The Joint Committee of the European Supervisory Authorities (ESAs) has outlined policy actions in a report to address risks and vulnerabilities in the EU financial system. The key risks considered relate to valuations and repricing of risk premia, the uncertainty around the terms of the UK’s withdrawal from the EU, operational and ICT risks and climate change risks.

The report outlines the following policy actions by the ESAs, national competent authorities, financial institutions and market participants moving forward.

  • Conduct and develop further stress test exercises across all sectors – ESMA is currently developing guidelines for stress testing carried out by money market funds and for asset managers on liquidity stress testing.
  • Continued attention to be paid by supervisory authorities on the risk appetite of financial institutions – financial institutions should carefully manage their interest rate risk and retail investors should consider the risk of moving into higher yielding and leveraged products.
  • Macro and micro prudential authorities should further contribute to address contagion risks and enhance their efforts in monitoring of lending standards. Authorities should focus on monitoring and improving asset quality.
  • EU financial institutions, their counterparties and investors and retail customers should plan appropriate mitigating actions in a timely manner to prepare for Brexit. Preparations should address the potential risk of a no-deal Brexit and be reported to national competent authorities (NCAs).