European policymakers warn that risks to the region’s financial system have ratcheted up over the past six months.
A new report from the Joint Committee of the European Supervisory Authorities (ESAs), which includes banking, securities and insurance regulators, concludes that the risks facing the European financial system overall “have not changed in substance, but have further intensified.”
The report notes that the main risks to the financial system continue to be the low growth, low inflation environment, coupled with volatile asset prices; investors and financial firms taking on more risk in the search for yield; poor industry conduct; and, risks associated with technology and cyber-attacks. It warns that while these major risks aren’t new, they have become further entrenched.
The committee also notes that while Europe’s economic performance improved slightly in early 2015, the financial sector continues to contend with a variety of challenges, including low investment demand, economic uncertainty in the region, and overall global economic weakness.
“The Joint Committee has noted some improvement in overall market conditions; however, the recovery is not yet sustained and is exposed to risks related to broad macroeconomic conditions, in particular the low interest environment and resulting search-for-yield behaviour. Additionally regulators continue to have concerns about the operational risks generated by some financial institutions’ inappropriate business conduct, as well as those risks posed by inadequate management of IT risks,” said Steven Maijoor, the current chairman of the Joint Committee, and chair of the European Securities and Markets Authority (ESMA).
Despite these risks, Maijoor stresses that a number of ongoing policy and regulatory initiatives — such as stress tests in the banking and insurance industry, and ongoing securities policy reforms — are “contributing to improving the stability and confidence in the financial system.”