The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have on 10 September issued their Autumn 2024 Joint Committee Report on risks and vulnerabilities in the EU financial system. The Report underlines ongoing high economic and geopolitical uncertainties. The ESAs warn national supervisors of the financial stability risks stemming from these uncertainties and call for continued vigilance from all financial market participants. For the first time, the Report also includes a cross-sectoral deep dive into credit risks in the financial sector.
The continued decline of inflation in late 2023 and early 2024 has led central banks to begin the shift towards looser monetary policy. Financial markets performed strongly in anticipation of future rate cuts and an improving macroeconomic outlook, save for the short-lived but sharp equity price dip in August. Considerable uncertainties, nonetheless, remain regarding the future path of the global economy, inflation and monetary policy and the interplay of these factors across different jurisdictions.
Amid ongoing geopolitical developments, such as the Russian aggression against Ukraine, the war in the Middle East and elections in the European Union and the United States, there is potential for sudden shifts in the economic outlook and market expectations. High market volatility in August provided a glimpse of the continued potential for sudden shifts in outlook and market expectations. In sum, the highly uncertain current environment continues to present material financial stability and operational risks that necessitate vigilance from all financial market participants.
Against the backdrop of these risks and vulnerabilities, the Joint Committee of the ESAs advises national competent authorities, financial institutions and market participants to take the following policy actions:
- financial institutions and supervisors should remain prepared to face the impacts of continued high interest rates on the real economy;
- credit risk should continue to be monitored and carefully managed as its potential materialisation remains a concern. This underlines the need for adequate provisioning levels and forward-looking provisioning policies, while maintaining prudent and up-to-date collateral valuation;
- financial institutions need to be flexible and agile and have proper plans and processes in place to address unexpected short-term multi-fold challenges;
- financial institutions and supervisors should remain vigilant regarding the impact of inflation on product development.
- financial institutions and supervisors should remain vigilant to operational and financial stability risks that could arise from cyber-risks, as exemplified by the global IT disruption in July from the failed software update of a widely used cybersecurity company.
