08 December 2023

The General Board of the European Systemic Risk Board held its 52nd regular meeting

At its meeting on 30 November 2023, the General Board of the European Systemic Risk Board (ESRB) concluded that financial stability risks in the EU remain elevated. Looking forward, the General Board cautioned that several factors continue to weigh on the financial stability outlook. Uncertainty and downside risks to the growth outlook have increased in recent months, not least on the back of rising geopolitical tensions. In particular, the challenging macroeconomic environment could create balance sheet stress for households and non-financial corporations, as the capacity of fiscal policy to support these sectors is more limited than in the past. The General Board acknowledged the high volatility in bond markets and the potential of a disorderly adjustment in financial markets, which could be amplified by high credit risk and liquidity risk in the non-bank financial intermediation sector.

Moreover, the General Board discussed recent strains in the commercial real estate (CRE) sector in several European Economic Area (EEA) countries and stressed the importance of its January 2023 recommendation on CRE exposures across the financial sector. The recommendation called for medium-term actions by supervisory authorities to improve their monitoring of CRE-related risks, ensure sound financing practices and increase the resilience of financial institutions. It highlighted that the CRE sector is particularly vulnerable to the tightening of financial conditions, and noted its modest growth outlook in the light of structural changes such as the shift towards e-commerce, remote working developments and stricter building standards as a result of climate policies. Finally, the recommendation also called for the development of activity-based supervisory tools for CRE exposures in the EU, to be applied consistently across all financial institutions.

The banking sector is still benefiting from strong profitability and robust funding liquidity, but uncertainty is also weighing on its outlook. First, the weak macroeconomic environment may affect asset quality, particularly for banks with high exposures to consumer loans and the CRE sector. Second, banks’ funding costs are expected to weigh on net interest income. Third, reduced credit demand and subdued growth prospects are likely to curtail lending volumes to households and non-financial corporations.

Against this background, the General Board considered it crucial for micro- and macroprudential authorities to continue monitoring the impact of the changing macro-financial environment on financial stability, with a view to adjusting policy responses as appropriate....

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