The Joint Committee of the European Supervisory Authorities (ESAs) published its fifth Report on Risks and Vulnerabilities in the EU Financial System. Overall, the report found that in the past six months, risks affecting the EU financial system have not changed in substance, but have further intensified.

Brexit is identified as a source of financial stability. The uncertainties surrounding the UK’s withdrawal from the EU could weaken market confidence. As a result, the report recommends that EU financial institutions start to prepare for a potential cliff-edge scenario, which should include considerations on potential relocation and contract continuity, since “financial institutions are responsible for ensuring that they are able to fulfil their contractual obligations under all circumstances”.

Other major risks include:

• Risks related to valuations and repricing of risk premia, which could adversely impact profitability and asset quality across sector. Volumes of non-performing loans have decreased in banks’ balance sheets but still remain high.

• Increased concerns about IT risks and cyber-attacks, which have become a “significant and highly escalating threat to investor protection, the financial markets and their stability worldwide”. Financial institutions are encouraged to improve “fragile IT systems” and ESMA will continue to pay supervisory attention to these risks.

• Climate change and its potentially destabilising effects, as well as the transition to a lower-carbon economy which could result in potential green bubbles or reputation damages, are considered as emerging risks.

For any questions or comments on this report, please contact Marie-Adelaide de Nicolay