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Main risks to EU financial market stability have intensified, says ESA

Risks affecting the financial systems of the European Union have not changed in substance, but have intensified over the past six months, according to EU financial regulators.07 May 2015

The EU's economic performance improved slightly in early 2015, but the financial sector continues to be affected by low investment demand, economic uncertainty in the eurozone and neighbouring countries, a global economic slow-down and a low-interest rate environment, the joint committee of the European Supervisory Authorities (ESA) said in its fifth report on Risks and Vulnerabilities in the EU Financial System. The ESA is made up of the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA).

Steven Maijoor, chairman of the joint committee, said: "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."

The report recommends that supervisors include misconduct tests in stress tests, and financial institutions should strengthen oversight and governance frameworks. the regulatory framework needs to be improved, too, to address conduct risks.

IT operational and cyber risk are major challenges, too, the report said, and IT risk must be integrated into overall risk management.

However, the report said a number of on-going policy and regulatory initiatives are contributing to improving the stability and confidence in the financial system as well as facilitating additional funding channels to the real economy.

"Recent regulatory initiatives across the banking, insurance and securities sectors are contributing to improving the stability and confidence in the EU financial system," Maijoor said.