Risks and vulnerabilities in the EU financial system | KPMG | GLOBAL

Risks and vulnerabilities in the EU financial system

Risks and vulnerabilities in the EU financial system

The ESAs report that the following factors give rise to risks to the stability of the EU financial sector:

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On September 21st, the Joint Committee of the European Supervisory Authorities published its Autumn 2017 Report on risks and vulnerabilities in the European Union's financial system.

The Report signals risks to the stability of the European financial sector and highlights vulnerabilities stemming from the following set of factors:

  • a political and economic environment characterised by uncertainty and fragmentation, accentuated by Brexit’s potential to expose the EU27 and the UK to instability, risks disruptions in the legal framework for financial services and impacts market confidence;
  • persistent low profitability challenges for financial institutions, which continue despite recent improvements, are aggravated by business model adaptability pressures, high non-performing loan (NPL) ratios and intensifying technological infrastructure investment needs;
  • a persistent low-interest environment encourages search for yield and nurtures an uncertain outlook for yields, potentially giving rise to valuation risks associated with asset price volatility and market liquidity impacts;
  • a rapid growth in FinTech capabilities bolsters transformative financial product and services innovation and ushers in fresh opportunity, but it also drives business model changes, attracts new market entrants to the industry, conditions the strategic response by financial firms, and affects regulatory and supervisory approaches. Key risks to both consumers and financial institutions are particularly around the areas of data privacy, potential client discrimination, cyber-crime vulnerability and associated legal issues; the Report also presents regulatory and supervisory initiatives towards monitoring and mitigating the risks identified.


These factors are consistent with the ESAs’ previous report of March 2017, but with an additional emphasis on challenges posed by political uncertainties and fragmentation threats.

Notably, given that the JC Report on Risks and Vulnerabilities of March 2017 considered as key risks to the EU financial system: (i) the persistent low profitability of financial institutions, (ii) risks around the adequate valuation of asset prices and price volatilities, (iii) increasing interconnectedness via direct and indirect exposure and (iv) information-technology-related risks in a fast-changing technological environment, this autumn’s Report largely reflects risk theme continuity, with an additional emphasis on challenges posed by political uncertainties and fragmentation threats. In fact, the ESAs’ approach coalesces with market participant sentiment, as the KPMG CEO Outlook 2017 indicates that 52% of UK CEOs place geo-political risk high on the list of current financial market concerns, “believ(ing) that the political landscape has a greater impact on their organisation than they have seen for many years”.

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As financial services continue to recover from the crisis and strengthen risk management, the focus remains on regulations and cost reduction.

 
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