[author: Ingrid Hesselbo]

On April 20, 2017, the Joint Committee of the European Supervisory Authorities (the “ESAs“) published its April 2017 report on risks and vulnerabilities in the EU financial system.

The ESA highlights the following main risks to the financial system:

The banking sector is being affected by high levels of non-performing loans (“NPLs“), high litigation costs, overcapacity and lack of focus in strategies to return to sustained profitability. Addressing low profitability challenges includes increasing supervisory action, making progress in structural reforms and improving the efficiency of secondary markets. Insurers face substantial challenges arising from prolonged low interest rates, and the fund industry’s rates of returns are subdued and remain mostly negative.

Increased asset price volatility and liquidity concerns have heightened risks relating to adequate valuation of asset prices. This has been exacerbated by political uncertainties.

Interconnectedness adds to financial sector risks. This includes concentration risk caused by highly correlated equity price movements for insurers and banks and high exposures of EU insurers to EU banks. Interconnectedness with the wider financial system is also increasing.

Cyber risk appears as a major risk and is on the rise. Currently, denial-of-service attacks, data theft or manipulation, malicious software, misinformation and false identification are the most relevant forms. Operational risks related to ICT risks also appear to be on the rise across the financial sector. The ESAs are responding to cyber and IT-related risks by, for example, drafting guidelines on ICT risk assessment for supervisors, assessing cybersecurity capabilities of central counterparties and assessing the potential accumulation of risk for insurers deriving from newly developed cybersecurity coverages.