Report Finds Risks to EU Financial Market Stability Deepening

Risks affecting the European Union (EU) financial system have not changed in substance, but have further intensified over the past six months suggests a report.

Issued by the Joint Committee of the European Supervisory Authorities (ESAs), the fifth ‘Report on Risks and Vulnerabilities in the EU Financial Systemfinds that the EU’s economic performance improved slightly in early 2015.

However the financial sector in general still suffers from low investment demand, economic uncertainty in the eurozone and its neighbouring countries, a global economic slowdown and a low-interest rate environment.

The main risks affecting the financial system haven’t changes but have become more entrenched. They include:

  •  Low growth, low inflation, volatile asset prices and their consequences for financial entities.
  •  Search for yield behaviour exacerbated by potential rebounds.
  •  Deterioration in the conduct of business.
  •  Increased concern about IT risks and cyber-attacks.

“Despite these risks, a number of ongoing policy and regulatory initiatives are contributing to improving the stability and confidence in the financial system as well as facilitating additional funding channels to the real economy,” states the report.

These include ongoing regulatory reforms in the securities, banking and insurance sectors such as the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), the work on the implementation of the Capital Requirements Directive and Regulation (CRDIV/CRR), the work on the Bank Recovery and Resolution Directive (BRRD), the Deposit-Guarantee Schemes Directive (DGS) and the Solvency II Directive, as well as the European Commission’s (EC) plan for a Capital Markets Union (CMU).

“The Joint Committee has noted some improvement in overall market conditions; however, the recovery is not yet sustained and is exposed to risks related to broad macroeconomic conditions, in particular the low interest environment and resulting search-for-yield behaviour,” said its current chairman Steven Maijoor, who also heads the European Securities and Markets Authority (ESMA).

“Additionally regulators continue to have concerns about the operational risks generated by some financial institutions’ inappropriate business conduct, as well as those risks posed by inadequate management of IT risks.”

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