The latest report on risks and vulnerabilities facing EU financial markets shows there are multiple risks, including cyberattacks, uncertainties around Brexit and financial market volatility, according to the European Banking Authority (EBA).

The report – by the Joint Committee of the European Supervisory Authorities (ESA) – also warns that virtual currencies, as well as climate change and the transition to a lower-carbon economy, are key risks for the securities, banking and insurance sectors in the European Union. The EBA's statement notes that: “In light of the ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key.”

The ESA report advises the following policy actions by European and national competent authorities as well as financial institutions:

1. Financial market risk

Against the backdrop of the potential for sudden risk premia reversals, supervisory stress testing remains a crucial tool for the management of systemic risk – these tests are to ensure that systemically relevant sectors and players are safe to withstand market shocks, such as insurance and occupational pensions sectors, central counterparties (CCP), banks and in the future asset managers.

2. Brexit

The ESAs recommend EU financial institutions and their counterparties, as well as investors and retail consumers, to consider timely mitigation actions to prepare for the UK's withdrawal from the EU – including possible relocations and actions to address contract continuity risks.

3. Cyber security

The ESAs encourage financial institutions to improve fragile IT systems, explore inherent risks to information security, connectivity and outsourcing. To support this, the ESAs will continue addressing cyber risks for securities, banking and insurance markets and monitor firms' use of cloud computing and potential build-up of cyber risks.

4. Climate change

The ESAs recommend financial institutions to consider sustainability risk in their governance and risk management frameworks and to develop responsible, sustainable financial products – moreover, supervisors should enhance their analysis of potential risks related to climate change for the financial sector and financial stability.

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CTMfile take: The Joint Committee Report on Risks and Vulnerabilities in the EU Financial System gives an in-depth analysis for financial risk analysts and financial professionals.