Premia Repricing

• Market Volatility: The risk of abrupt increases in risk premia could lead to asset price volatility and losses across various asset classes.
• Macroeconomic Environment: A less favorable macroeconomic environment, including slower growth and tightening financial conditions, exacerbates these risks.
• Impact on Financial Institutions: Elevated volatility highlights vulnerabilities in banks' trading books and sovereign exposures, which directly affect capital levels.

3. Investment Fund Sector Risks

• Outflows: Significant outflows from the fund sector in H2 2018, particularly from bond funds, have raised concerns about financial stability.
• Low Returns: In a low-return environment, the cost of investment products becomes a key factor for investors.
• Alternative Investment Funds: These funds experienced their worst performance since the Global Financial Crisis, with negative returns due to large outflows and geopolitical uncertainty.
• Scenario Analysis: The potential impact of a sudden repricing of risk premia on EU bond funds is assessed through scenario analysis, indicating possible negative fund performance and investor outflows.

Key Sectors and Their Specific Challenges

Banking Sector

• Funding Needs: Banks face substantial market funding needs, which may be affected by rising costs and increased volatility.
• Profitability: Current returns are insufficient for long-term sustainability, and increased downside risks to economic growth could threaten profitability.
• Non-Performing Loans (NPLs): Efforts to reduce NPLs may be jeopardized by higher funding costs and economic uncertainty.
• Sovereign Exposures: Banks have significant exposures to sovereign debt, particularly in Italy, which could have a major impact on their capital and profitability.
• Lending Standards: New lending should be closely monitored to ensure standards do not ease and pricing requirements remain robust.

Insurance and Pension Fund Sector

• Yield Increases: Sudden increases in yields could lead to immediate losses in fixed-income portfolios.
• Low Interest Rates: Persistent low interest rates challenge the ability of insurers and pension funds to meet obligations and generate sufficient returns.
• Stress Testing: The 2018 Insurance stress test identified vulnerabilities, which EIOPA is continuing to analyze and address.

Policy Actions and Recommendations

1. Contingency Planning: Financial institutions and supervisory authorities must accelerate contingency planning and communication to customers regarding Brexit implications.
2. Stress Testing: The development and regular use of stress tests across all sectors remain crucial to assess and mitigate risks.
3. Supervisory Vigilance: Close supervision and cooperation are essential to manage risks and ensure financial stability.
4. Regulatory Alignment: ESAs are monitoring the implementation of their opinions and are working to ensure regulatory alignment and continuity.
5. MoUs and Cooperation: The establishment of MoUs between EU and UK authorities supports regulatory continuity and facilitates information exchange.
6. Cost Analysis: ESAs have conducted reports on the cost and performance of retail investment products, highlighting the importance of cost efficiency and transparency.

Conclusion

The report underscores the necessity for proactive measures and continuous vigilance in the face of Brexit uncertainties and macroeconomic challenges. It calls for coordinated action by the ESAs, competent authorities, and financial institutions to safeguard the stability of the EU financial system.