European Union Financial Regulators Assess Risks to the Financial Sector

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.

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. 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. Capital relief should be used in support of continued lending to the real economy in the downturn. 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. It is key for financial institutions and their service providers to carefully manage their ICT and security risks, including when outsourcing ICT activities.

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