The three European Supervisory Authorities (ESAs) – EBA, EIOPA and ESMA – have issued a joint risk report highlighting the deteriorating economic outlook alongside providing recommendations to prepare for challenges ahead.
The joint committee’s risk report notes that the post-pandemic economic recovery in Europe was impacted severely by the Russian invasion of Ukraine.
A rapid deterioration of the economic outlook has occurred as a result of the war, leading to additional inflationary pressures by increasing energy and commodity prices, imbalances in supply and demand as well as reducing the purchasing power of households.
Elsewhere, European investment grade bonds prices fell 15% between August last year and May 2022 as the impacts of the Russian invasion and inflation were felt across the market, as found by a risk report by ESMA earlier this month.
In light of the risk and uncertainties highlighted by the ESAs in their joint risk report, the committee recommends that national competent authorities, financial institutions and market participants take five policy actions.
Firstly, financial institutions and supervisors are advised to continue to be prepared for a deterioration in asset quality in the financial sector. Supervisors should also monitor developments in assets which benefitted from temporary support measures related to the pandemic, as well as in assets that are vulnerable to rising inflation and high energy and commodity prices.
Secondly, the ESAs advise that financial institutions and market participants should monitor the impact of increases in policy rates and the potential for sudden increases in risk premia will have on them more broadly.
Thirdly, financial institutions and supervisors have been recommended to closely monitor the impact of inflations risks, as well as ensuring efforts are made to ensure investors awareness on the effects of inflation on real returns of assets and how these can differ across asset types.
Elsewhere, the ESAs have advised supervisors to continue to monitor risks to retail investors, especially in regard to crypto-assets and related products, where consumers may not completely understand the extent of the risks involved in investing in such assets.
Finally, the committee has advised financial institutions and supervisors to manage environmental risks and cyber risks carefully to address threats to information security and business continuity, including risks that are related to the ever-increasing sophistication of cyber attacks.
The full risk report can be accessed here.