The European Union (EU) financial system continues to face ongoing risks stemming from weak economic growth and the low yield environment, according to a report released Wednesday by Europe’s banking, securities and insurance regulators. The report also warns of new risks, including the fallout from “Brexit.”
The report, published by the Joint Committee of the European Supervisory Authorities (ESAs), indicates that risks brought on by the financial crisis of 2008-09, including the long-lasting impacts of the crisis on industry profits and asset quality, remain a factor. But the system is facing emerging threats as well, the report states. In particular, it notes that the outcome of the U.K.’s Brexit vote “has added political and legal uncertainties to those already affecting the financial system.”
The low-growth and low-yield environment continues to affect the EU financial sector through various channels, the report notes.
“Interest rates and growth expectations have decreased further and are posing new challenges to the entire financial sector. Low interest margins significantly constrain banks’ profitability, while life insurers’ and pension funds’ liabilities increase as it becomes more difficult to generate high investment returns,” the report states. It adds that these factors may drive firms and funds to take on more risks in search of higher returns.
Additionally, poor asset quality, the rising costs of industry misconduct and growing competition from fintechs may negatively affect the profitability of EU banks and insurers, the report adds. “Subdued returns, further lowered by fees and charges, reduce the attractiveness of investment funds,” it says, adding that industry profits may be further imperilled by Brexit fallout and other geopolitical risks.
Finally, the report says that the interconnectedness of the EU financial sector with the wider financial system is increasing. The regulators recommend that “stability risks should be assessed thoroughly to mitigate the increasing risk exposure outside the traditional financial system.”
The Joint Committee of the ESAs is an umbrella group that includes the European Banking Authority, the European Securities and Markets Authority and European Insurance and Occupational Pensions Authority (EIOPA).
“We are considering the possibilities for further enhancing monitoring of financial industries, reinforcing adequate capital or risk buffers as well as ensuring adequate resolution arrangements for affected sectors,” said Gabriel Bernardino, chairman of the Joint Committee, and chairman of EIOPA. “The Joint Committee is committed to providing a strong and streamlined supervisory response both on a micro- and macro prudential level, which is required by the challenging economic environment.”
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