ESAs warn of deterioration in asset quality

Written by Adam Cadle

12/09/2022

Financial institutions and supervisors are again being warned by the three European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) to be prepared for a deterioration in asset quality in the financial sector.

The ESAs said developments in assets that benefited from temporary measures related to the pandemic and those that are particularly vulnerable to a deteriorating economic environment should be monitored, as well as inflation and high energy and commodity prices.

The following policy actions have been advised:
1. Financial institutions and supervisors should continue to be prepared for a deterioration in asset quality in the financial sector and monitor developments including in assets that benefitted from temporary measures related to the pandemic and those that are particularly vulnerable to a deteriorating economic environment, to inflation as well as to high energy and commodity prices.
2. The impact of further increases in policy rates and of potential sudden increases in risk premia on financial institutions and market participants at large should be closely monitored.
3. Financial institutions and supervisors should closely monitor the impact of inflation risks.
4. Supervisors should continue to monitor risks to retail investors, in particular with regard to products where consumers may not fully realise the extent of the risks involved, such as crypto-assets.
5. Financial institutions and supervisors should continue to carefully manage environmental risks and cyber risks to address threats to information security and business continuity.

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