The socio-economic crisis caused by the Covid-19 pandemic, the full effects of which have not yet been felt in the European Union, is a serious test of the economic governance and prudential rules in the banking and financial sectors put in place at European level after the 2008 crisis, the European Court of Auditors noted in a report published on Thursday 24 September.
This report, which is not an audit, acknowledges that the banking sector entered the pandemic period better capitalized than when it faced the 2008 financial crisis. EU law has been strengthened to improve the supervision of financial entities, including their ability to manage their risk exposures, such as holding sovereign securities, and their liquidity needs. The ‘European Semester’ process also provides a strengthened framework for the coordination of socio-economic policies.
Nevertheless, the Court points to a number of weaknesses and challenges facing the EU institutions and the financial sector. It highlights the profitability problems of the banking sector, as well as the persistence of non-performing loans and the fragmentation of insolvency rules. In addition, the Covid-19 pandemic is expected to result in additional losses in credit portfolios.
Furthermore, EU auditors note the difficulty of managing “conflicting national and EU interests” and of dealing with “regulatory arbitrage” that allows financial actors to choose the national legislation that is most favourable to them.
Finally, the instruments for detecting financial risks apply mainly, at this stage, to the banking sector, while the macroprudential framework for the insurance sector and non-bank financial intermediaries is less developed.
See the Court’s report: https://bit.ly/3mNgo6H (Original version in French by Mathieu Bion)