European regulators highlight vulnerabilities to FIs

The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) have issued a joint statement on the increasing vulnerabilities in the financial sector.

As part of its second joint risk assessment report for 2021, the regulators have stated the rise in cyber risk and event-driven risks.

As crisis measures implemented to handle risks from Covid-19 start to be laxed, the regulators are concerned there are still major vulnerabilities. It explained there are still worries around increasing debt levels, upward pressure on asset prices, and increased investor risk-taking. It also states there are expectations of inflation.

Alongside these challenges, the regulators highlight an increased exposure to cyber risk, with financial services the most targeted sector. As a result, the regulator states firms will need to adapt their technical infrastructure to combat new threats.

Finally, the regulators state there is a risk of event-driven risks, such as GameStop, Archegos, Greensill. Additionally, there is a chance for rising prices and volumes traded on crypto assets.

To combat the vulnerabilities, the regulators have said financial institutions and supervisors should be prepared for deterioration of asset quality. It also stated that as the environment improves, focus should be moved to allow a proper assessment of the consequences of the pandemic on banks and support a transition to the recovery phase.

The regulators also said that disorderly increases in yields and sudden reversals of risk premia should be monitored in terms of impact for financial institutions. Finally, it said financial institutions and supervisors should continue to carefully manage their ICT and cyber risks.

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