The General Board of the European Systemic Risk Board (ESRB) held its 30th regular meeting on 28 June 2018

5 July 2018

The General Board noted that more broad-based economic growth is supporting the outlook for the stability of the EU financial system. However, tail risks remain elevated amid significant political, geopolitical and policy uncertainties. Against this background, the General Board exchanged views on the potential vulnerabilities related to cyclical developments, focusing on credit and real estate price dynamics across EU countries, as well as private non-financial sector indebtedness, taking into consideration the macroprudential measures already activated.

Furthermore, the General Board discussed the vulnerabilities in the EU commercial real estate (CRE) sector. The sector is important to financial stability due to its size and strong interconnections with both the financial system and other parts of the real economy. In the low interest rate environment, investors’ search-for-yield behaviour has contributed to both high CRE prices and low CRE yields, particularly in the prime segments, by historical standards across EU countries. As the General Board noted earlier, a reassessment of risk premia could act as a common trigger for abrupt and widespread price reversals in high yield and risky assets, including CRE assets. While the banking sector in some countries remains highly exposed to CRE markets, the role of non-bank and cross-border financing is increasing. Given the rising importance of these forms of financing in the CRE markets, it is important to investigate whether new instruments should be made available and also implemented for non-banks’ CRE exposures. Limitations in terms of data consistency and availability continue to hamper a full assessment of the risks, and therefore the EU and national authorities should step up their efforts to close current data gaps, following up on ESRB Recommendation 2016/14. These considerations are covered in an ESRB report that analyses, from a macroprudential perspective, vulnerabilities in the EU CRE sector. The ESRB will publish the report in the coming months.

The General Board also endorsed the publication of the third EU Shadow Banking Monitor, a report prepared jointly by the ESRB’s Advisory Technical Committee and Advisory Scientific Committee. The Monitor provides an assessment of structural changes and an overview of the key risks associated with the activities of the EU shadow banking sector. This year the Monitor will be accompanied by an ESRB Occasional Paper focusing on the linkages between the shadow banking sector and the banking sector. Both documents will be published in the coming months.

Finally, the General Board exchanged views on macroprudential approaches to non-performing loans (NPLs).[1] The work is ongoing in this regard and the General Board considered a progress policy report, together with a report prepared by the Advisory Scientific Committee, discussing the conceptual foundations for a macroprudential approach to NPLs. Both reports will be finalised and published later this year.

The ESRB will release the 24th issue of its risk dashboard today. The risk dashboard is a set of quantitative and qualitative indicators of systemic risk in the EU financial system.

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[1]The EU Council conclusions on the “Action plan to tackle non-performing loans in Europe”, adopted by the Council of the European Union on 11 July 2017, invited the ESRB to develop, by the end of 2018, “macro-prudential approaches to prevent the emergence of system-wide NPL problems, while taking due consideration of the procyclical effects of measures addressing NPL stocks and potential effects on financial stability”.