A report by the European Supervisory Authorities (ESAs) has highlighted three key risks in the EU financial system, which are related to the 2007 financial crisis. However, Brexit is a more immediate risk.

The three risks and vulnerabilities named in the report are:

1. Low growth and low yield environment

According to the report, interest rates and growth expectations have decreased further and are posing new challenges to the entire financial sector, with difficulty in generating high investment returns. “This environment may lead banks, insurers, pension funds and other investors to engage in risky search-for-yield behaviour, adding to already elevated risks around asset valuation and adjacent concerns about market liquidity.”

2. Profitability of financial institutions and asset quality

This is related to the above-mentioned low growth and low yields, as well as conduct costs and heightened competition in the financial sector. The report states: “Addressing NPLs [non-performing loans] as a major driver of uncertainties in the financial system has become a key challenge, and further NPL resolution requires comprehensive and proactive action among all relevant stakeholders.”

3. Interconnectedness within the financial system

The report considers that there is increasing interconnectedness between the financial sector outside of the banking, insurance and pension fund industries and the wider financial system.

Added political and legal uncertainties

The report states: “These risks have persisted for some time and can be related to lasting effects of the 2007 financial crisis. However, the EU financial system is also vulnerable to more immediate risks such as the result of the UK referendum on EU membership which has added political and legal uncertainties to those already affecting the financial system.”

The European Supervisory Authorities (ESAs) is the collective name for three entities: the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA).

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CTMfile take: This report is a useful indicator of macro financial risks in the EU financial system. September's report doesn't differ hugely from the one published in April this year, with two of the risks remaining the same. However, the risk of 'potential contagion from China and other emerging markets' has been replaced with 'low growth and low yield environment'. Also, this month's report underlines the immediate risks posed by the UK's 'Brexit' referendum, adding political and legal uncertainties to the problems already existing in financial markets.