EUROPEAN UNION: ESAs See Continued Risks in EU Financial Markets and Call for Rigorous Action on Assets and Liabilities

Thursday September 10 2015

The European Supervisory Authorities (the European Securities and Markets Authority, the European Banking Authority and the European Insurance and Occupational Pensions Authority) have published the August 2015 Joint Committee Report on Risks and Vulnerabilities in the EU financial system. The joint risk report informs on risks in the EU financial system (banking, securities and insurance sector), with a particular focus on cross-sectoral vulnerabilities and developments.

The joint risk report identifies that risks to the EU financial system have persisted since March 2015. Risks resulting from low interest rates, search for yield and low profitability of financial institutions remain present, along with risks related to reductions in market liquidity and their possible implications for asset managers. The fragile recovery of European economies continues to adversely affect profitability and asset quality of the EU’s financial sector.

Currently, 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.

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