European regulators warn of risks associated with the fragile economic outlook
The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) issued their joint Autumn 2023 report on risks and vulnerabilities in the EU financial system.
Background context: The ESAs note that the adverse events of recent years such as the war in Ukraine, the volatility in commodity markets, and the turmoil among certain US mid-sized banks has ushered in a period of heightened uncertainty, presenting financial stability risks that require vigilance from market participants.
Specific trends: The report notes how the increase in interest rates has resulted in heterogeneous impacts for the financial services sector, having generated increased net interest income for banks, reduced profitability for insurers, and introduced liquidity risks for the asset management sector.
Looking forward: The ESAs encourage national European regulators and financial institutions to closely monitor the impact from increases in policy rates, to prepare for deterioration in asset quality, to monitor inflation risk, and ensure that effective risk management and governance arrangements are in place. They note the absence of effective risk management for liquidity and interest rate risk during recent problems in the US and Switzerland.
Bloomberg
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