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September 30, 2022

EU financial sector facing severe risks to stability, warns ESRB

Eurozone’s top financial regulators have warned that the region’s financial sector is facing “severe risks” to its stability due to the Russia-Ukraine war and the economic downturn. 

The European Systemic Risk Board (ESRB), which oversees the European Union’s financial system and prevents systematic risks, issued the warning after its meeting last week.

The regulator feels that risks to financial stability in the bloc and the probability of tail-risk scenarios materialising have increased since the beginning of 2022 and have been exacerbated by recent geopolitical developments.

“Rising geopolitical tensions have led to an increase in energy prices, causing financial distress to businesses and households that are still recovering from the adverse economic consequences of the COVID-19 pandemic. In addition, higher-than-expected inflation is tightening financial conditions,” the ESRB said in a statement. 

According to the regulator, the risks are related to the deterioration of the macroeconomic outlook, risks to financial stability arising from a potential correction in asset prices, and the impact of said developments on the quality of assets.

Additional risk areas identified by the ESRB include the residential and commercial real estate sectors and the heightened risk of cyberattacks on critical economic and financial infrastructures in the wake of the ongoing war in Ukraine. 

The regulator has called on private sector institutions, market participants and relevant authorities to prepare for scenarios in which tail risks materialise.

Credit institutions, which can act as the first line of defence, have been asked to ensure provisions and capital to dampen the impact on dwindling economy.

The ESRB noted that risks beyond the banking sector should also be addressed by tackling vulnerabilities and boosting the resilience of non-bank financial entities and market-based finance. 

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