EU financial regulators assess risks to the financial sector after the outbreak of COVID-19 and call for enhanced cooperation
22 September 2020
The three ESAs have issued their first joint risk assessment Report of the financial sector since the outbreak of COVID-19. The Report highlights further amplified profitability concerns across the board and heightened liquidity challenges in segments of the investment fund sector.
The impact of the crisis on EU banks’ asset quality is a key concern
as significant uncertainty about the timing and size of a recovery
persists. The ESAs see a risk of decoupling of financial market
performance from the underlying economic activity, and , a prolonged
lower for longer interest rate environment which is expected to weigh on
the profitability and solvency of financial institutions, as well as
contributing to the build-up of valuation risks.
Directly following the COVID-19 outbreak in Europe, the ESAs’ actions
provided for regulatory flexibility, fostered operational resilience,
and highlighed the importance of consumer protection. In light of
ongoing uncertainties on the recovery from the COVID-19 pandemic,
regulatory and supervisory cooperation between the ESAs, the European
Systemic Risk Board (ESRB) and the European Commission remains key. In
particular, the ESAs highlighted the need to implement the following
policy actions:
- monitor risks and perform stress testing: risks
to valuation, liquidity, credit and solvency have increased across
financial sectors. The use and adequacy of liquidity management tools in
the investment fund sector should be continuously monitored;
- foster flexibility where and when needed:
supervisors and banks are encouraged to make use of the flexibility in
the existing regulatory framework, including use of capital and
liquidity buffers to absorb losses;
- support to the real economy: capital relief should be used in support of continued lending to the real economy in the downturn;
- stay prepared: EU financial institutions need to be well-prepared
for any disruptions they and their clients may face at the end of the
UK’s transition period of leaving the EU;
- supervise digital transformation: it is key for
financial institutions and their service providers to carefully manage
their ICT and security risks, including when outsourcing ICT activities.
Full Report
EIOPA
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