Citing concerns about the risk of a “no deal” Brexit, European financial regulators say that financial institutions and market players should have plans in place to weather the volatility the event may trigger.
The Joint Committee of the European Supervisory Authorities (ESAs) — which encompasses the region’s banking, insurance, pensions and securities regulators — issued a report on Tuesday highlighting the major risks facing the financial system, which is topped by the prospect of the U.K. abandoning the European Union (EU) without a negotiated deal.
The report suggests that a no-deal Brexit, coupled with a weaker economic environment, could prompt a repricing of risk and asset price volatility.
“In light of the ongoing uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key,” it says.
In particular, the ESAs say it is “crucial” for financial firms, market participants and counterparties to “enact timely contingency plans” to prepare for the “market volatility a no-deal Brexit may trigger.”
Given the risk of a sudden spike in market volatility, the regulators are also emphasizing the importance of regular stress testing across all sectors.
To that end, the ESAs’ report notes that the European Securities Markets Authority (ESMA) will issue guidance on fund liquidity and money market fund stress testing in 2019, and that it’s also developing its next stress test for central counterparties (CCPs).
“Banks should develop strategies to carefully manage and address large refinancing needs, including building loss-absorbing capacity,” the report says, adding that they should also review their business models to improve profitability.
“The financial sector and banks in particular, need to manage their sovereign exposure carefully, which might imply a significant impact on their profitability and capital,” it says.