Inflation continues to ease and monetary policy is turning, but the risks to financial stability have not abated, European regulators warn.
In a joint report, the three major European financial regulators — the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority — call for “continued vigilance” from both financial firms and regulators, given the elevated risks to financial stability.
While inflation and financial strains are easing, the regulators warned that “considerable uncertainties … remain regarding the future path of the global economy, inflation and monetary policy and the interplay of these factors across different jurisdictions.”
At the same time, a variety of geopolitical events — including ongoing conflict in Ukraine and the Middle East, and elections in the U.S. and Europe — mean the economic outlook and market expectations could undergo sudden shifts. Markets demonstrated this in August, when equities dropped sharply in response to resurgent economic concerns.
“[T]he highly uncertain current environment continues to present material financial stability and operational risks that necessitate vigilance from all financial market participants,” the regulators said.
In particular, credit risk needs to be carefully monitored and managed, financial institutions must properly provision for potential losses, and participants must be prepared for multiple short-term stresses.
The regulators also warned industry firms and regulators to be ready to deal with the economic fallout from still-high interest rates, the possible effects of inflation on financial product development, and the ever-evolving cybersecurity risks to operational and financial stability.