Vulnerabilities of the EU Financial System and supervisory priorities for 2017/2018

The joint supervision committee (ESAs) is prompting supervisors to take action focusing on NPL, low profitability and risk management

Low Profitability

High levels of non-performing loans (NPLs), continuously high litigation costs, overcapacity, and lack of focus in strategies to return to sustained profitability affect the banking sector, notwithstanding a further steady strengthening of the capital ratios.

ESAs will be looking closer the application of ECB/EBA latest NPL guidelines by SSM and Joint Supervisory Colleges.

Ask our team how we can support you adopt the new NPL guidelines and manage conduct risk more efficiently

Valuation risks around search for yield and repricing of risk premia

Increased asset price volatility coupled with lingering liquidity concerns has heightened risks around the adequate valuation of asset prices. Risks are exacerbated by political uncertainties.

The recently observed steepening of the yield curve, while benefitting the profitability of banks, insurers and pension funds, poses additional valuation concerns. For the insurance sector, a sudden substantial increase of the interest rate might expose companies to an increasing probability of lapses.

ESA’s keen to explore how the Interest Rate in the Banking Book (IRBB) Stress Tests are supporting the supervisory process in Banking and expand to other sectors.

Ask our team how we can help you update your internal Pillar II models

Interconnectedness within the financial system

Interconnectedness, in particular via asset price contagion and direct financial exposure, adds to financial sector risks. Highly correlated equity price movements for insurers and banks, and high exposures of EU insurers to EU banks indicate risk concentration within those two sectors.

ESA’s keen to supervise groups (banking, insurance, investment management) as Financial Conglomerates (FICO)

Ask our team how FICO supervision affects your regulatory capital requirements and capital agenda

Cyber risks and IT-related operational risks

Fast technological change is expected to have a significant impact on the existing business models of financial institutions over time. Many financial intermediaries have to deal with ageing core IT systems, hence the need for extensive IT investments, which further aggravate profitability. In addition, cyber risk threatens data integrity and business continuity in an interconnected financial system.

The ESAs are responding to cyber and IT-related risks by, e.g., drafting Guidelines on ICT risk assessment for supervisors, assessing cyber security capabilities of central counterparties (CCPs) and assessing the potential accumulation of risk at insurers deriving from newly developed cyber security coverages.

Ask our team how we can support you upgrade your cyber and operational risk frameworks to comply with supervisory expectations

Should you be interested in any of our solutions, including organising a workshop with our team, please do not hesitate to contact us.