Joint Committee

The European Union's (EU) banking, insurance, pensions and securities sectors continue to face a range of risks, the latest report on "Risks and Vulnerabilities in the EU Financial System" published today by the Joint Committee of the European Supervisory Authorities (ESAs) shows.

The 2019 Autumn ESAs' report highlights the following risks as potential sources of instability:

  • Uncertainties around the terms of the United Kingdom's withdrawal from the European Union
  • Persistently low interest rates, which combined with flattening yield curves, put pressure on the profitability and returns of financial institutions, incentivise search-for-yield strategies and increase valuation risks
  • Transition to a more sustainable economy and environmental, social and governance (ESG) related risks, leading to possible challenges to the viability of business models with high exposures to climate sensitive sectors.

In light of the ongoing uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key. Therefore, the ESAs call for the following policy actions by European and national competent authorities (NCAs) as well as financial institutions:

·       Contingency planning: Financial institutions and supervisors should continue their work on contingency planning and assurance of business continuity in the case of a no-deal Brexit. Considering the variety of measures undertaken by the ESAs and national supervisory authorities and other competent authorities, the EU financial sector should be well informed and prepared to manage risks from a micro-perspective. The ESA’s will also continue to closely monitor ongoing political and market developments and consider the need for further communications on that basis.

·       “Low-for-long” scenario: Supervisors and financial institutions should continue taking into account a “low-for-long” interest rate scenario and associated risks. Low interest rates are an important driver of low bank profitability and remain the main risk for the insurance and pension fund sectors. They contribute to the further build-up of valuation risks in securities markets as well as to a move into less liquid and more leveraged investments through search-for-yield strategies. On the investment fund side, a convergent application of the rules on liquidity management and (for UCITS) eligible assets as well as a consistent use of stress testing will be important supervisory tools.

·       Bank profitability: There is a need to further address unprofitable banks and their business models in order to increase the resilience of institutions to a more challenging economic environment. Further investments into financial technologies and exploring opportunities for bank sector consolidation are among responses to low profitability. Transparency and the consistent application of common prudential requirements and supervisory rules across jurisdictions are preconditions, which could contribute to the use of opportunities cross border consolidation, may offer.

·       Leveraged lending market: Risks related to the leveraged loan market and Collateralized Loan Obligations (CLOs) in the financial sector should be further explored and identified. There is a lack of clarity about the total volume of leveraged loans outstanding and about the ultimate holders of risks of many CLO tranches. Supervisors have raised concerns about a possible underpricing of risks.

·       Sustainable finance and ESG risks: Supervisory authorities and financial institutions should continue their work on identifying exposures to climate related risks and facilitate access of investors to sustainable assets. Scenario analysis and stress testing are important tools that can be implemented by supervisors with a goal to incorporate sustainability considerations into risk assessment. Financial institutions should incorporate climate risk and other ESG factors into their risk management framework and should play a stewardship role by taking into account the impact of their activities on ESG factors. Going forward, the ESAs should take a proactive stance in fulfilling mandates on sustainable finance, including on how ESG considerations can be incorporated into the regulatory and supervisory framework of EU financial institutions.

 

Background

The Joint Committee is the forum for cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the European Supervisory Authorities (ESAs).

Through the Joint Committee, the three ESAs cooperate regularly and closely to ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board (ESRB).

The three European Supervisory Authorities, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities Markets Supervisory Authority (ESMA) launched today a consultation on draft Implementing Technical Standards (ITSs) on the reporting of intra-group transactions and risk concentration for Financial Conglomerates. 

The draft technical standards were developed based on the mandate included in Financial Conglomerates Directive (FICOD). The consultation runs until 15 August 2019.

The draft technical standards aim at offering a single framework of requirements for the reporting of intra-group transactions and risk concentration by financial conglomerates subject to supplementary supervision in the European Union.

The ITSs provide the foundation for the harmonisation of reporting, with one single set of templates and a single embedded dictionary using common definitions and a single set of instructions to fill in the templates. The ITSs will help the coordinators and other relevant competent authorities to identify relevant issues and exchange information more efficiently, thereby reducing costs and fostering a level playing field across financial conglomerates in the European Union.

Consultation process

For responding to this consultation please use the following link.

Please note that the deadline for the submission of comments is Thursday, 15 August 2019 at 23.59 hrs CET.

All contributions received will be published following the close of the consultation, unless requested otherwise.

Legal basis

These draft ITS have been developed according to the mandate provided in Article 21 a (2b) and (2c) of Directive 2002/87/EC.

The European Supervisory Authorities (ESAs) today published two pieces of Joint Advice in response to requests made by the European Commission in its March 2018 FinTech Action Plan:

Regarding the need for legislative improvements, in developing the Joint Advice the ESAs’ objective was that every relevant entity should be subject to clear general requirements on governance of ICT, including cybersecurity, to ensure the safe provision of regulated services. Guided by this objective, the proposals presented in the Advice aim at promoting stronger operational resilience and harmonisation in the EU financial sector by applying changes to their respective sectoral legislation. Incident reporting is highly relevant to ICT risk management and allows relevant entities and authorities to log, monitor, analyse and respond to ICT operational, ICT security and fraud incidents. Therefore, the ESAs call for streamlining aspects of the incident reporting frameworks across the financial sector. Furthermore, the ESAs suggest that a legislative solution for an appropriate oversight framework to monitor the activities of critical third party service providers should be considered.

Regarding the costs and benefits of a coherent cyber resilience testing framework, the ESAs see clear benefits of such a framework. However, at present there are significant differences across and within financial sectors as regards the maturity level of cybersecurity. In the short-term, the ESAs advise to focus on achieving a minimum level of cyber-resilience across the sectors, proportionate to the needs and characteristics of the relevant entities. Furthermore, the ESAs propose to establish on a voluntary basis an EU wide coherent testing framework together with other relevant authorities taking into account existing initiatives, and with a focus on Threat Lead Penetration Testing (TLPT). In the long-term, the ESAs aim to ensure a sufficient cyber maturity level of identified cross-sector entities.

To implement the proposed actions, the ESAs highlight the required legal basis and explicit mandate, which is necessary for the development and implementation of a coherent resilience testing framework across all financial sectors by the ESAs in cooperation with other relevant authorities.

Background

The European Commission's March 2018 FinTech Action Plan specifically requests the ESAs:

  • To map, by Q1 2019, the existing supervisory practices across financial sectors around ICT security and governance requirements, and where appropriate a) to consider issuing guidelines aimed at supervisory convergence and enforcement of ICT risk management and mitigation requirements in the EU financial sector and, b) if necessary, provide the Commission with technical advice on the need for legislative improvements.
  • To evaluate, by Q4 2018 (now Q1 2019), the costs and benefits of developing a coherent cyber resilience testing framework for significant market participants and infrastructures within the whole EU financial sector.

The Joint Committee of the European Supervisory Authorities (ESAs) – EBA, EIOPA and ESMA – published today its 2018 Annual Report providing a detailed account of all the joint work achieved in the past year.

Consumer protection and financial innovation matters were once again a key priority for the Joint Committee over the last year, where in particular the ESAs continued their joint efforts in assessing the potential benefits and risks for consumers and financial institutions related to the developments in financial technology. The Report also highlights the ESAs' continued efforts in overseeing market developments and cross-sectoral risks, including those posed by Brexit.

In the area of anti-money laundering and countering the financing of terrorism (AML/CFT), the ESAs enhanced their focus on ensuring consistent application of AML/CFT rules across the EU and improving standards of AML/CFT supervision.

The European Union’s (EU) banking, insurance, pensions and securities sectors continue to face a range of risks, the latest report on “Risks and Vulnerabilities in the EU Financial System” published today by the Joint Committee of the European Supervisory Authorities (ESAs) shows. The 2019 Spring ESAs’ report highlights the following risks as potential sources of instability:

  • Uncertainties around the terms of the United Kingdom's withdrawal from the European Union.
  • Further repricing of risk premia and asset price volatility, which could be aggravated in conjunction with a less favourable macro-economic environment and the materialisation of a no-deal Brexit scenario.

In light of the ongoing uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key. Therefore, the ESAs calls for the following policy actions by European and national competent authorities (NCAs) as well as financial institutions:

Contingency Plans: It is crucial that European Union financial institutions, market participants and their counterparties enact timely contingency plans to prepare for the United Kingdom’s withdrawal from the European Union, including possible market volatility a no-deal Brexit may trigger. The ESAs are closely monitoring Brexit developments and the possible associated risks of a no-deal scenario. The ESAs issued Opinions and Recommendations to provide important guidance for financial institutions, market participants and NCAs in this regard.

Stress Tests: Against the backdrop of the potential for sudden risk premia reversals with a risk of rising funding costs, the development and regular use of stress tests across all sectors remains crucial. Therefore, the scenarios for the 2018 bank and insurance stress tests conducted by the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) reflected these risks. Furthermore, the European Securities Markets Authority (ESMA) will present guidelines on fund liquidity and Money Market Fund stress testing during 2019. ESMA is also preparing its next Central Counter Parties (CCPs) stress test. The EBA has started to prepare the methodology for its 2020 stress test exercise, and EIOPA launched its 2019 Occupational Pensions Stress Test.

Banks: Banks should develop strategies to carefully manage and address large refinancing needs, including building loss-absorbing capacity. In addition, banks should continue with efforts to address the stocks of non-performing loans (NPLs), and should review their business model to improve profitability. In addition, it is important that banks carefully manage their credit risk and interest rate risk. New bank lending has started to increase and warrants close monitoring of credit quality trends of new lending portfolios. Banks need to ensure that lending standards and covenant requirements do not weaken. The financial sector and banks in particular, need to manage their sovereign exposure carefully, which might imply a significant impact on their profitability and capital.

Insurance: Supervisors and insurance companies need to ensure that risks of a potentially sudden reassessment of risk premia and continued low interest rates are properly monitored and analysed as well as appropriate mitigating actions taken. In this context, the vulnerabilities identified in EIOPA’s 2018 Insurance Stress Test need to be addressed.

Background

The Joint Committee is the forum for cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the European Supervisory Authorities (ESAs).

Through the Joint Committee, the three ESAs cooperate regularly and closely to ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board (ESRB).

Pages