The three European Supervisory Authorities (EBA, EIOPA and ESMA - the ESAs) today issued their Spring 2024 Joint Committee update on risks and vulnerabilities in the EU financial system. The risk update shows that risks remain elevated in a context of slowing growth, an uncertain interest rate environment and ongoing geopolitical tensions.

In recent months, financial markets have performed strongly in anticipation of potential interest rate cuts in 2024 in both the EU and the US, despite the significant uncertainty surrounding these. This strong performance entails elevated risks of market corrections linked to unexpected events. Credit risk is also expected to continue to increase as refinancing needs grow, particularly for high-yield debt and real estate. While asset quality has remained robust in the banking sector, it is expected to deteriorate as economic growth slows further. The real estate slowdown could also drive impairments at banks.

The insurance sector maintained solid capitalisation in 2023, with solvency ratios well above 200%.  Defined benefit occupational pension schemes improved their financial position. The liquidity positions of insurers diminished slightly but remain ample. Challenges stemming from subdued growth and the potential repricing of risk premia  nevertheless persist.

In the banking sector, capital and liquidity positions are solid with CET1 ratio of 15.8% and a liquidity coverage ratio above 160% amid high profitability in 2023. However, the outlook is more challenging, as banks face the repricing of liabilities and assets with prospects of lower interest income, slower loan growth, high costs and the challenging macro environment.

Fund performance and flows have been volatile as the interest rate environment has changed. While funds have managed the transition to higher interest rates, concerns remain regarding the valuation of real-estate fund assets, and liquidity risks in these funds could have wider spillover effects.

Heightened geopolitical instability and increased reliance on digital solutions are raising the stakes linked to cyber security. The number of attacks and cyber threats is increasing, and while the impact of these attacks so far has been limited, cyber-related insurance claims keep increasing, and the (re)insurance industry is further strengthening pricing techniques and risk-transfer mechanisms. In the banking sector, the findings from the cyber resilience testing currently underway will be important.