EBA欧洲银行-JC-2014-063-28Report-on-Risks-and-Vulnerabilities-in-the-EU-Financial-System-Autumn-201429_for-publication_16页_621kb

Summary of the Joint Committee Report on Risks and Vulnerabilities in the EU Financial System (August 2014)

Core Content

The Joint Committee Report on Risks and Vulnerabilities in the EU Financial System, published in August 2014, outlines a range of macro and operational risks that continue to challenge the stability of the European financial system. Despite signs of economic recovery and improved market sentiment, the system remains exposed to several inter-related and cross-sectoral risks, particularly in a high-debt and low-interest-rate environment.

Main Risks and Vulnerabilities

1. Macro Risks

• Weak Economic Growth and High Debt Levels
  The EU's macroeconomic recovery is fragile and uneven, with many countries facing high levels of private and public debt. Unemployment remains elevated, and consumer confidence is sluggish. The risk of very low inflation or deflation persists, especially in the context of overvalued real estate markets and undercapitalised banks.

• Search for Yield in a Low-Interest-Rate Environment
  Investors are increasingly seeking higher returns in a prolonged low-interest-rate environment, leading to increased exposure to less liquid, riskier, and longer-duration assets. This search for yield has intensified as market returns have declined and volatility has remained historically low. The potential for snapbacks (sudden market re-pricing) has raised valuation risks.

• Global Emerging Market Risks
  The European financial system is exposed to risks from global emerging market economies, including volatility in exchange rates and potential shocks to the real economy. The low interest rate environment has also contributed to increased exposure to these markets, which may affect the stability of the EU financial system.

2. Operational Risks

• Business Conduct Risks
  The report highlights concerns regarding the conduct of business by financial institutions, particularly in the areas of mis-selling of financial products and the reliability of key financial benchmarks. These risks are increasingly material and require stronger corporate governance, compliance, and risk management practices.

• IT-Related Operational Risk and Cyber Risk
  IT-related risks have increased since the last report, with concerns about the resilience of financial market infrastructures and the potential for cyber-attacks. While some initiatives have been launched to address these risks, further action and understanding are required to mitigate them effectively.

Regulatory Context and Policy Responses

• Progress in Regulatory Reforms
  The EU has made significant strides in regulatory reform, including the establishment of the Banking Union with the Single Resolution Mechanism (SRM) and the Single Resolution Fund. These reforms aim to break the link between sovereigns and banks, enhancing financial stability.

• Implementation of Key Directives
  The implementation of regulations such as MiFID II, the Insurance Mediation Directive (IMD II), and Solvency II is ongoing, with the goal of increasing transparency, competition, and investor protection. These reforms are expected to improve the resilience of financial markets and reduce potential risks.

• Supervisory Actions and Challenges
  The European Supervisory Authorities (ESAs) are playing a crucial role in the implementation of these reforms, including the preparation of technical standards and enhanced supervision. However, uncertainties remain regarding the full implementation of burden-sharing provisions and the impact of regulatory changes on market confidence.

Key Policy Recommendations

• Enhanced Supervision and Risk Management
  The report recommends that the European System of Financial Supervision (ESFS) and ESAs should focus on addressing macroeconomic risks, particularly those linked to the prolonged low-interest-rate environment and the search for yield.

• Structural Reforms and Balance Sheet Adjustments
  Continued structural reforms are essential to improve competitiveness and revive the lending channel. The repair of balance sheets and debt restructuring should remain a priority for the medium term.

• Corporate Governance and Conduct of Business
  Financial institutions need to enhance their corporate governance structures to better manage business conduct risks, including mis-selling and benchmark-related risks. Improved compliance and risk management culture are necessary to mitigate reputational and financial damage.

• Market Consistent Valuation and Solvency II
  The introduction of market-consistent valuation methods under Solvency II is expected to provide a better understanding of the solvency position of insurance companies and the impact of capital market developments.

Conclusion

The European financial system remains vulnerable to macroeconomic and operational risks, necessitating continued regulatory focus, improved corporate governance, and structural reforms. The report underscores the importance of maintaining commitment to these reforms to ensure long-term financial stability and market confidence.