Financial Institutions Need to Be Prepared for Potential Degradation of Assets-April 21, 2022 11:30 am


-European regulators of Banking (EBA), Insurance and Occupational Pensions (Eiopa) and Financial Markets (Esma) released a joint quarterly report on the risks and vulnerabilities of the European financial system on Wednesday.

A report urging local regulators, financial institutions and market players to follow six steps. For supervisors, financial institutions must first ensure that they comply with the sanctions systems in place in Europe and elsewhere to prepare for the potential new negative effects of current geopolitical tensions.

Therefore, they must continue to prepare for “possible” deterioration in the quality of assets in the financial sector. “Given the sustainability of risk and the accumulation of medium-term risk, significant uncertainty is added, but supervisors are benefiting from assets, especially in the area of ​​mortgages, especially support measures.” The report states.

Real estate concerns

With respect to the real estate market, supervisors see potential price revisions as an additional concern for the European financial sector. “The EU residential real estate market is growing rapidly, primarily due to telecommuting practices, very low borrowing rates, and economic recovery, and prices are likely to exceed fundamentals,” they warn. ing.

The situation can be even more complicated for commercial real estate, which is more vulnerable to structural changes in the post-pandemic era. Too high a valuation in the financial and real estate markets can lead to sharp adjustments, especially in the context of rising yields, the report analyzes.

Another recommendation from regulators is to carefully monitor the impact of new potential increases in yields and sudden fluctuations in the risk premium on financial institutions and investors. The liquidity of funds, especially corporate bond funds, also needs to be carefully monitored if the market becomes less liquid when the market becomes more stressed, the report said.

European regulators are also concerned about private investors, as market participation has increased significantly in recent years. They believe that regulators need to manage the risks borne by individual investors who buy assets in the hope of a significant price increase, unaware of the high risks associated with them.

Need more ESG

As a result, financial institutions, according to supervisors, need to further integrate environmental, social and governance (ESG) considerations into their business strategies and governance structures.

“They need to factor ESG risks into their risk appetite and internal capital allocation processes. Financial institutions need to continue to develop methodologies and approaches to test ESG factors and long-term resilience to risk. The lack of data continues to question the integration of ESG considerations into risk management, investment processes, and financial institution investment advice, “the report emphasizes.

Finally, financial institutions need to strengthen their cyber-resilience measures to prepare for potential increases in cyberattacks and future consequences. The frequency of cyber incidents has reached an unprecedented rate. Find a European supervisor.