Three European supervisory authorities have jointly warned that there are still risks in EU financial markets and said that action needed to be taken, particularly to counter the valuation risks that exist in illiquid markets.

In their Joint Committee Report on Risks and Vulnerabilities in the EU financial system for August, the European Supervisory Authorities for securities (ESMA), banking (EBA) and insurance and occupational pensions (EIOPA) said risks resulting from low interest rates, the search for yield and low profitability of financial institutions were still there.

These risks are just as severe as reported in the March 2015 report, they said.

There are also risks related to lower market liquidity and their possible implications for asset managers, according to the supervisors’ latest assessment.

The report said: “Risks resulting from low interest rates and search for yield remain unchanged.”

The fragile economic recovery is still hitting profitability in the financial sector, it said.

It added that market uncertainty linked to Greece’s financial situation had led to capital controls, high market volatility and renewed risks to the cohesion of the euro area, though it noted that a pact between Greece and the other euro-area countries had mitigated immediate risks.

Reduced corporate bond market liquidity has exposed asset managers to valuation risks, the report said, adding that managers also face risks because they are investing more in illiquid assets. 

The authorities said worries about asset managers’ liquidity risks could get in the way of plans to spur economic growth by channelling funds managed by institutional investors to SMEs.

Supervisors need to scrutinise efforts to clean up balance sheets and look closely to see how sustainable financial entities’ business models are, in order to manage current risks and make asset owners more able to lend, the report said.

“A clear picture of institutions’ earnings potentials, funding mixes and strategies is crucial,” it said. 

“Promotion of rigorous valuation of assets and liabilities and transparency in the disclosure of valuation risk is essential to discourage mis-valuation tendencies.”

They said regulators should go ahead with plans to support market-based funding by, for example, making suitable rules for non-bank loan origination models.

They should also support “adequate, transparent and harmonised marketing of investment products”.

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