On September 14, the European Securities and Markets Authority (ESMA) published its Trends, Risks and Vulnerabilities Report No. 2 for 2015 (the TRV) on the European securities markets. The TRV covers the time period from January to June 2015. ESMA also published its Risk Dashboard No. 3 for 2015 (Dashboard), providing a summary of the risks facing EU markets.
ESMA has raised its risk indicator for the EU markets to the highest level of “very high.” ESMA maintains that market risk has been elevated for investors, market infrastructures, and the financial system at large due to high volatilities and fluctuating performances across asset classes. ESMA’s credit risk assessment remained unchanged at very high levels. ESMA stated that it expects that liquidity risk, which is currently at a high level, will increase in the future, largely due to structural market changes that may have modified costs and incentives for market makers to provide liquidity. ESMA reported that contagion risk remained high and that operational risk remained elevated.
The TRV also reports ESMA’s monitoring on possible vulnerabilities in the European financial system. The areas of concern include shadow banking, market liquidity and alternative funding. ESMA has proposed a more-focused approach to better measure the size of shadow banking activity. ESMA also examined how liquidity in sovereign bond markets is affected by the funding constraints of primary dealers and investigated the potential and risk of bank-loan mutual funds as a source of lending.
ESMA updates the TRV and Dashboard semi-annually as part of it ongoing market surveillance.