On 31 March, the three ESAs (EIOPA, ESMA and EBA) published their first Joint Committee Report for 2021 on risks and vulnerabilities in the EU financial system.
The report highlights how the COVID-19 pandemic continues to weigh heavily on short-term recovery prospects.It also highlights several vulnerabilities in the financial markets and warns of possible further market corrections.
The ESAs advise national competent authorities, financial institutions and market participants to take the following policy actions:
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Prepare for an expected deterioration of asset quality;
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Continue to develop further actions to accommodate a “low-for-long” interest rate environment and its risks: while low interest rates are important to support economic activity, they remain the main risk for the life insurance and pension fund sector. The report notes that for insurers, it is important that the regulatory framework also reflects the steep fall in interest rates experienced in recent years and the existence of negative interest rates;
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Ensure sound lending practices and adequate pricing of risks by banks;
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Follow conservative policies on dividends and share buy-backs: any distributions should not exceed thresholds of prudency; and
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Investment funds should further enhance their preparedness in the face of potential increases in redemptions and valuation shocks.