Financial institutions told to prepare for expected deterioration of asset quality

Written by Adam Cadle

01/04/2021

Financial institutions, national competent authorities and market participants should prepare for an expected deterioration of asset quality in 2021, three European Supervisory Authorities (ESAs) have said in their first joint risk assessment report of 2021.

The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) said in light of how the COVID-19 pandemic continues to weigh heavily on short-term recovery prospects, financial institutions should continue to develop further actions to accommodate a “low-for-long” interest rate environment and its risks.

“For insurers, it is important that the regulatory framework also reflects the steep fall in interest rates experienced in recent years and the existence of negative interest rates,” the ESAs said.

“Financial institutions should also continue to monitor, and be prepared for, changes in interest rates, especially in light of the recent upward shifts of long-term interest rates and the consequent concerns about re-emerging inflationary pressures.”

Investment funds have also been advised to further enhance their preparedness in the face of potential increases in redemptions and valuation shocks. "To this end the alignment of fund investment strategy, liquidity profile and redemption policy should be supervised, as well as funds’ liquidity risk assessment and valuation processes in a context of valuation uncertainty," the report stated.

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