[author: Kevin Wong]

The Joint Committee of the European Supervisory Authorities (“ESAs“) (that is, the EBA, EIOPA and ESMA) published its spring 2018 report (JC 2018 07) on risks and vulnerabilities in the EU financial system on April 12, 2018.

The Joint Committee identifies the following as the main risks to the EU financial system:

• Brexit. Uncertainties around the terms of the UK’s withdrawal from the EU could expose the EU27 and the UK to economic and financial instability and weaken market confidence, particularly if negotiations end in a disorderly way. The lack of a conclusive agreement on the withdrawal terms could affect the legal framework for financial services and the continuity of financial contracts, and create operational challenges.
• Cyber risks. These risks threaten data integrity and business continuity and are particularly dangerous because of possible multiplier effects leading to further business risks such as supply chain risk and reputational risk. Similarly, risks related to virtual currencies and crypto-assets have recently materialised.

The Joint Committee published a report in March 2017 noting that the growing use of big data could increase the risk of harm from cyber attacks.

• Asset repricing. The risks related to valuations and repricing of risk premiums could reduce profitability and asset quality across sectors. Asset quality in the banking sector has recently improved and volumes of non-performing loans (“NPLs“) disposals are increasing. However, the amount of NPLs on banks’ balance sheets remains high, which needs to be addressed by banks and supervisors.

The Joint Committee’s spring 2017 report on risks and vulnerabilities in the EU financial system warned that the banking sector was being affected by high levels of NPLs.

• Climate change and the transition to a lower carbon economy. This raises concerns about the sustainability of investments across large parts of the financial sector. Climate change can affect asset quality through different transmission channels, which could in turn affect the solvency position of financial institutions.

In the light of the risks identified, the Joint Committee recommends a series of policy actions by the ESAs, national competent authorities and financial institutions. These recommended actions are set out in the report.

The Joint Committee previously reported on risks and vulnerabilities in the EU financial system in September 2017.