Risks in the European Union’s financial system “remain elevated” the three European Supervisory Authorities (EBA, EIOPA and ESMA - the ESAs) have said.

The ESAs’ spring 2024 joint committee update on risks and vulnerabilities in the union’s financial system found that they remain high in the context of slowing growth, an uncertain interest rate environment and ongoing geopolitical tensions.

In regard to defined benefit occupational pension schemes, the ESAs noted that they have 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,” they stated.

On a positive note, the ESAs said the insurance sector maintained solid capitalisation in 2023, with solvency ratios well above 200 per cent.

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,” they stated.

The ESAs also warned that 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,” the ESAs said.

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