The securities, banking and insurance sectors in the European Union (EU) is affected by several different risk sources, which are periodically reported by the Joint Committee of the European Supervisory Authorities (ESAs) shows. In the second half of 2017, ESA highlighted the set of risks of major concern for financial stability as grouped in three categories:
- sudden repricing of risk premia (as showed by the recent spike in volatility);
- uncertainties around the terms underlying Brexit;
- Sudden risk premia reversal: supervisory stress testing remains a crucial tool for the management of systemic risk – these tests are to ensure that systemically relevant sectors and players are safe to withstand market shocks, such as insurance and occupational pensions sectors, central counterparties (CCP), banks and in the future asset managers;
- Brexit: the ESAs recommend EU financial institutions and their counterparties, as well as investors and retail consumers, to consider timely mitigation actions to prepare for the UK’s withdrawal from the EU – including possible relocations and actions to address contract continuity risks;
- Cyber security: the ESAs encourage financial institutions to improve fragile IT systems, explore inherent risks to information security, connectivity and outsourcing. To support this, the ESAs will continue addressing cyber risks for securities, banking and insurance markets and monitor firms’ use of cloud computing and potential build-up of cyber risks; and
- Climate change: the ESAs recommend financial institutions to consider sustainability risk in their governance and risk management frameworks and to develop responsible, sustainable financial products – moreover, supervisors should enhance their analysis of potential risks related to climate change for the financial sector and financial stability.