On September 11, the Joint Committee of the ESAs published a report on the risks and vulnerabilities in the EU financial system (JC 2018 34), which sets out recommendations for policy action. The report can be found here.

The report states that in the light of ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and co-operation across all sectors remains key. As a result, the ESAs advise the following policy actions by financial institutions and by EU and national competent authorities:

• Stress tests. Stress test exercises should continue to be conducted and developed further across all sectors, especially given rising interest rates and the potential for sudden risk premia reversals, which should be factored into the scenarios.
• Risk appetite. Supervisory authorities need to pay continued attention to the risk appetite of all market participants. Banks should accelerate addressing their stocks of non-performing loans (NPLs) and adapt business models to sustainably improve profitability, and financial institutions need to carefully manage their interest rate risk.
• Contagion risks. Macro and micro prudential authorities should contribute to addressing possible contagion risks, including continuing their efforts in monitoring lending standards.
• Brexit. It is crucial that EU financial institutions and their counterparties, as well as investors and retail consumers, plan appropriate mitigating actions to prepare for the UK’s withdrawal from the EU in a timely manner, including the risks associated with a no-deal scenario.