Financial Services: Covid-19 have heightened liquidity challenges in financial services sector

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The three European Supervisory Authorities (EBA, EIOPA and ESMA) have issued their first joint risk assessment Report of the financial sector since the outbreak of the Covid-19 pandemic. The Report highlights how the pandemic has led to further amplified profitability concerns across the board and heightened liquidity challenges in segments of the investment fund sector. It particularly points to economic and market uncertainty as a key challenge going forward. 

The impact of the crisis on EU banks’ asset quality is a key concern as significant uncertainty about the timing and size of a recovery persists. The ESAs see a risk of decoupling of financial market performance from the underlying economic activity, and , a prolonged lower for longer interest rate environment which is expected to weigh on the profitability and solvency of financial institutions, as well as contributing to the build-up of valuation risks. 

Directly following the Covid-19 outbreak in Europe, the ESAs’ actions provided for regulatory flexibility, fostered operational resilience, and highlighted the importance of consumer protection. Considering ongoing uncertainties on the recovery from the Covid-19 pandemic, regulatory and supervisory cooperation between the ESAs, the European Systemic Risk Board (ESRB) and the European Commission remains key. 

In particular, the ESAs highlighted the need to implement the following policy actions monitor risks and perform stress testing, foster flexibility where and when needed, support to the real economy and supervise digital transformation.