On 12 September, the European Supervisory Authorities’ Joint Committee (ESAs JC) published a report on “Risks and Vulnerabilities in the EU Financial System“.
The secretariat of Insurance Europe has analysed the report and prepared an overview (see below). In general, the report concentrates on the risks related to:
1. the UK’s decision to withdraw from the EU
2. the low interest rate environment
3. ESG, including general considerations on sustainable finance
Should members have any comment, please contact investment@insuranceeurope.eu
Overview of the report
The report considers risks related to:
1. the UK’s decision to withdraw from the EU
- The report notes that in light of the fact that the Brexit date has been postponed until end of October 2019, the risk of a no-deal Brexit has not subsided and financial institutions should continue to plan for a no-deal Brexit scenario.
- As a consequence, the ESAs JC advises that financial institutions and supervisors continue their work on contingency planning and assurance of business continuity in the case of a no-deal Brexit.
2. the low interest rate environment
- The report highlights that risks related to the low interest rate environment continue to put pressure on the financial sector, even if during H1 2019 the global macroeconomic environment and the financial conditions improved. Low interest rates 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.
- As a consequence, the ESAs JC invites supervisors and financial institutions to continue taking into account a “low-for-long” interest rate scenario and the risks that come with it. On the investment fund side, a convergent application of the rules on liquidity management will be a key supervisory tool.
3. ESG, including general considerations on sustainable finance
- The report stresses that climate change poses different risks to the stability of the financial system due to the close relationship between the economy and the environment. In addition, it notes that EU-based investors are showing a growing interest in green and sustainable finance, with the green bond market growing both in size and coverage.
- As a consequence, the report reiterates that European supervisory authorities and financial institutions should continue the work on identifying exposures to climate related risks and
- facilitate access to sustainable assets for investors wanting to invest in the transition to a low-carbon emission economy. The planned actions by ESAs are summarised below.
- EIOPA:
- o plans to develop and implement a scenario analysis for climate related risks, especially because its analysis of insurers’ asset exposures to climate-related risk showed that 13% of insurers’ assets may be vulnerable to the transition to a more carbon neutral economy. In this respect, EIOPA wants to establish good practices for climate scenarios as part of a forward-looking risk assessment under SII (eg ORSA).
- o is working on the integration of sustainability risks in the investment and underwriting practices of (re)insurers (via an advice and a more recent draft opinion).
- o has started to work on the protection gap for natural catastrophe risks, on the basis of the potentially systemic impact that it can have on financial systems, as well as households and business.
- ESMA:
- o is working, jointly with the ESAs, on potential undue pressure on corporations from the financial sector to prioritise short-term results.
- o includes provisions on sustainability preferences in its guidelines on the suitability assessment.
- o plans to promote supervisory convergence on non-financial disclosures by issuers in accordance with the Non-Financial Reporting Directive
- o prescribes how ESG information should be disclosed in the credit rating market.
- EBA:
- o is working on specific steps and publication to incorporate ESG considerations into banks’ strategy, governance, products and disclosures (review of Pillar 2 and 3).
- EIOPA: