ESAs: EU financial regulators warn of an expected deterioration of asset quality
31 March 2021
They highlights a number of vulnerabilities in the financial markets and warn of possible further market corrections.
The three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) issued today their first joint risk assessment report of 2021.
The report highlights how the COVID-19 pandemic continues to weigh
heavily on short-term recovery prospects.
Macroeconomic conditions improved in the second half of 2020,
supported by ongoing fiscal and monetary policy efforts, but the
resurgence of the COVID-19 pandemic since the last quarter of 2020 has
led to increasing economic uncertainty. The start of the rollout of
vaccinations provides a crucial anchor for medium-term expectations, but
insufficient production capacities, delays in deliveries as well as
risks related to mutations of the virus are weighing heavily on
short-term recovery prospects.
Macroeconomic uncertainty was generally not reflected in asset
valuations and market volatility which have recovered to pre-crisis
levels, highlighting a continued risk of decoupling of valuations from
economic fundamentals.
In light of these risks and uncertainties, the ESAs advise, national
competent authorities, financial institutions and market participants to
take the following policy actions:
- Prepare for an expected deterioration of asset quality: banks
should adjust provisioning models to adequately address the impact of
the economic shock of the pandemic and to ensure a timely recognition of
adequate levels of provisions. They should engage to restructure over
indebted but viable exposure efficiently. To supervisors, banks’
provisioning policies should continue to be a point of particular
attention;
- Continue to develop further actions to accommodate a “low-for-long”
interest rate environment and its risks: while low interest rates are
important to support economic activity, they negatively impact banks’
interest income and remain the main risk for the life insurance and
pension fund sector. For insurers, it is important that the regulatory
framework also reflects the steep fall in interest rates experienced in
recent years and the existence of negative interest rates. Financial
institutions should also continue to monitor, and be prepared for,
changes in interest rates, especially in light of the recent upward
shifts of long-term interest rates and the consequent concerns about
re-emerging inflationary pressures;
- Ensure sound lending practices and adequate pricing of risks: banks
should continue to make thorough risk assessments to ensure that lending
remains viable in the future, and this should be closely monitored by
supervisors. Banks should continue to make thorough risk assessments to
ensure that lending remains viable, including after public support
measures such as loan moratoria and public guarantee schemes will
expire;
- Follow conservative policies on dividends and share buy-backs: any distributions should not exceed thresholds of prudency; and
- Investment funds should further enhance their preparedness in the
face of potential increases in redemptions and valuation shocks: to this
end the alignment of fund investment strategy, liquidity profile and
redemption policy should be supervised, as well as funds’ liquidity risk
assessment and valuation processes in a context of valuation
uncertainty.
Download the report
EIOPA
© EIOPA
