Focus on Financial Institutions: Risks and Vulnerabilities of the EU Financial System – ESA Policy Actions

In their recent publication joint committee reportthe European supervisory authorities (EBA, EIOPA and ESMA – ESA) advise a number of political measures for the competent national authorities (CNA), financial institutions and market players. The ESAs advise these policy actions in light of the perceived risks and vulnerabilities in the EU financial system, resulting primarily from rising inflation, the COVID-19 pandemic and the Russian invasion of the EU. ‘Ukraine. Financial institutions should consider this brief report and factor it into their forward-looking and compliance risk frameworks. Key highlights from the report are collated below for your convenience.


In the context of the ongoing geopolitical developments and, in particular, the Russian invasion of Ukraine, the ESAs advise financial institutions to be prepared for possible new harmful implications. Financial institutions should ensure compliance with sanction regimes implemented both at EU and global level. To the extent possible, NCAs should effectively coordinate the scope and implementation of sanctions by authorities and financial market participants.

Asset quality

The ESAs advise financial institutions and NCAs to continue to prepare for a possible deterioration in asset quality in the financial sector. Given the persistence of risks and an accumulation of risks in the medium term with high uncertainties, NCAs should continue to closely monitor the quality of assets, including in the area of ​​real estate loans, and in particular those assets which have already benefited from support measures.


The ESAs advise watching closely for possible further increases in yields and sudden reversals in risk premia in terms of impact for financial institutions as well as investors. Higher yields could lead to higher funding costs for banks and higher credit risks, but it is recognized that banks’ profitability outlook could improve given their interest rate sensitivity. Rising yields could also increase credit risks for corporate loans via higher borrowing costs. Credit risks related to the corporate and banking sector also remain a major concern for insurers as well as for the credit quality of bond fund portfolios. Fund liquidity should also be closely monitored should market liquidity deteriorate in the event of greater market stress. The ESAs further advise NCAs, policy makers and financial institutions to continue to develop mitigants to hedge against the risks associated with rising inflation.

Retail investors

The ESAs say retail investors are of particular concern, given their increased participation in financial markets in recent years, and while this diversification offers opportunities, it also carries risks. The ESAs advise CRAs to monitor the risks for retail investors who buy assets in anticipation of significant price growth, and without realizing the high risks involved. When disclosures are ineffective, these risks are compounded.

The recently released Central Bank of Ireland (CCR) Consumer Protection Outlook Report highlights a number of consumer risks arising from changing business practices and ineffective investment product disclosure, and the CBI’s expectations of regulated firms to address these risks . In addition, CBI has today written to MiFID investment firms outlining the results of a series of targeted reviews of structured retail products (PRS) and setting out the CBI’s expectations of regulated firms to take steps to identify a sufficiently precise target market for SRPs and to improve the quality and transparency of information provided to investors on the risks associated with these products.

The ESAs also indicate that as the crypto-asset market continues to develop, risks to investors and financial stability are considered to have increased and, pending the entry into force of the proposed markets for crypto-assets (Mica), consumers generally do not benefit from any guarantee or legal protection. ESA and CBI concerns regarding retail investors/consumers investing in crypto-assets are reflected in their recent warning consumers about the risks of investing in crypto-assets.


The ESAs advise financial institutions to further integrate ESG considerations into their business strategies and governance structures. They must factor ESG risks into their risk appetite and internal capital allocation process. Financial institutions should continue to develop methodologies and approaches to test their long-term resilience to ESG factors and risks.

ESAs further indicate that data gaps continue to challenge the integration of ESG considerations into financial institutions’ risk management, investment processes and investment advice and stress the importance of public disclosures. , as well as data collections through bilateral engagement with counterparties, as relevant data sources. for the assessment and monitoring of ESG risks.


The ESAs advise financial institutions to strengthen their cyber resilience measures and prepare for a potential increase in cyber attacks and their consequences in the future. This need for enhanced resilience measures stems from both the COVID-19 pandemic and its continued push for the digital transformation of the financial sector, and geopolitical tensions, in particular the Russian invasion of Ukraine. In this regard, the ESAs welcomed the decision of the European Systemic Risk Board recommendation for the establishment of a pan-European systemic cyber incident coordination framework.

Next steps

These policy actions align closely with the CBI’s financial regulatory priorities for 2022, as highlighted in our recent preview. There is particular alignment with the CBI’s focus on cyber resilience, achieving fair outcomes for consumers and investors, strengthening the EU regulatory framework for capturing crypto-assets and the climate change, thereby further emphasizing the need for regulated companies to take these policy steps. in updates to their forward-looking analysis table and regulatory and compliance plans.

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