The three European Financial Supervisory Authorities (ESAs) - ESMA for the financial markets, EBA for the banking sector, and EIOPA for the insurance sector - published on Tuesday 22 September their first joint risk assessment report on the financial sector since the outbreak of the Covid-19 pandemic.
The appearance of the coronavirus has had an inevitable impact on the EU financial sector. “Liquidity, credit and solvency risks have increased across the board”, the ESAs note.
While the EU banks’ liquidity positions remained relatively strong, the EU investment fund industry faced a significant deterioration in asset liquidity in some segments, the report says.
The pandemic has also heightened concerns about the profitability of all financial sectors and is expected to lead to a deterioration of asset quality in the EU banking sector.
Institutions for occupational retirement provision (IORPs) in the EU have also been hit hard by the pandemic and the prolonged low interest rate environment. According to the ESAs, this situation could lead to a significant decline in coverage and funding ratios.
Given the uncertainty about the extent and duration of the crisis, the three authorities stress the importance of the financial sector remaining well capitalised. In this regard, they call on financial institutions to ensure that their capital valuation is forward-looking and takes into account current uncertainties, in particular by following “prudent policies regarding dividends and other distributions, including variable compensation”.
At the same time, the ESAs recommend that supervisors and banks make use of the flexibility provided by the existing regulatory framework, in particular to use capital and liquidity reserves to absorb losses, thereby ensuring continued lending to the economy
See the ESA report: https://bit.ly/3mFNCER
Moratoriums. On the other hand, the EBA decided on Monday that it is not necessary to renew, after the end of September, its April guidelines on moratoria on the repayment of loans from companies and individuals, which were decided before the end of June 2020 (see EUROPE 12461/14).
The effects of these moratoria will continue to be felt for an estimated six months to a year, it noted. It now considers it “appropriate” to return to a practice where decisions are made on a case-by-case basis. (Original version in French by Marion Fontana and Mathieu Bion)