The Spring 2024 Joint Committee update by the three European Supervisory Authorities (EBA, EIOPA, and ESMA) on risks and vulnerabilities in the EU financial system underscores ongoing challenges amidst a backdrop of changing economic dynamics and geopolitical uncertainties.
Financial markets have shown resilience with strong performances, yet risks of market corrections loom large due to the anticipation of interest rate cuts in 2024, both in the EU and the US.
Credit risk is expected to rise alongside growing refinancing needs, particularly in high-yield debt and real estate sectors. This poses challenges for banks as asset quality may deteriorate amidst slowing economic growth, potentially leading to impairments.
In contrast, the insurance sector appears robust, maintaining solid capitalisation with solvency ratios well above 200% in 2023. However, challenges persist due to subdued growth and potential repricing of risk premia. Liquidity positions have slightly diminished but remain adequate.
Banking institutions have shown strength in capital and liquidity positions in 2023, with a CET1 ratio of 15.8% and a liquidity coverage ratio above 160%. Yet, they face challenges ahead, including the repricing of liabilities and assets, slower loan growth, high costs, and a challenging macro environment.
The report also sheds light on fund performance and flows, indicating volatility amidst changing interest rate environments. Concerns linger over the valuation of real estate fund assets and liquidity risks.
However, amidst these financial concerns, the report flags a critical issue – the escalating cyber threats. Heightened geopolitical instability and increased reliance on digital solutions amplify cybersecurity risks. The banking sector is particularly vulnerable, prompting ongoing cyber resilience testing. Cyber-related insurance claims are on the rise, prompting the (re)insurance industry to fortify pricing techniques and risk-transfer mechanisms.
In conclusion, the Spring 2024 update signals a mixed outlook for the EU financial system, with resilience demonstrated in some sectors but challenges persisting in others, particularly in the face of evolving economic and geopolitical landscapes.
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