EBA欧洲银行-ESAs_joint_risk_report_autumn_2013_final_33页_859kb

Summary of the Joint Committee Report on Risks and Vulnerabilities in the EU Financial System (August 2013)

Core Content

The European financial system is exposed to a range of interrelated, cross-sectoral risks that challenge its stability. These risks include macroeconomic downturns, prolonged low interest rates, market fragmentation, increased use of collateral, concerns over balance sheet valuations and risk disclosures, loss of confidence in financial benchmarks, and operational risks from cyber attacks. The report highlights the need for coordinated policy responses and enhanced financial regulation to address these vulnerabilities.

Main Risks and Vulnerabilities

1. Risks from a Weak Macroeconomic Outlook

• Impact on Financial Institutions: A weak economic outlook continues to challenge the financial position of banks, insurers, and investors.
• Asset Quality and Profitability: Banks face declining asset quality and profitability due to continued economic weakness, with particular concerns about SME lending, residential and commercial mortgages.
• Funding Risks: Banks are vulnerable to sudden shifts in market sentiment and may struggle with funding stability despite some improvements in capital levels.
• De-risking and Deleveraging: The process of deleveraging and de-risking across the EU banking sector is ongoing, but the pace and scope vary by region. Continued asset quality deterioration and insufficient provisioning raise concerns about the adequacy of capital buffers.
• Consumer Confidence: Negative business practices by European banks have impacted consumer confidence and reputational risks, requiring closer attention to legal and compliance frameworks.

2. Risks from Prolonged Low Interest Rates

• Bank Profitability: Low interest rates reduce net interest margins and profitability, especially for banks that have not fully re-priced their assets.
• Insurance and Pension Fund Solvency: Insurers and defined-benefit pension funds face solvency pressures due to the higher present value of long-term liabilities and depressed reinvestment returns.
• Investor Behavior: Low returns encourage search-for-yield strategies, increasing risk-taking and leverage in financial markets.
• Liquidity Issues: Low interest rates negatively impact liquidity in short-term, unsecured markets and increase demand for collateral.
• Interest Rate Reversals: The risk of sudden interest rate reversals remains a concern, especially as central banks may begin to tighten monetary policy.

3. Risks from Fragmentation of the Single Market

• Market Clustering: Financial markets within the EU are becoming more fragmented, with the formation of two main clusters in sovereign debt markets.
• Cross-Border Lending: There is a significant reduction in cross-border lending to economies experiencing sovereign stress or recession.
• Lending Rate Disparities: Lending rates vary significantly based on the firm's country of domicile, weakening capital allocation and increasing credit supply disparities.
• Domestic Bias in Insurance Portfolios: Insurers have increased their domestic bias in asset portfolios due to the financial and sovereign debt crisis, highlighting the need for harmonized regulatory frameworks.

4. Risks from Increased Use of Collateral

• Collateral Shortages: Concerns about potential collateral shortages persist, especially with the concentration of high-quality assets in a few institutions.
• Collateral Transformation: The transformation and re-use of collateral can increase interconnectedness and pro-cyclical effects, particularly in the event of a resolution process for large financial institutions.
• Market Valuation: Market valuation of collateral may lead to higher liability valuations and lower asset valuations, affecting the capital positions of financial institutions.

5. Risks to Confidence in Balance Sheet Valuations and Risk Disclosures

• Delayed Recognition of Losses: Financial institutions often delay and understate the recognition of economic losses in their portfolios.
• Uncertainty in Risk Weighted Assets (RWA): Market uncertainties regarding RWA calculations have negatively affected perceptions of EU banks.
• Need for Asset Quality Reviews: Conducting asset quality reviews is essential to improve transparency and address concerns about asset quality, especially prior to the implementation of the Single Supervisory Mechanism (SSM).

6. Risk of Loss of Confidence in Financial Benchmarks

• Impact of Manipulation: Erroneous or manipulative benchmark quotes can erode investor confidence, reduce transparency, and increase transaction and hedging costs.
• Regulatory Framework: ESMA and EBA have published principles to address benchmark setting issues until a formal regulatory framework is established.

7. Operational Risk of Cyber Attacks

• Recent Incidents: Cyberattacks, such as DDoS attacks in April 2013 and global bank robberies in June 2013, have highlighted the operational risks of cyber threats.
• Capital and Risk Management: While banks must hold capital against operational risks, this should not substitute for robust risk management practices.

Key Recommendations

• Asset Quality Reviews: Conduct asset quality reviews for major EU banks to improve transparency and address concerns about asset deterioration.
• Harmonized Regulation: Implement EU-harmonized regulatory valuation rules for the insurance sector, especially in light of Solvency II delays.
• Resolution Frameworks: Monitor the implications of bail-in and bank resolution proposals on funding structures.
• Regulatory Consistency: Ensure that regulatory reforms are consistent across sectors to prevent regulatory arbitrage and support long-term stability.
• Transparency in Benchmarks: Strengthen transparency and reliability in financial benchmarks to maintain market confidence.
• Cyber Risk Management: Improve operational risk management and ensure that cyber risk is not underestimated.

Conclusion

The EU financial system faces a complex and interconnected set of risks that require a coordinated and resilient response from both policymakers and supervisory authorities. While some progress has been made in regulatory reforms, the continued economic weakness, low interest rates, and market fragmentation underscore the need for ongoing vigilance and adaptive policy measures to safeguard financial stability.