The European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) have outlined the “increasing vulnerabilities” in the financial sector, in their first joint risk assessment report for 2022.

The report noted that Russia’s invasion of Ukraine and its economic consequences have aggravated the outlook for growth and inflation and brought heightened market volatility.

“Market resilience will critically depend on the ability of markets and financial institutions to deal with the economic consequences of the Russian invasion of Ukraine, and to withstand changes in public policy support on the monetary or fiscal side without material disruptions,” the ESAs stated.

Some of the risks emerging during 2021 and highlighted in the report were amplified by Russia’s invasion of Ukraine. The EU economy was on track for a strong recovery from the crisis caused by the Covid-19 pandemic and the financial sector largely proved resilient. However, the recovery appears to have been hindered by new waves and variants of the virus, concerns regarding inflation risk, rising commodity prices and heightened geopolitical risks.

In addition, other vulnerabilities and risks for the financial system have built up over time. For example, financial markets remain vulnerable to changes in market sentiment, particularly if financial conditions tighten unexpectedly due to inflation pressures. In the real estate sector, persistent price increases and higher borrowing by households have increased risks.

At the same time, the financial sector is increasingly exposed to environmental risks and risks stemming from digitalisation. As a result, financial institutions are advised to further incorporate ESG considerations into their business strategies and governance structures.

The report also details the increasing threat of cyber risks. The ESAs recommend that financial institutions should strengthen their cyber resilience and prepare for a potential increase in cyberattacks.

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