Weak bank profits, inflated markets and the growing demands of technology highlight a list of risks to the financial system that European regulators identified in a new report published on Thursday.
In particular, the report published by the Joint Committee of the European Supervisory Authorities — which includes the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority — points to a "protracted period of low profitability" for banks and the difficulties faced by insurers in generating adequate returns to meet their long-term liabilities.
"High levels of non-performing loans, continuously high litigation costs, overcapacity, and lack of focus in strategies to return to sustained profitability affect the banking sector," the report says.
The Joint Committee also highlights the risk of high valuations driven by the search for yield and the repricing of risk in the report.
"Increased asset price volatility coupled with lingering liquidity concerns has heightened risks around the adequate valuation of asset prices," the report says. "Risks are exacerbated by political uncertainties."
Finally, the report points to rising operational risks related to technology that requires increased supervisory attention.
"Many financial intermediaries have to deal with aging core IT systems, hence the need for extensive IT investments, which further aggravate profitability. In addition, cyber risk threatens data integrity and business continuity in an interconnected financial system," the report says. "Against this background, the demand for cyberinsurance is expected to grow while cybercoverage products are still relatively new in the market, with limited underwriting experiences."