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ESAs cite Brexit as key source of market instability

Brexit_arrowsUncertainty over the UK’s withdrawal from the European Union is a key risk to market stability, according to the latest report from the joint committee of the European Supervisory Authorities (ESAs).

The report on “Risks and vulnerabilities in the EU financial system” also said that cyber-attacks and the sudden repricing of risk premia – as witnessed by a recent spike in volatility and market corrections – were additional risks to the health of the European economy.

“In the light of the ongoing risks and uncertainties, especially those around Brexit, supervisory vigilance and cooperation across all sectors remains key,” said the report for the second half of 2017.

The report added that Brexit has “the potential to expose the EU27 and the UK to economic instability and to weaken market confidence, in particular if negotiations end in a disorderly fashion”.

It also said that financial institutions in the EU as well as their counterparties, investors and retail consumers should “consider timely mitigation actions to prepare for the UK’s withdrawal from the EU, including possible relocations and actions to address contract continuity risks”.

The report also called on national financial regulators to use stress testing which, it said, remains a “crucial tool” for the management of systemic risk given the potential for sudden risk premia reversals.

The joint committee of the European Supervisory Authorities co-ordinates the work of the three pan-European financial regulators: the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority.

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