Weak financial sector profits represent one of the chief risks to Europe’s financial system, according to a new report from the Joint Committee of the European Supervisory Authorities published on Thursday.
The report from Europe’s major banking, securities and insurance regulators flags the major risks facing the region’s financial system. At the top of their list is the low profitability of financial institutions in a low-return environment.
“Yields in Europe remain at historical lows and risks concerning the low profitability of financial entities pose key concerns to the EU financial system,” the report says.
Given the risks, regulators must be scrutinizing the sustainability of firms’ business models, as financial services institutions take actions to reduce costs and adjust their businesses, the report says.
The second key risk flagged in the report is the “increasing interconnectedness” of bank and non-bank firms, which could help spread negative shocks throughout the system, the report warns. The Joint Committee recommends that this risk “should be tackled through enhanced supervisory monitoring of concentration risks, cross border exposures and regulatory arbitrage.”
Finally, the report finds that emerging markets, including China, could pose a risk to European financial firms and markets. It suggests that national supervisors include emerging-market risk in their stress testing, and that they scrutinize the emerging-market exposure and projected returns for financial institutions from emerging-market businesses.