## 1eurea2025002 ## Source details **Canonical URL:** [1eurea2025002](https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1eurea2025002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1eurea2025002.pdf.json) --- ### Executive summary — systemic resilience and vulnerabilities - Stress tests indicate the banking sector in the euro area (EA) would be resilient to severe economic shocks, while pointing to vulnerabilities in some banks. - Major stress-testing findings: - Major EA banks would be resilient to severe stress scenarios, including an adverse geopolitical scenario with “trade wars” and a recessionary scenario with sovereign distress. - Most banks’ solvency buffers remain comfortably above regulatory capital requirements; some banks would dip into their buffers, and only a few banks would breach capital requirements. - EA banks can withstand significant liquidity outflows, but exposure to contingent liquidity risks, including from links to nonbank financial institutions (NBFIs), is rising. - Joint stress testing of solvency and liquidity risk for global systemically important banks (G-SIBs) reveals amplification risks from market shocks, loss of market confidence, and counterparty credit risk (CCR). - In a severely adverse two-day market shock scenario, system-wide stress tests revealed liquidity gaps that may expose banks to counterparty losses. - A prolonged two-week period of stress, comparable to the 2020 dash-for-cash episode, would significantly disrupt core euro area funding markets. ### Macroeconomic outlook, labor and price developments, and risks - Projections and outlook: - GDP growth: 0.8 percent this year and 1.2 percent in 2026 (April 2025, WEO). - Inflation expected to remain broadly at the 2 percent target from the second half of 2025. - Disinflation drivers: lower energy prices, subdued activity moderating nominal wage growth, and firmly anchored inflation expectations. - Labor market: record-low unemployment; financial system described as stable. - Risks: - Growth risks tilted to the downside (trade policy uncertainty, tariffs, weak manufacturing, falling confidence). - Inflation risks balanced: downside from trade diversion and euro appreciation; upside from imported inflation and higher wage growth. - Fiscal spending (including on defense) could be larger or more inflationary than baseline. ### Financial sector structure and key vulnerabilities - Financial size and composition: - Assets of the EA financial sector amount to over five times GDP. - Banks account for about half of total financial sector assets; 70 percent of bank assets are accounted for by 114 significant institutions (SIs) directly supervised by the ECB, of which 7 are G-SIBs. - Remaining banking sector composition: about 2,000 less significant institutions (LSIs) supervised by national authorities (13 percent); (non-EU) branches not subject to harmonized EU/EEA regulation and supervision (17 percent). - Assets of NBFIs are more than twice EA GDP, dominated by investment funds. - About 90 percent of total fund assets are held in open-ended funds subject to liquidity risk from investor redemptions. - Ninety percent of fund assets domiciled in France, Germany, Ireland, Luxembourg, and the Netherlands. - Financial metrics and vulnerabilities: - Consolidated balance sheet of the Eurosystem declined from 68 percent to 42 percent of GDP since end-2021. - NPL ratios: declined from about 3.5 percent in 2020Q2 to 2.3 percent in 2022Q3 and have since remained broadly stable; Stage 2 loans increased to about 10 percent in 2024Q4 from 8.4 percent in 2020Q2. - Liquidity coverage ratio remained stable at about 160 percent in December 2024. - G-SIBs’ return on equity at 7.9 percent; more diversified lenders’ ROE at 12.2 percent. - Larger banks posted lower capital and liquidity ratios than medium-/small-sized banks. - CRE risks: CRE firms’ defaults under stress would more than double at the trough of the scenario, especially due to U.S. exposures. - Interlinkages with NBFIs amplify systemic risk via repo markets (banks account for over half of EUR 9.6 trillion outstanding volume in December 2024), large derivative positions (notional derivative amounts reached EUR 314 trillion in 2022, of which 80 percent were interest rate derivatives), and structural liquidity mismatches in investment funds. ### Household and corporate vulnerability assessment - Household stress results (HFCS-based, 2021 microdata): - By end-2026, under IMF WEO baseline conditions, 15 percent of households, holding 17 percent of outstanding debt, could become overburdened (essential payments exceed 70 percent of income). - In the geopolitical scenario, over 20 percent of households holding 22 percent of debt could become overburdened. - In the recessionary scenario, the impact would be cut by half due to offsetting effects of lower interest payments and cost-of-living expenses. - Corporate sector: - Nonfinancial corporations’ debt-to-GDP ratio decreased to 68.8 percent in 2024Q3 from 70.7 percent in 2023Q3. - Nonfinancial corporations’ gross operating surplus declined at an annual rate of 1.2 percent. - Business bankruptcies remained elevated; corporate vulnerabilities could rise if downside growth risks materialize. ### Bank stress tests — solvency (coverage, baseline and adverse outcomes) - Coverage and data: - Stress test covers 95 out of 109 SIs (excluding custodian and developmental banks); tests used December 2024 regulatory data over a 3-year horizon (2025–27). - Baseline: - Aggregate CET1 capital ratio grows to 16.6 percent in 2027 from 15.7 percent in December 2024. - Adverse scenarios CET1 depletion: - Geopolitical scenario: system-level CET1 depletion of 423 bps. - Recessionary scenario: system-level CET1 depletion of 456 basis points. - Depletion larger for G-SIBs at around 500 bps. - Banks potentially breaching requirements: - Geopolitical scenario: 8 banks could face challenges; aggregate capital shortfall 0.05 percent of total risk-weighted assets (0.3 percent of total equity); 23 banks would need to dip into buffers, leading to a 1.0 percent SI’s capital depletion relative to total risk-weighted assets (6.4 percent of total equity). - Recessionary scenario: 9 banks could face challenges; capital shortfall 0.1 percent of total risk-weighted assets (0.7 percent of total equity); 28 banks would breach buffers, resulting in a 1.1 percent SI’s capital depletion relative to total risk-weighted assets (7.1 percent of total equity). - Business model sensitivities: - G-SIBs more affected by loan loss provisions in corporate portfolio and funding costs. - Lenders more vulnerable to deterioration in credit quality and unrealized losses in the recessionary scenario. - Universal banks more resilient due to diversified operations. ### Bank stress tests — liquidity and solvency–liquidity interactions - Aggregate liquidity metrics and trends: - Overnight contractual liquidity gap increased by 4 percentage points to 31 percent of total assets in 2020–24 due to decreased share of stable deposits and increased SFTs (repos and collateral swaps). - Asset encumbrance: half of banks have asset encumbrance ratio of less than 15 percent of total assets. - Encumbered non-tradeable loan portfolios amount to almost EUR 0.5 trillion with ECB. - Reserves at central banks and highly rated sovereign bonds constitute almost half of liquidity buffers. - Unweighted average LCR close to 190 percent. - NSFR at 136 percent. - Cash flow stress test outcomes: - Survival horizons exceed two months for most banks under various stress scenarios. - Severe outflows scenario leads to negative counterbalancing capacity (CBC) in 10 percent of banks within one month. - U.S. dollar stress: several large banks would face a U.S. dollar liquidity gap within the first week of stress, but the gap is small (0.5 percent of total assets). - In case of U.S. dollar shortage and/or swap market dysfunction, EA banks would rely on the ECB/FRB swap facility or intragroup funding from parent U.S. banks for subsidiaries. - Solvency–liquidity joint stress testing for EA G-SIBs: - Two-week market shock scenario: banks could become insolvent due to feedback loops between solvency and liquidity pressures. - “Trapped liquidity” scenario: amount of liquidity banks can generate under stress could materially decrease. - Business risk from client attrition over business model sustainability concerns could amplify insolvency risk. - CCR losses materially increase insolvency regions; inclusion of losses from unexpected default of banks’ three largest, most vulnerable counterparties notably expands failure regions. - Market shocks based on expected shortfall at 0.1 percent of risk factors’ marginal distributions. ### System-wide spillovers from NBFI liquidity distress and CCP CCR - Fund sample and timing: - Sample includes around 33,000 funds domiciled in the EA, representing half 90 percent of assets under management for UCITs (AIFs); stress test based on data for end of 2024Q2. - Scenarios and aggregate outflows: - Two-day scenario: combined liquidity outflows amount to EUR 16 billion, concentrated in bond funds (comparable to margin calls in March 2020 with estimates ranging between EUR 10 and 30 billion). - Two-week scenario: combined liquidity outflows close to EUR 700 billion, corresponding to an aggregate outflow rate of 4.7 percent of assets under management (AUM), concentrated in equity funds. - NAV declines vary between 3 to 23 percent depending on strategy and asset composition. - Redemption rates vary between one and 13 percent of AUM. - Two-day scenario shortfall and repo: - Available liquidity insufficient, resulting in a shortfall of up to EUR 9.8 billion. - Funds with insufficient liquid buffers hold EUR 1.6 trillion in AUM, or 11 percent of the sample, concentrated in UCITS Bond funds. - Eligible unencumbered collateral (per ECB’s definition for general collateral) could cover up to EUR 7 billion. - For funds engaging in repo, around 80 percent of counterparties are located outside of the EA. - Two-week scenario market impacts: - Funds primarily meet liquidity demands by selling assets—disrupting core markets and amplifying initial shock. - Price impacts on EA government bonds ranged between 12 and 350 bps, translating into a yield impact of up to 40 bps. - Price impacts on corporate bonds ranged between 45 and 174 bps. - MMFs face up to EUR 40 billion in redemptions—comparable to dash-for-cash in 2020; MMFs would liquidate around EUR 21.5 billion in corporate paper after using cash buffers. - Margin calls on insurers’ derivatives portfolios could add EUR 9 billion in MMF redemptions, bringing total pressure on the CP market to EUR 26 billion. - Deposit outflows would amount up to EUR 70 billion when funds use cash before asset sales, corresponding to a 45 percent runoff rate. - CCP reverse repo CCR assessment: - Losses from reverse repo investments could amount to up to 120 percent of CCP's own capital exposed to clearing member default losses (“skin-in-the-game”) in worst cases; losses concentrated in a few CCPs with relatively less skin-in-the-game. - Losses from investments are not absorbed via the CCP waterfall and could be distributed to clearing members; initial margin posted by NBFIs could partly mitigate CCR losses. ### Banking supervision, SSM performance, and recommended supervisory improvements - SSM strengths and challenges: - SSM described as a highly capable supervisor with an intrusive approach, diverse supervisory tools, excellent risk analysis and supervisory expertise. - Supervisory improvements have strengthened bank risk management in credit, liquidity, internal models, operational resilience, and climate-related financial risk. - Operational and legal challenges: SSM resources stretched, dependency on NCA staff (more than half NCAs unable to meet staffing commitments), complex centralized governance, need to apply different national laws where EU-wide standards lack detail. - Recommendations to strengthen supervision and alignment with international standards: - Simplify the supervisory process and introduce a risk tolerance framework to strengthen supervision. - Further delegate decision-making, ensure timely implementation of supervisory measures, and broaden enforcement tools. - Address Basel III deviations, implement the postponed fundamental review of the trading book, reduce dependence on national rules, enhance the definition of related-party transactions, and broaden sanctioning powers. - Adopt and implement robust prudential standards as the primary focus of financial regulators. - Ensure ECB maintains sufficient supervisory focus on traditional risk categories while integrating climate and nature-related financial risk workstreams. ### Macroprudential framework and buffers - Recommendations and findings: - EU legislation should facilitate early activation of countercyclical capital buffers (CCyB) and remove legal uncertainty preventing early activation when cyclical systemic risks are not yet elevated. - Streamline procedures for macroprudential tools to enhance framework efficiency (e.g., SyRB and Art. 458 CRR measures). - Ensure releasable capital buffers are in place and consistently used across EA countries, including through top-up powers (ESRB, ECB). - Harmonize methodology for setting buffers on other systemically important institutions (O-SII) while allowing flexibility for country specificities (EC to mandate EBA consultation with ESRB). ### Investment funds, capital markets union, ESMA, and investment fund reforms - Findings and recommendations: - Investment fund regulation remains fragmented; recent legal amendments introduce liquidity risk management and reporting requirements for UCITS and AIFs, with full compliance expected by end-2027. - MMF regulation should be aligned with international good practice. - Empower ESMA to top-up national measures for leveraged investment funds deemed systemic and enforce cross-border reciprocation. - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA, including information on Liquidity Management Tools (LMTs) and committed credit lines. - Introduce compulsory supervisory colleges and consolidated supervision for large cross-border asset management groups. - Strengthen ESMA’s institutional and governance arrangements and establish a sustainable funding framework in its founding regulation before expanding direct supervisory mandates. ### Financial safety nets, resolution, and Emergency Liquidity Assistance (ELA) - Progress and gaps: - Improvements since 2018: operational preparedness, SRB readiness, banks’ resolvability, build-up of loss absorbing capacity; SRF reached its target level. - Remaining fragmentation: absence of a common deposit insurance system; reliance on national ELA; third-country securities law issues in bail-in; constraints in resolution liquidity access. - Key policy recommendations: - Increase SRM flexibility, establish an EA-wide deposit insurance system with pooled loss-sharing, and centralize ELA to enhance coordination and risk-sharing. - Strengthen liquidity provision arrangements in resolution and ELA to systemically important NBFIs with robust oversight and transparency. - Introduce a financial stability exemption for access to the Single Resolution Fund (SRF). - Put arrangements in place for the SRF to provide guarantees to support central bank liquidity to banks in resolution, including, if possible, an EU fiscal backstop. - Further harmonize and ultimately centralize ELA arrangements. - Maintain high priority on resolution execution and address third-country securities law issues in bail-in. ### AML/CFT transition and AMLA operational priorities - Transition timeline and instruments: - AML/CFT Regulation applies from July 2027. - AMLA will begin operations later in 2025 and will begin the direct supervision of high-risk financial institutions in 2028. - Operational recommendations for AMLA: - Develop holistic, risk-based methodologies for selecting entities for direct supervision covering national, cross-border, and sectoral risks. - Prioritize understanding ML/TF risks, build operational capacity, leverage data-driven technologies (including for NBFI and crypto assets), enhance AML/CFT colleges, and improve information-sharing arrangements. - Ensure incentives and enforcement mechanisms for timely, comprehensive, and accurate data submission to the new AML/CFT database. - Oblige reporting scope includes crypto-asset service providers; crowdfunding platforms; mortgage credit intermediaries and consumer credit providers that are not financial institutions. ### Cross-cutting recommendations and capacity building (selected, timing in parentheses) - Improve data quality, availability, and system-wide risk monitoring: enhance timely and automatic data collection and sharing (including for NBFI and transaction-level data) and deepen collaboration of European financial authorities. (MT) - Strengthen resources and governance of the TARGET Services oversight team at the ECB to enhance capacity to identify and mitigate emerging risks. (I) - Given DORA, further empower authorities to fine critical third-party providers, accelerate pan-European cyber incident framework implementation, and enhance cyber risk expertise and practices. (MT) - Strengthen resources and prudential powers of supranational authorities with prudential oversight of NBFIs. (MT) - For insurers: vest EIOPA with stronger powers related to supervision of internal models, cross-border insurers, and market conduct; introduce a systemic risk score for individual insurers in the European systemic risk assessment framework. (ST/MT) - For AML/CFT: AMLA should adopt a holistic methodology to classify risk profiles, a harmonized AML/CFT supervisory methodology, foster stronger cooperation through AML/CFT supervisory colleges, and take an active role in regulatory enforcement across the EA. (MT) ### Key recommendations table highlights (selection with timing) - Systemic Risk Analysis: - Strengthen system-wide financial risk monitoring and conduct system-wide stress tests, including bank and nonbank sectors. (ECB, ESRB, ESMA, EIOPA, EC) Timing: MT - Enhance data collection and powers for automatic and timely sharing of financial stability data including for nonbank financial institutions and transaction-level data. (EC) Timing: MT - Continue enhancing macroprudential stress tests that account for interaction between bank solvency and liquidity risk. (ECB) Timing: MT - Financial Sector Oversight—Banking: - Reduce SSM reliance on national legislative frameworks. (EC) Timing: MT - Improve governance of budgetary processes, further delegate decision-making, and align resources to workload. (ECB) Timing: MT - Review capital requirements for EU internationally active banks and ensure alignment with Basel standards. (EC) Timing: MT - Ensure legislation allows for early activation of the CCyB even when cyclical systemic risks are not yet elevated. (EC) Timing: ST - Ensure releasable capital buffers are in place and consistently used across EA countries, including through recommendations or top-up powers. (ESRB, ECB) Timing: MT - Investment Funds and ESMA: - Reform MMF Regulation in line with international standards. (EC) Timing: ST - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA. (EC, ESMA) Timing: MT - Empower ESMA to top-up national measures and enforce cross-border reciprocation for leveraged funds posing systemic risk. (EC, ESMA) Timing: MT - Strengthen ESMA’s institutional and governance arrangements before expanding its direct supervisory mandate. (EC, ESMA) Timing: MT - Financial Safety Nets and Systemic Liquidity: - Introduce a financial stability exemption for SRF access; establish a European deposit insurance system with loss sharing and strong funding backstops. (EC) Timing: ST/MT - Centralize and harmonize ELA arrangements and address barriers to ELA for NBFIs, ensuring oversight and operational readiness. (ECB, EC, Eurosystem) Timing: ST/MT ### Methodology, data vintage and institutional coverage (selected) - Stress test horizon: 2025 – 2027 (three years). - Data vintage: 2024:Q4 for solvency tests; liquidity data updated to 2024:Q4 in April/May 2025; NBFI/system-wide tests use 2024:Q2 stock and 2020–2024 time series. - Institutions and scope: - Banking solvency and liquidity: 95 SIs (out of 109 SIs), of which 7 are G-SIBs (covering about 99 percent of banking sector assets). - NBFI system-wide spillover perimeter: 13,000 UCITS (EUR 7.1 trillion), 19,000 AIF (EUR 7.4 trillion), around 1,000 MMF (EUR 1.5 trillion), and 109 EA SIs. - CCP CCR analysis: 14 EU CCPs + 2 Tier 2 CCPs; SFTR and CCP supervisory return data, 2024:Q4 baseline. - Key modelling features: - Solvency: static balance-sheet approach, IFRS 9 provisioning transition matrix, IRB and SA projection of PDs, LGDs, EADs, and RWA. - Market shocks: one-off market stress scenarios aligned with narratives; market shocks based on expected shortfall at 0.1 percent of risk factors’ marginal distributions for certain analyses. - Liquidity: LCR-based stress tests (30-day horizon), cashflow-based stress tests (1 day through 1 year), reverse stress tests. - NBFI spillovers: market depth models calibrated on MiFID trading disclosures; redemptions calibrated from historical net flows and returns. ### Selected key projections and indicators (exact figures) - Real GDP growth: 2021: 6.3; 2022: 3.5; 2023: 0.4; 2024: 0.9; 2025 (Proj.): 0.8; 2026 (Proj.): 1.2; 2027 (Proj.): 1.3; 2028 (Proj.): 1.3; 2029 (Proj.): 1.2; 2030 (Proj.): 1.1. - Unemployment rate (percent): 2021: 7.8; 2022: 6.7; 2023: 6.6; 2024: 6.4; 2025 (Proj.): 6.4; 2026 (Proj.): 6.3; 2027 (Proj.): 6.2; 2028 (Proj.): 6.2; 2029 (Proj.): 6.2; 2030 (Proj.): 6.2. - Consumer prices (year-on-year percent): 2021: 2.6; 2022: 8.4; 2023: 5.4; 2024: 2.4; 2025 (Proj.): 2.1; 2026 (Proj.): 1.9; 2027 (Proj.): 2.0; 2028 (Proj.): 2.0; 2029 (Proj.): 2.0; 2030 (Proj.): 2.0. - Overall fiscal balance (percent of GDP): 2021: -5.1; 2022: -3.5; 2023: -3.6; 2024: -3.1; 2025 (Proj.): -3.2; 2026 (Proj.): -3.4; 2027 (Proj.): -3.5; 2028 (Proj.): -3.5; 2029 (Proj.): -3.6; 2030 (Proj.): -3.7. - Gross public debt (percent of GDP): 2021: 93.9; 2022: 89.5; 2023: 87.4; 2024: 87.7; 2025 (Proj.): 88.7; 2026 (Proj.): 89.7; 2027 (Proj.): 90.4; 2028 (Proj.): 91.1; 2029 (Proj.): 91.9; 2030 (Proj.): 92.9. - Current account balance (percent of GDP): 2021: 2.7; 2022: -0.1; 2023: 1.7; 2024: 2.8; 2025 (Proj.): 2.3; 2026 (Proj.): 2.1; 2027 (Proj.): 2.1; 2028 (Proj.): 2.0; 2029 (Proj.): 2.1; 2030 (Proj.): 2.1. - Investment Funds and financial system size (selected exact values): - Investment Funds (Size of the financial sector, December 2023, Billion Euros): 17,117. - Insurance corporations: 8,845; Pension funds: 3,587. - Total financial system assets (2023): 80,694 (Billion Euros); (2024): 76,787 (Billion Euros). - Investment Funds (2023): 19,730 (In percent of assets 24.4; In percent of GDP 130.2). Investment Funds (2024): 17,186 (In percent of assets 22.4; In percent of GDP 117.7). - On average CRE accounts for 5 percent of total assets in EU as of end-2024. - Liquidity and collateral statistics: - Banks account for over half of EUR 9.6 trillion outstanding repo volume in December 2024. - Notional derivative amounts: EUR 314 trillion in 2022 (80 percent interest rate derivatives). - Estimated EUR 4.7 trillion of eligible collateral held by counterparts; EUR 1.5 trillion mobilized with the ECB vs. peak of EUR 2.2 trillion during the crisis. - Spread to the deposit facility reduced to 15bps. - LCR unweighted average close to 190 percent; NSFR at 136 percent. ### Appendix II — status of key 2018 FSAP recommendations (selected statuses) - Reduce fragmentation of national legal frameworks for bank supervision (EU) — MT: Partially implemented. - Revise legal provisions to close regulatory gaps with international standards (EU) — MT: Not implemented; new deviations introduced in CRR3. - Improve planning of supervisory resources (SSM) — ST: Partially implemented; dependency on NCA staff remains an issue. - Raise standards for loan classification and provisioning (SSM) — ST: Implemented. - Ensure availability of liquidity in resolution (SRB, EC, Eurosystem) — ST: Not implemented. - Establish an EDIS with a backstop (EU) — ST: Not implemented. - Designate and make operational the SRF backstop (ESM revolving credit facility initially amounting to EUR 68 billion) — ST: Not implemented; ratification pending. *Source: IMF Financial Sector Assessment — Executive Summary* ### EXECUTIVE SUMMARY __________________________________________________________________________ 8 ### EXECUTIVE SUMMARY ### Systemic resilience and vulnerabilities - Stress tests indicate the banking sector in the euro area (EA) would be resilient to severe economic shocks, while pointing to vulnerabilities in some banks. - Major findings from stress testing: - Major EA banks would be resilient to severe stress scenarios, including an adverse geopolitical scenario with “trade wars” and a recessionary scenario with sovereign distress. - Most banks’ solvency buffers remain comfortably above regulatory capital requirements; some banks would dip into their buffers, and only a few banks would breach capital requirements. - EA banks can withstand significant liquidity outflows, but exposure to contingent liquidity risks, including from links to nonbank financial institutions (NBFIs), is rising. - Joint stress testing of solvency and liquidity risk for global systemically important banks (G-SIBs) reveals amplification risks from market shocks, loss of market confidence, and counterparty credit risk. - In a severely adverse two-day market shock scenario, system-wide stress tests revealed liquidity gaps that may expose banks to counterparty losses. - A prolonged two-week period of stress, comparable to the 2020 dash-for-cash episode, would significantly disrupt core euro area funding markets. ### Banking supervision and prudential alignment - The single supervisory mechanism (SSM) is described as a highly capable supervisor with an intrusive approach and diverse supervisory tools, supported by excellent risk analysis and supervisory expertise. - Supervision has enhanced bank risk management in areas including credit risk, liquidity risk, internal models, operational resilience, and climate-related financial risk. - Further supervisory improvements and alignment with international standards are recommended: - Simplify the supervisory process and introduce a risk tolerance framework to further strengthen supervision. - Further delegate decision-making, ensure timely implementation of supervisory measures, and broaden enforcement tools. - While transposition of final elements of the Basel III reforms into EU legislation is positive, further alignment with international standards is needed to address Basel III deviations, implement the postponed fundamental review of the trading book, reduce dependence on national rules, enhance the definition of related-party transactions, and broaden sanctioning powers. - Adopt and implement robust prudential standards as the primary focus of financial regulators. ### Macroprudential framework and buffers - The macroprudential policy framework for banks would benefit from further harmonization: - EU legislation should facilitate early activation of countercyclical capital buffers (CCyB). - Streamline procedures for macroprudential tools to enhance framework efficiency. - Ensure releasable capital buffers are in place and consistently used across EA countries (including through top-up powers). - Harmonize methodology for setting buffers on other systemically important institutions (O-SII) while allowing flexibility for country specificities. ### Nonbank financial intermediation (NBFI) oversight - Strengthening oversight of NBFI is essential given expanding interlinkages and growing market impact. - Key risks and channels: - Bank interlinkages with CCPs, investment funds, money-market funds (MMFs), and insurance firms can amplify shocks via redemptions and collateral calls. - NBFI–bank links and market volatility increase contingent liquidity and counterparty risks for banks. - Recommended supervisory and data actions: - Undertake system-wide stress tests including banks and nonbanks. - Remove legal impediments to data sharing and harmonize regulatory templates for stress testing. - Centralize data collection at EIOPA and ESMA. - Enhance collaboration between the ESRB, ECB, and ESAs. ### Capital markets union, ESMA, and investment funds - ESMA has matured and laid groundwork to assume carefully sequenced additional mandates; further steps needed before expansion: - ESMA will need robust powers and supervisory tools established through founding regulation. - Governance arrangements should be enhanced to ensure independence and agility; sufficient expertise must be secured. - Investment fund regulation remains fragmented; recent legal amendments introduce liquidity risk management and reporting requirements for UCITS and AIFs, with full compliance expected by end-2027. - Recommendations for funds and ESMA include: - Align MMF regulation with international good practice. - Empower ESMA to top-up national measures for leveraged investment funds deemed systemic and enforce cross-border reciprocation. - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA. - Introduce compulsory supervisory colleges and consolidated supervision for large cross-border asset management groups. - Strengthen ESMA’s institutional and governance arrangements, including amending its regulation to bestow a wider range of supervisory powers and a sustainable funding framework before expanding direct supervisory mandates. ### Financial safety nets, resolution, and ELA - Progress since the 2018 FSAP has been made on operational preparedness, SRB readiness, banks’ resolvability, and build-up of loss absorbing capacity, but fragmentation remains. - Key gaps and recommendations: - Absence of a common deposit insurance system and reliance on national emergency liquidity assistance (ELA) contribute to fragmentation. - Reiterate 2018 recommendations: increase SRM flexibility, establish an EA-wide deposit insurance system with pooled loss-sharing, and centralize ELA to enhance coordination and risk-sharing. - Strengthen liquidity provision arrangements in resolution and provision of ELA to systemically important NBFIs, accompanied by robust oversight, monitoring, and transparency. - Introduce a financial stability exemption for access to the Single Resolution Fund (SRF). - Put arrangements in place for the SRF to provide guarantees to support central bank liquidity to banks in resolution, including, if possible, an EU fiscal backstop. - Further harmonize and ultimately centralize ELA arrangements. - Maintain high priority on resolution execution and address third-country securities law issues in bail-in. - Consider conditions to expand the counterparty framework for systemwide support to be used in times of stress. ### Cross-cutting recommendations and capacity building - Selected FSAP recommendations for immediate to medium-term implementation: - Improve data quality and availability and system-wide risk monitoring by enhancing timely and automatic data collection and sharing (including for NBFI and transaction-level data) and deepen collaboration of European financial authorities. (MT) - Strengthen resources and governance of the TARGET Services oversight team at the ECB to enhance capacity to identify and mitigate emerging risks. (I) - Given DORA, further empower authorities to fine critical third-party providers, accelerate pan-European cyber incident framework implementation, and enhance cyber risk expertise and practices. (MT) - Strengthen resources and prudential powers of supranational authorities with prudential oversight of NBFIs, ensuring resources are adequate for existing and new responsibilities. (MT) - For insurers: vest EIOPA with stronger powers related to supervision of internal models, cross-border insurers, and market conduct; introduce a systemic risk score for individual insurers in the European systemic risk assessment framework. (ST/MT) - For AML/CFT: AMLA should adopt a holistic methodology to classify risk profiles, a harmonized AML/CFT supervisory methodology, foster stronger cooperation through AML/CFT supervisory colleges, and take an active role in regulatory enforcement across the EA. (MT) ### Key recommendations table highlights (selection) - Systemic Risk Analysis: - Strengthen system-wide financial risk monitoring and conduct system-wide stress tests, including bank and nonbank sectors. (ECB, ESRB, ESMA, EIOPA, EC) Timing: MT - Enhance data collection and powers for automatic and timely sharing of financial stability data including for nonbank financial institutions and transaction-level data. (EC) Timing: MT - Continue enhancing macroprudential stress tests that account for interaction between bank solvency and liquidity risk, in particular through margin calls, business risk, and credit sensitive funding. (ECB) Timing: MT - Financial Sector Oversight—Banking: - Reduce SSM reliance on national legislative frameworks. (EC) Timing: MT - Improve governance of budgetary processes, further delegate decision-making, and align resources to workload. (ECB) Timing: MT - Review capital requirements for EU internationally active banks and ensure alignment with Basel standards. (EC) Timing: MT - Make supervisory process more risk-focused; consider sovereign risk concentration when setting pillar 2 capital add-ons; utilize full range of corrective and sanctioning powers. (ECB) Timing: MT - Ensure legislation allows for early activation of the CCyB even when cyclical systemic risks are not yet elevated. (EC) Timing: ST - Ensure releasable capital buffers are in place and consistently used across EA countries, including through recommendations or top-up powers. (ESRB, ECB) Timing: MT - Streamline EU governance procedures for activating macroprudential measures. (EC) Timing: ST - Harmonize O-SII buffer methodology while allowing flexibility for country specific issues. (EC) Timing: MT - Insurance: - Provide EIOPA stronger powers for supervisory convergence on internal models and policyholder protection for cross-border insurance; implement minimum harmonization for Insurance Guarantee Schemes. (EC, EIOPA) Timing: ST/MT - Ensure EIOPA is adequately resourced for new permanent tasks. (EC, EIOPA) Timing: I - Investment Funds and Capital Markets Union: - Reform MMF Regulation in line with international standards. (EC) Timing: ST - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA. (EC, ESMA) Timing: MT - Introduce more structured stress testing at ESMA and system-wide stress testing. (ESAs, ESRB, ECB, EC) Timing: MT - Empower ESMA to top-up national measures and enforce cross-border reciprocation for leveraged funds posing systemic risk. (EC, ESMA) Timing: MT - Strengthen ESMA’s institutional and governance arrangements before expanding its direct supervisory mandate. (EC, ESMA) Timing: MT - Payments and Cybersecurity: - Review and augment resources of TARGET Services oversight team; apply more forward-looking interventions. (ECB) Timing: I - Review framework for fining non-cooperating critical third-party providers under DORA; accelerate cybersecurity oversight capacity at ESAs. (EC; EBA, ESMA, EIOPA) Timing: MT/ST - AML/CFT: - Ensure AMLA adopts a holistic methodology and harmonized supervisory methodology; foster cooperation among NCAs, AMLA, and third-country supervisors; make AMLA active in harmonizing enforcement. (EBA, EC, AMLA) Timing: MT - Financial Safety Nets and Systemic Liquidity: - Introduce a financial stability exemption for SRF access; establish a European deposit insurance system with loss sharing and strong funding backstops. (EC) Timing: ST/MT - Centralize and harmonize ELA arrangements and address barriers to ELA for NBFIs, ensuring oversight and operational readiness. (ECB, EC, Eurosystem) Timing: ST/MT - Consider expanding counterparty framework for systemwide support in times of stress. (ECB) Timing: MT *Source: IMF Financial Sector Assessment — Executive Summary* ### 1. The EA economy has remained resilient in the face of multiple shocks. Despite recurring ### 1. The EA economy has remained resilient in the face of multiple shocks. Despite recurring ### Macroeconomic outlook and labor/price developments - GDP growth is projected at 0.8 percent this year and 1.2 percent in 2026 (April 2025, WEO). - Inflation is expected to remain broadly at the 2 percent target from the second half of 2025. - Disinflation drivers cited: lower energy prices, subdued activity moderating nominal wage growth, and firmly anchored inflation expectations. - Labor market: record-low unemployment referenced; financial system described as stable. - Policy interactions: higher tariffs, trade policy uncertainty, and geopolitical tensions are weighing on activity in 2025, more than offsetting an anticipated lift from fiscal policy support and easing monetary policy. ### Risks to the outlook - Growth risks tilted to the downside: - Potential triggers: rise in trade policy uncertainty, escalation of tariffs, continuing weakness in manufacturing, declines in consumer confidence and business sentiment. - Inflation risks described as balanced: - Downside: trade diversion lowering non-energy goods import prices, weaker-than-expected growth, euro appreciation. - Upside: higher imported inflation from escalation of geopolitical and trade tensions, possibility of higher-than-expected wage growth. - Fiscal spending (including on defense) could be larger or more inflationary than baseline. ### Credit, lending, and market volatility - Credit to nonfinancial corporations and households contracted in real terms in 2024Q4, both about-1.5 percent (year-on-year), with the pace having slowed. - Credit standards: started to ease from restrictive levels driven by mortgage lending; borrowing costs remain high. Credit standards tightened for firms during 2024Q4 and 2025Q1. - Quantitative tightening expected to progress in an orderly way but requires careful monitoring of liquidity in banks, NBFIs, and core funding markets amid heightened trade policy uncertainty. ### Financial sector structure - Assets of the EA financial sector amount to over five times GDP. - Banks account for about half of total financial sector assets; 70 percent of bank assets are accounted for by 114 significant institutions (SIs) directly supervised by the ECB, of which 7 are G-SIBs. - Remainder of banking sector composition: - about 2,000 less significant institutions (LSIs) supervised by national authorities (13 percent), - (non-EU) branches not subject to harmonized EU/EEA regulation and supervision (17 percent). - Assets of NBFIs are more than twice EA GDP, dominated by investment funds. - About 90 percent of total fund assets are held in open-ended funds subject to liquidity risk from investor redemptions. - Ninety percent of fund assets domiciled in France, Germany, Ireland, Luxembourg, and the Netherlands. - Consolidated balance sheet of the Eurosystem declined from 68 percent to 42 percent of GDP since end-2021. - Banking integration has slowed; ECB price-based and quantity-based indicators show intra-EA cross-border bank integration has not substantively increased since inception of the Economic and Monetary Union. ### Financial risks and vulnerabilities - Banking sector resilience drivers: robust capital and liquidity position, diversified deposit base, limited unrealized losses. - Profitability: reached post-global financial crisis highs in 2023 due to rapid monetary policy tightening and sticky retail deposit rates. - Asset quality: NPL ratios declined from about 3.5 percent in 2020Q2 to 2.3 percent in 2022Q3 and have since remained broadly stable; Stage 2 loans increased to about 10 percent in 2024Q4 from 8.4 percent in 2020Q2. - Liquidity coverage ratio remained stable at about 160 percent in December 2024. - G-SIBs’ return on equity at 7.9 percent; more diversified lenders’ ROE at 12.2 percent. - Larger banks posted lower capital and liquidity ratios than medium-/small-sized banks. - Rising global risks, increased uncertainty, and volatile financial conditions could be triggered by negative macrofinancial surprises or materialization of geopolitical risks. - Commercial real estate (CRE) vulnerabilities: CRE firms particularly vulnerable to further asset price declines; simulations show CRE firms’ defaults under stress would more than double at the trough of the scenario, especially due to U.S. exposures. - Interlinkages with NBFIs could amplify systemic risk through: - exposure to repo markets (banks account for over half of EUR 9.6 trillion outstanding volume in December 2024), - large derivative positions (notional derivative amounts reached EUR 314 trillion in 2022, of which 80 percent were interest rate derivatives), - structural liquidity mismatches in investment funds and potential for redemptions and margin calls, - concentrated home bias in sovereign holdings and significant participation in repos and derivatives exposing banks to margin calls and counterparty credit risk. ### Systemic risk assessment and adverse scenarios - Two adverse macrofinancial scenarios assessed: - “Geopolitical scenario”: further escalation of geopolitical conflicts, heightened commodity price volatility, large adverse trade, price and tariff shocks (“trade wars”). - “Recessionary scenario”: synchronized global slowdown amplified by sovereign debt distress in the EA, widening credit spreads, term premium decompression, and confidence losses. - Adverse scenarios simulated using a global macrofinancial model and a structural macroeconometric model covering forty economies. - Scenario policy responses: - Geopolitical scenario: fiscal policies in countries with fiscal space partly used to counteract demand falls. - Recessionary scenario: monetary policy accommodation used to mitigate aggregate demand impact. ### Household and corporate vulnerability assessment - Household vulnerabilities vary across the EA with material heterogeneity in adjustable-rate mortgage shares. - HFCS-based simulations (2021 HFCS microdata) indicate: - By end-2026, under IMF WEO baseline conditions, 15 percent of households, holding 17 percent of outstanding debt, could become overburdened (essential payments exceed 70 percent of income). - In the geopolitical scenario, over 20 percent of households holding 22 percent of debt could become overburdened. - In the recessionary scenario, the impact would be cut by half due to offsetting effects of lower interest payments and cost-of-living expenses. - Corporate sector: - Nonfinancial corporations’ debt-to-GDP ratio decreased to 68.8 percent in 2024Q3 from 70.7 percent in 2023Q3. - Nonfinancial corporations’ gross operating surplus declined at an annual rate of 1.2 percent. - Business bankruptcies remained elevated; corporate vulnerabilities could rise if downside growth risks materialize. ### Bank stress tests — solvency - Stress test coverage: 95 out of 109 SIs (excluding custodian and developmental banks); tests used December 2024 regulatory data over a 3-year horizon (2025–27). - Baseline stress test outcome: aggregate CET1 capital ratio grows to 16.6 percent in 2027 from 15.7 percent in December 2024. - Adverse scenarios CET1 depletion: - Geopolitical scenario: system-level CET1 depletion of 423 bps. - Recessionary scenario: system-level CET1 depletion of 456 basis points. - Depletion larger for G-SIBs at around 500 bps. - Banks potentially breaching requirements: - Geopolitical scenario: 8 banks could face challenges; aggregate capital shortfall 0.05 percent of total risk-weighted assets (0.3 percent of total equity); 23 banks would need to dip into buffers, leading to a 1.0 percent SI’s capital depletion relative to total risk-weighted assets (6.4 percent of total equity). - Recessionary scenario: 9 banks could face challenges; capital shortfall 0.1 percent of total risk-weighted assets (0.7 percent of total equity); 28 banks would breach buffers, resulting in a 1.1 percent SI’s capital depletion relative to total risk-weighted assets (7.1 percent of total equity). - Business model sensitivities: - G-SIBs more affected by loan loss provisions in corporate portfolio and funding costs. - Lenders more vulnerable to deterioration in credit quality and unrealized losses in the recessionary scenario. - Inflationary environment supports income generation, partly offsetting loan losses due to asymmetric pass-through of rate hikes. - Universal banks more resilient due to diversified operations. ### Bank stress tests — liquidity - Aggregate liquidity risk exposure (overnight contractual liquidity gap) increased by 4 percentage points to 31 percent of total assets in 2020–24 due to decreased share of stable deposits and increased SFTs (repos and collateral swaps). - Asset encumbrance: half of banks have asset encumbrance ratio of less than 15 percent of total assets. - Encumbered non-tradeable loan portfolios amount to almost EUR 0.5 trillion with ECB; remaining unencumbered assets (except loans) mostly high quality. - Reserves at central banks and highly rated sovereign bonds constitute almost half of liquidity buffers. - LCR and NSFR metrics: - Unweighted average LCR close to 190 percent. - NSFR at 136 percent. - Cash flow stress test outcomes: - Survival horizons exceed two months for most banks under various stress scenarios. - No large bank moves into negative counterbalancing capacity (CBC) in the mild outflows scenario within first month. - Severe outflows scenario leads to negative CBC in 10 percent of banks within one month. - G-SIBs and universal banks are most affected by stress scenarios but still possess substantial liquidity buffers. - U.S. dollar stress: several large banks would face a U.S. dollar liquidity gap within the first week of stress, but the gap is small (0.5 percent of total assets). - In case of U.S. dollar shortage and/or swap market dysfunction, EA banks would rely on the ECB/FRB swap facility or intragroup funding from parent U.S. banks for subsidiaries. *Content unit: 1eurea2025002 - 1. The EA economy has remained resilient in the face of multiple shocks. Despite recurring* ### 18. Overall, banks’ exposure to contingent liquidity risks has increased since 2020 and ### 1eurea2025002 - 18. Overall, banks’ exposure to contingent liquidity risks has increased since 2020 and ### Liquidity exposures and channels - Overall exposure to contingent liquidity risks has increased since 2020 via several channels: - higher share in secured funding; - increased use of collateral swaps; - potential margin calls from derivatives. - LCR stress tests: - show the impact of asset fire-sale haircuts on HQLA of banks due to a system-wide liquidity stress in NBFI is not negligible; - average LCR declining by almost 50 percentage points (while remaining above 100 percent). - Analysis focused on haircuts (price effects only) and excluded redistribution of liquidity within the system; outflows from NBFIs could end up in banks. ### Solvency–liquidity interactions (EA G-SIBs joint stress testing) - Joint stress testing reveals amplification effects from: - endogenous liquidity flows; - business risk; - counterparty credit risk (CCR). - Two-week market shock scenario: - banks could become insolvent due to feedback loops between solvency and liquidity pressures. - Scenario findings: - A “credit sensitive” scenario compounded with “business as usual” dynamics can significantly increase regions of failure. - “Trapped liquidity” scenario: the amount of liquidity banks can generate under stress could materially decrease. - Business risk from client attrition over business model sustainability concerns could amplify insolvency risk. - Bank resilience decreases significantly when CCR losses are considered. - Reverse stress tests: - plausible combinations of market shocks and endogenous liquidity shocks are unlikely to push banks into insolvency in a two-day scenario when CCR losses are excluded; - default risk increases notably when losses from the unexpected default of banks’ three largest, most vulnerable, counterparties are included. - When CCR is measured by projected NBFIs’ inability to meet margin calls, the region of failure expands significantly, particularly under high market volatility. - Method and scope notes: - market shocks based on expected shortfall at 0.1 percent of risk factors’ marginal distributions, applied to fair value positions; - banks can monetize assets by pledging collateral in market/CB repos and access short-term unsecured funding markets; - analysis excludes cash inflows from margin calls on derivatives at negative replacement value. ### Interbank network analysis - Coverage and baseline: - analysis covers 72 banks within the EA; - under a baseline parameterization, findings suggest G-SIBs can induce high system-wide losses but are not vulnerable to shocks originating within the EA banking system. - Contagion and vulnerability findings: - two banks identified with potential to amplify spillovers given high contagion and vulnerability scores; - top ten hypothetical exogenous default events in terms of contagion scores induce on average 1.3 percent of capital losses to the EA banking system, with contagion transmitted entirely through credit losses. ### Systemic risk from NBFI — CCP counterparty credit risk (CCR) - Reverse repo positions used by CCPs to invest cash received as margin: - bilateral reverse repo positions have, on average, lower haircuts on collateral received than typically applied by CCPs to cleared transactions. - Loss distribution assessment: - assessed in a value-at-risk setup using historical simulations over the past 5 years. - In most cases losses were modest compared to total cash investment, but could amount to up to 120 percent of CCP's own capital exposed to clearing member default losses (“skin-in-the-game”). - Losses concentrated in a few CCPs characterized by relatively less skin-in-the-game. - Waterfall and loss allocation: - losses from investments are not absorbed via the CCP waterfall; similar arrangements typically in place where the CCP covers only a pre-determined amount; - a significant portion of estimated potential losses from CCR could be distributed to clearing members. - Note: CCR losses could be partly mitigated by initial margin posted by NBFIs. ### System-wide spillovers from investment funds’ liquidity distress - Sample and timing: - sample includes around 33,000 funds domiciled in the EA, representing half 90 percent of assets under management for UCITs (AIFs) in the region; - stress test conducted based on data for the end of 2024Q2. - Stress-test scenarios and horizons: - two market scenarios with horizons of two days and two weeks. - two-day scenario (two-day settlement): share redemptions and asset sales excluded; funds cannot re-employ margins received. - two-week scenario: market-induced decline in funds’ NAV triggers investor redemptions calibrated via a flow/performance analysis; funds may re-employ margin received to cover liquidity demand. - NAV declines, redemption rates, and aggregate outflows: - decline in funds’ NAV varies between 3 to 23 percent, depending on strategy and asset composition (higher impact for equity funds and funds of funds). - redemption rates vary between one and 13 percent of assets under management. - combined liquidity outflows amount to EUR 16 billion in the two-day scenario, concentrated in bond funds (comparable to margin calls faced by EA funds in March 2020 with estimates ranging between EUR 10 and 30 billion). - in a two-week scenario combined liquidity outflows are close to EUR 700 billion, corresponding to an aggregate outflow rate of 4.7 percent of assets under management (AUM), concentrated in equity funds. - Two-day scenario liquidity shortfall and repo considerations: - available liquidity insufficient to meet aggregate liquidity demand, resulting in a shortfall of up to EUR 9.8 billion. - funds with insufficient liquid buffers hold EUR 1.6 trillion in AUM, or 11 percent of the sample, concentrated in UCITS Bond funds. - repo borrowing can help overcome shortfalls in short horizons, but most funds do not engage in repo and operational hurdles may impede quick access. - eligible unencumbered collateral (per ECB’s definition for general collateral) available to affected entities could cover up to EUR 7 billion. - for funds engaging in repo, around 80 percent of counterparties are located outside of the EA. - Two-week scenario market impacts and mitigation: - funds primarily meet liquidity demands by selling assets—disrupting core markets and amplifying initial shock. - price impacts on EA government bonds ranged between 12 and 350 bps, depending on rating and maturity, translating into a yield impact of up to 40 bps. - price impacts on corporate bonds ranged between 45 and 174 bps. - impacts diminish sharply if funds tap into the repo market, avoiding sales in a stressed market. - recent regulation and liquidity management tools (LMTs) seek to avoid this effect, but mitigating impact could not be measured due to lack of data on LMTs’ prevalence and extent. - Impacts on financial institutions and markets: - MMFs face up to EUR 40 billion in redemptions—comparable to dash-for-cash in 2020. - in severe scenarios, MMFs would first use cash buffers and then liquidate around EUR 21.5 billion in corporate paper, the majority issued by banks. - margin calls on insurance companies’ derivatives portfolios could add EUR 9 billion in MMF redemptions, bringing total pressure on the CP market to EUR 26 billion. - under waterfall liquidation assumptions, most investment funds have sufficient higher ranked assets to avoid selling shares of other investment funds; under pro rata sales, funds face additional redemptions up to 0.5 percentage points, with bond funds hit hardest. - deposit outflows would amount up to EUR 70 billion when funds use cash before asset sales, corresponding to a 45 percent runoff rate. - market impact would drive high-quality liquid assets down an additional 80 bps, compounding the decline from the market scenario. ### Financial sector oversight and policy recommendations - System-wide oversight and data gaps: - EA has a comprehensive institutional framework for financial sector surveillance and macroprudential policies for banks, but reporting fragmentation from NBFIs hampers effective monitoring of systemic risks. - absence of a reporting framework for UCITS limits oversight; data quality issues in the AIF framework require attention. - legal restrictions on data use among national authorities create monitoring gaps. - recommendation: enhance data sharing and advance system-wide stress testing; implement reforms to the Alternative Investment Funds Managers Directive (AIFMD) to establish a unified reporting framework for investment funds and improve data accessibility, with ESMA as a data hub for NCAs and EU authorities. - insurance supervisory data collection should be centralized at EIOPA, which should become recipient of data from insurers with NCAs granted access. - EIOPA should develop its European Systemic Risk Assessment Framework, including a systemic risk score for individual insurers and an outward-looking risk assessment dimension, and publish individual insurer stress test results. - recommendation: adopt a more structured approach to systemic risk monitoring across the ESAs, the ESRB and the ECB and further develop system-wide stress testing building on the FSAP approach. - Banking supervision (SSM) progress and challenges: - SSM (ECB in cooperation with NCAs) is exclusively responsible for prudential supervision of credit institutions in participating Member States and has made significant progress since the 2018 FSAP. - SSM strengths: clear mandate, independence, intrusive supervision, broad toolset, robust skill set, thorough assessments in priority areas, improved supervisory cooperation with third countries, transparency. - banks in the EA maintain solid capital and liquidity positions on average, well above regulatory requirements. - operational and legal challenges: - SSM resources stretched, with pressures in ICT risk and internal models; - dependency on NCA staff affects planning and delivery, with more than half the NCAs unable to meet staffing commitments to the SSM; - complex and highly centralized governance; need to apply different national laws where EU-wide legal standards lack sufficient detail (e.g., licensing and fit and proper assessments). - recommendation: further delegate decision-making, improve governance of budgetary processes, ensure alignment of resources to current and expected future workload, and reduce reliance on national frameworks. - Regulatory reforms and gaps: - Adoption of the EU banking package—CRR3 and CRD6—is positive, though gaps persist compared to international standards. - earlier deviations from Basel prudential standards were not rectified; new permanent and temporary deviations were introduced in CRR3 (e.g., transitional arrangements, longer phase-in for the output floor, allowing reduced-risk weight for calculation of minimum capital requirements for banks using internal models based on standardized floor); implementation of the fundamental review of the trading book proposals was postponed. - CRD6 will improve supervision of third-country branches and acquisition of material holdings, but issues persist (e.g., narrow definition of related-party transactions, limited sanctioning powers). - recommendation: remain vigilant that focus on banks’ safety and soundness is not lost amid debates on competitiveness; adopting and implementing robust prudential standards should remain the primary focus and gaps with international standards should be addressed. *Source: Excerpt from the IMF Euro Area Financial Sector Assessment (FSAP) chapter provided.* ### 33. The SSM operates with a strong risk-based approach and efficiency, but there is still ### 1eurea2025002 - 33. The SSM operates with a strong risk-based approach and efficiency, but there is still ### SSM supervision, risk-based approach and convergence - Findings: - The SSM operates with a strong risk-based approach and efficiency, but there is still potential to further refine and enhance its effectiveness. - To ensure a level playing field and consistency in the supervisory assessment, the SSM adopted a highly codified approach to support convergence of supervisory processes. - The codified approach generates many findings and, consequently, presents a challenge for effective follow-up remediation. - Supervision of concentration risk is based on an overall robust process, but further attention should be given to sovereign risk concentrations, which are not included in the concentration risk indicators of the SREP and only assessed if deemed relevant by SSM supervisors. - Capital add-ons reflecting high sovereign concentration risks have only been imposed in a few instances. - Regarding the ECB oversight of LSI supervision, the use of moral suasion vis-a-vis NCAs has been effective in disseminating best supervisory practices for LSIs, but more work is needed to improve supervisory convergence and the consistency of supervisory priorities across member states. - Ongoing adaptations and initiatives: - The SSM acknowledges that it needs to adapt and has started to take action to reduce the administrative burden and improve supervisors’ agility. - Key initiatives include simplifying the supervisory review and evaluation process (SREP), including planning with a multi-year horizon and implementing a risk tolerance framework, expected to foster risk-based supervision when fully implemented. - Other supervisory processes such as those relating to fit and proper assessment and internal models’ approval could be further streamlined and made more risk focused. - Supervisory follow-up and enforcement: - The ECB intends to use its escalation policy more actively, including through enforcement actions, to address the challenge of effective follow-up remediation. ### Climate- and nature-related financial risks in supervision - Findings: - The ECB has been a leader in incorporating climate and nature-related financial risks in its supervisory approach. - A wide range of initiatives have been undertaken, including climate stress tests, thematic reviews, and firm-specific work. - The ECB issued several binding supervisory decisions relating to management and governance of climate risks leading, in some cases, to the potential imposition of periodic penalty payments in cases where banks fail to meet the requirements set out in supervisory decisions. - Elements of the ECB approach (Box 1): - In 2020, the ECB published expectations for credit institutions to manage financial risks related to climate change (Guide on climate-related and environmental (C&E) risks) within their governance and risk management frameworks; this guidance addresses both climate-related financial risks and nature degradation. - After a thematic review on C&E risks in 2022, the ECB released three good practice reports on risk management, climate stress testing, and disclosures. - It established staggered, institution-specific deadlines by year-end 2024 for institutions to fully integrate these expectations. - Supervisors regularly evaluate banks' effectiveness in adopting climate risk governance and risk management frameworks. - Specific exercises, such as stress tests and scenario-analyses, inform risk assessments; the 2022 climate stress test contributed to the overall SREP and prompted banks to advance their climate stress testing efforts. - The ESAs and the ECB conducted a "Fit-For-55" climate scenario analysis based on three scenarios from the European Systemic Risk Board. - The ECB's Guide highlights environmental factors (water stress, biodiversity loss, and resource scarcity) as drivers of financial risk and integrates biodiversity loss as a risk component across business strategy and model, governance framework, risk tolerance, risk management, capital adequacy, and fit-and-proper assessments. - Recommendation: - The ECB should ensure that, in a context of budget stabilization, it maintains sufficient supervisory focus on all aspects and drivers of traditional risk categories—in addition to climate risk. ### Macroprudential framework for banks - Findings: - To strengthen the macroprudential framework for banks, EU legislation should ensure that early activation of countercyclical capital buffers is possible, and procedures for activating macroprudential tools should be streamlined. - The set of macroprudential instruments in the EA contains capital tools from the Basel framework, as well as additional EU-specific measures to address systemic risk. - Several countries have started to build releasable capital buffers by activating the CCyB early in the cycle. - Legal uncertainty concerning the early activation of the CCyB should be removed from the relevant EU legislation to allow for all EU members states to set a positive buffer rate when cyclical systemic risks are not yet elevated. - The use of some macroprudential tools (e.g., sectoral systemic risk buffer (SyRB) in the CRD and risk-weight measures in the Art. 458 of the CRR) is unnecessarily complicated, including in part because of complex governance procedures and should be streamlined. - There is significant heterogeneity in the implementation of O-SII buffers that address too-big-to-fail risks. - Recommendations: - The ECB should ensure that releasable capital buffers are in place and consistently used across EA countries, including by means of its top-up powers if needed. - The ESRB should ensure that releasable capital is available by revising its recommendations regarding the use of the CCyB. - Activation of the CCyB should avoid procyclical effects; the availability of banks’ voluntary capital buffers and bank profitability—both at the aggregate and in terms of its distribution across banks—can guide the activation together with expert judgement. - The EC should mandate the EBA, in consultation with the ESRB, to harmonize the methodology for O-SII buffers, while allowing some flexibility to reflect country specificities. ### Insurers and EIOPA - Findings: - While EIOPA is assuming a greater role, insurance supervision remains primarily a national responsibility. - The EC’s retail investment strategy proposal and DORA will likely result in increased roles for EIOPA. - EIOPA faces challenges in cross-border insurers, market conduct, and internal model supervision. - Difficult cross-border cases have highlighted that EIOPA and the EC lack sufficient authority to protect policyholders when NCAs do not fulfill their obligations. - Solvency II is a sophisticated, risk-based solvency regime that has helped enhance the resilience of the EA insurance sector; EA insurance groups are generally well capitalized. - SCR ratios have been stable during the market turmoil in 2020 and as interest rates increased. - The Solvency II Review was completed in January 2025. - A substantial increase in insurers’ surplus capital over SCR (compared to the original EIOPA advice) will be the result of changes introduced by the EC and European Parliament. - There has been insufficient overall focus on the impact on the calibration of the SCR after these changes. - Recommendations: - EIOPA should be endowed with emergency powers to take binding decisions when home NCAs are unwilling or unable to act. - EIOPA should be given stronger powers to improve convergence of internal model supervision. - Prudential policy should be the primary objective of Solvency II; other objectives should be secondary. - EIOPA’s resources are stretched and should be augmented: - Over the last five years, EIOPA needed to deprioritize some activities to accommodate the heavier workload from regulatory reform. - EIOPA has been unable to recruit to meet its existing resource envelope. - EIOPA should explore new ways to recruit a full complement of staff and NCAs should ensure seconded positions at EIOPA are filled. - EIOPA’s budget and staff establishment plan should be reviewed considering the new legislative tasks it has been given. - Other funding mechanisms should be explored given budgetary challenges at the NCAs and EIOPA. ### Securities markets, investment funds, and ESMA - Findings: - The regulatory framework for investment funds is complex, remains fragmented, and requires further reforms to ensure supervisory convergence. - Differences in national implementation may lead to regulatory arbitrage and affect the resilience and effectiveness of the prudential framework. - Recent amendments to the UCITS and AIF Directives introduce essential requirements for liquidity risk management and reporting, including a new reporting framework for UCITS that will take time to implement (full compliance by end 2027). - The regulation of MMFs should also be revised to better align with international good practices. - Recommendations: - The implementation of compulsory supervisory colleges for large cross-border asset managers, coordinated by ESMA, is recommended. - Introducing consolidated supervision for these asset managers would allow for a better identification of risk exposures at the level of the group and across jurisdictions. - The FSAP recommends that ESMA be empowered to top-up national measures—for significantly leveraged investment funds that include the imposition of leverage limits and other measures (including for liquidity) and to enforce cross-border reciprocation. - Going forward, authorities should consider developing additional tools in line with EU authorities’ proposals under the EC macroprudential consultation to further enhance the liquidity risk management framework once recent amendments to UCITS and AIFMD have embedded. - ESMA institutional and supervisory reforms (sequencing and priorities): - Strengthening ESMA’s powers and governance: - ESMA needs a robust set of powers and supervisory tools to effectively monitor firms under its direct supervision; these should be established through ESMA’s founding regulation rather than via sectoral legislation. - Supervisory powers should ensure that ESMA can use its remediation tools without requiring formal investigations or the imposition of sanctions. - Enhanced governance arrangements are needed to support efficient, independent decision making, e.g., by introducing independent non-executive members to the board or exploring alternative configurations for executive decision making. - ESMA's founding regulations should be made consistent with the Principles of Securities Regulation of the International Association of Securities Commissions in the next ESA review. - Funding and resources: - ESMA needs a more sustainable funding framework, including for levying fees, to be established in its founding regulation. - ESMA will also need funding from the EU budget for preparatory work before it can recoup costs from the industry; these should be set at a proportionate and realistic level. - Risk-based supervision: - ESMA has built expertise and effective supervisory frameworks for a range of conduct supervision mandates for credit rating agencies, benchmark administrators and market transparency infrastructures, and has refined its risk-based approach. - Going forward, ESMA will need to articulate a risk tolerance to inform complex resource allocation choices under an enlarged mandate and set stakeholder expectations. - Building supervisory expertise and transition: - Practical arrangements to draw upon NCA staff expertise will be critical; appropriate coordination with NCAs, the ECB and the SSM and with national resolution authorities will be needed. - Prudent transition periods will be required to minimize disruption; minimum supervisory capabilities need to be maintained across the EA for entities still supervised at the national level. - Investor protection: - Supervisory focus on investor protection should be enhanced as retail access to markets grows. - Consideration should be given to revisiting the Investor Compensation Scheme Directive to ensure it remains adequate. ### Payment systems and TARGET Services oversight - Findings: - TARGET Services is a systemically important FMI in the EA that went live in March 2023, by consolidating three major FMIs for real time gross settlement, securities settlement and instant payments. - The ECB’s oversight of TARGET Services was reviewed against the five responsibilities for authorities in the Principles of FMIs. - The FSAP examined the ECB’s oversight via a focused analysis of the implementation of select recommendations of an independent review launched by the ECB, following several major incidents in 2020. - Recommendations: - The FSAP recommends that the ECB augments its small team for the oversight of TARGET Services, reflecting the complexity and systemic importance of TARGET Services. - Changes to address potential conflicts of interest related to the Eurosystem’s dual role as operator and overseer of TARGET Services are recommended, by separating the operator and oversight functions into separate directorates. - The ECB oversight team should further use forward-looking interventions to help anticipate emerging risks before they materialize, and ensure that the TARGET Services operators address oversight findings on a timely basis. ### Cyber resilience, DORA implementation and supervisory capacity - Findings: - The FSAP reviewed cyber risk supervision and operational resilience of SIs and systemic FMIs within the ECB's remit in the EA. - The banking sector's reliance on interconnected ICT systems makes cyber risk a significant operational risk with systemic implications. - While global cyber risk is rising, the EA banking sector's overall risk level has remained stable since 2023. - ICT security, outsourcing, and change risks showed worsening trends, attributed to more frequent cybersecurity incidents, increased cloud service reliance, and critical ICT projects. - Supervisory focus will now shift to cyber resilience reviews, outsourcing arrangements, and cloud computing expectations. - DORA has been applicable since January 2025. - Recommendations and process improvements: - DORA is expected to improve stability and reliability by strengthening cyber resilience; ICT and cyber security expectations previously set out in ESAs guidance are now strengthened and legally binding. - Critical third-party providers (yet to be designated) have been brought under an oversight framework. - DORA has significant resource implications for both supervised entities and supervisory authorities; the ESAs and the ECB are hiring significant additional specialists to discharge their DORA responsibilities. - The FSAP recommends reviewing the regulatory framework for any gaps in the ability to fine non-cooperating CTPPs, particularly for non-compliance with the ESAs’ recommendations made under the DORA oversight framework. - The full operationalization of the pan-European systemic cyber incident coordination framework should be accelerated. - An EU-wide centralized cyber incident reporting technical infrastructure should be implemented. - Cyber risk expert capacity should be increased in FMI oversight and on-site inspections should be conducted regularly. - Institutions’ internal audit or external audit should be leveraged more for follow-up work. - Internal standards on documenting bank supervision activities should be strengthened, e.g., using common templates across all on-site teams, and a single filing and archiving tree structure in the supporting applications. *Source: 1eurea2025002 - 33. The SSM operates with a strong risk-based approach and efficiency, but there is still (PDF chapter content).* ### 45. The EA is transitioning from domestic to EU-wide AML/CFT supervision as ### 1eurea2025002 - 45. The EA is transitioning from domestic to EU-wide AML/CFT supervision as ### AML/CFT transition and rationale - The EA is transitioning from domestic to EU-wide AML/CFT supervision as recommended in the 2018 FSAP to enhance financial sector integrity and curb financial abuse. - Two key developments underpin the transition: - The AML/CFT Regulation, which harmonizes rules for obliged entities and will apply from July 2027. - The creation of AMLA, which will begin operations later in 2025. - Current fragmentation in national approaches produces specific challenges: - Gaps in understanding domestic, regional, and cross-border ML/TF risks, compounded by inconsistent data collection, varying quality levels of national risk assessments, and a lack of collection and reporting of ML/TF statistics at the regional level. - Challenges in cross-border cooperation among AML/CFT and prudential NCAs, weak cooperation mechanisms and inconsistent enforcement actions, including with third country supervisors of entities operating in member states. ### AMLA priorities and operational recommendations - AMLA should develop holistic, risk-based methodologies for selecting entities for direct supervision that encompass national, cross-border, and sectoral risks. - Key operational priorities for AMLA: - Prioritize understanding of ML/TF risks given high cross-border activity and increasing complexity of financial crimes. - Adopt a flexible approach to account for diverging national and sectoral risks. - Build operational capacity and expertise to leverage agile, data-driven and advanced technologies, especially in less mature supervision areas (e.g., NBFI and crypto assets). - Foster cooperation with domestic and international counterparts and the private sector. - Enhance AML/CFT colleges, improve information exchange, and increase coordinated actions across member state and third-country authorities. - Establish better information-sharing arrangements and involve financial stability experts in cases of egregious AML/CFT violations. - In the transition to a new AML/CFT database, ensure prompt access while strictly limiting circumstances where justified supervisory requests are denied, supported by: - An effective system of incentives for timely, comprehensive and accurate data submission. - An adequate enforcement framework in case of non-compliance. - Note on obliged entities (from the source): obliged entities include crypto-asset service providers; crowdfunding platforms; mortgage credit intermediaries and consumer credit providers that are not financial institutions. ### Financial safety net — overview of progress and remaining gaps - Operational preparedness for crisis management has improved since the 2018 FSAP, including: - Improved cooperation of the SRB with the SSM, national and third-country authorities, and other financial sector participants. - Development of detailed crisis contingency plans. - Build-up of loss absorbing capacity in EA banks and SRF reaching its target level. - Remaining gaps that impede a more unified crisis management regime for rapid failure of a large bank or G-SIB: - Third-country securities law issues in bail-in remain a high priority. - Constraints in access to resolution funding and loss sharing under the unified banking union regime, leading to continued reliance on national options (national insolvency, voluntary industry support, state support). - Complex governance and decision-making arrangements for resolution, including use of SRF and the ESM backstop, which rely on rapidly reaching high consensus and should be streamlined. ### Policy recommendations for banks and insurers - Introduce a financial stability exemption to overly restrictive rules on access to the SRF (as recommended in the 2018 FSAP) and ratify the ESM backstop. - Restore momentum on a common EA-wide system of deposit insurance: - A common industry-funded system with pooled loss-sharing would better handle medium or large bank failures, serve as resolution financing, and reduce risk of national authorities being unable to finance deposit payouts. - Increase minimum funding targets for national deposit guarantee schemes, especially if national solutions persist and in the continuing absence of a European deposit insurance scheme. - Strengthen backstop liquidity arrangements for deposit guarantee schemes in many member states. - Urgently progress arrangements for banks’ access to liquidity in resolution: - The resolution of a large EA bank in a fast-burn liquidity crisis would likely require more liquidity than available through the SRF and the ESM backstop (once ratified). - The SRB, the Eurosystem, and the EC should put in place arrangements for the SRF to provide guarantees to enhance a bank under resolution’s ability to access central bank liquidity (including in amounts exceeding the size of the SRF and ESM backstop), subject to safeguards to protect central bank balance sheets and, if possible, an EU fiscal backstop. - Finalize the Insurance Recovery and Resolution Directive and establish minimum harmonization for insurance guarantee schemes: - A temporary pause on further insurance-related regulatory reform is recommended to allow ongoing reforms and harmonization to be implemented. ### Systemic liquidity — status and recommendations - Balance sheet normalization and core funding markets: - All targeted longer-term refinancing operations have been repaid. - The ECB balance sheet is expected to take about three years to reach "steady state." - The ECB maintains a demand-driven operational framework, supplying reserves inelastically through its main refinancing operation, with the spread to the deposit facility reduced to 15bps. - Core funding markets function well despite some volatility in the secured market due to quarter-end window dressing and collateral availability. - An estimated EUR 4.7 trillion of eligible collateral is held by counterparts, of which EUR 1.5 trillion is mobilized with the ECB, compared to a peak of EUR 2.2 trillion during the crisis. - The ECB’s banking supervision collaborates with monetary policy for information exchange and proactive case signaling; efforts are underway to extend this framework to NCAs for institutions not under direct ECB supervision. - The ECB supports U.S. dollar funding markets through a weekly standing facility and maintains confidence in its U.S. dollar supply via a network of swap lines with four major central banks. - Transmission Protection Instrument and counterparty constraints: - The Transmission Protection Instrument provides a framework for system-wide interventions guided by proportionality (effectiveness, efficiency, potential side effects like moral hazard and balance sheet risks). - The ECB is limited to dealing with credit institutions, which may hinder responses to crises involving NBFIs; the ECB should establish conditions for temporarily expanding the counterparty framework during crises while identifying constraints to such expansion. - Emergency Liquidity Assistance (ELA) and NBFIs: - The FSAP reiterates the 2018 recommendation to centralize ELA at the ECB (noting the need for a Treaty amendment) to align with its role as direct supervisor for all SIs and to enhance policy consistency, coordination for cross-border support, reduce the sovereign-bank nexus, and minimize interference with other Eurosystem tasks. - Steps are needed to extend ELA to systemically important NBFIs: - Two CCPs are banks with access to standard ECB operations and recent modifications have improved overnight liquidity access for eligible CCPs, but broader ELA provision to NBFIs faces legal and regulatory hurdles at ten NCBs. - Resolve these constraints and develop operational capacity to mitigate NBFI liquidity stress, ensuring ELA availability is paired with robust oversight, enhanced monitoring, transparency and clear communication to contain moral hazard. ### Key statistics and specific figures cited - AML/CFT: - AML/CFT Regulation applies from July 2027. - AMLA will begin operations later in 2025. - Collateral and liquidity: - Estimated EUR 4.7 trillion of eligible collateral held by counterparts. - EUR 1.5 trillion mobilized with the ECB vs. peak of EUR 2.2 trillion during the crisis. - Spread to the deposit facility reduced to 15bps. - Nonperforming loans example: - The 95th percentile of national NPL ratios in the EU fell from 20.3 percent in Q4 2018 to 4.4 percent in Q4 2024. ### Authorities’ views - Authorities welcomed the FSAP’s comprehensive and constructive assessment, noting the insights and policy discussions were valuable and broadly aligned with their assessment of risks and vulnerabilities. - They concurred that multiple scenarios in bank stress testing allowed a more thorough assessment, while recognizing institutional constraints that limit feasibility of such exercises. - Authorities emphasized ongoing efforts and methodological enhancements for system-wide liquidity stress testing to capture interactions and spillovers between banks and non-banks and impacts on core markets. - They broadly supported concerns about data gaps, access, and sharing but noted legal challenges for cross-border sharing at the national level. - On regulatory and supervisory assessment: - Authorities welcomed recognition of significant progress since the last FSAP and recommendations on supervisory processes and methods. - They noted the methodology did not fully capture the impact of the Banking Package published in June 2024. - They highlighted that the application of Basel capital requirements to all EU credit institutions strengthens safety and soundness and eliminates potential regulatory arbitrage between banks. - Most deviations from international standards are temporary and should be viewed in the context of the overall EU regulatory framework and delays in other jurisdictions regarding Basel III. - Authorities discussed timing and relevance of recommendations that would involve changes in the EU legal framework. - Authorities welcomed the assessment of the insurance supervisory framework and stressed the importance of implementing a minimum harmonization framework for insurance guarantee schemes across member states. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025002.pdf* ### 58. The authorities agreed on the importance of completing the banking and capital ### 1eurea2025002 - 58. The authorities agreed on the importance of completing the banking and capital markets union and stressed the need to take sequential steps ### Banking and Capital Markets Union: authorities' stance and IMF role - Authorities agreed on the importance of completing the banking and capital markets union and stressed the need to take sequential steps. - Authorities highlighted the importance of the IMF support in the FSAP for the ongoing reforms in the Crisis Management and Deposit Insurance (CMDI) framework. - Authorities generally noted that a future European deposit insurance system (EDIS) should: - build on the recent developments in the single market for banking; - aim to strengthen financial stability; - acknowledge that political challenges remain. - Authorities agreed on the need to further address the issue of liquidity in resolution, with adequate safeguards. - Authorities welcomed the assessment of progress in the capital markets union and were overall supportive of recommendations to ensure that the regulatory and supervisory framework adapts to the needs of deeper and more integrated capital markets, as envisaged under the savings and investment union initiative. ### Macrofinancial conditions and interest rate environment - The steep rise in ECB policy rates that started in mid-2022 has sharply tightened financial conditions, increasing debt servicing payments for new borrowers and outstanding borrowers with adjustable-rate loans. - Real credit growth has posted negative rates for both household and corporate loans, triggering a significant widening of the negative credit-to-GDP gap. - Key chart observations (as described): - Share of adjustable mortgages on households’ main residence shown for 2023. - Percentiles computed at the income group level (advanced economies) over 1995–2024. ### Real estate market and commercial real estate (CRE) risks - Despite some correction in housing prices, housing affordability remains a concern in Europe, weighing on households’ ability to service their debt. - Monetary tightening and structural changes have triggered a turnaround in the CRE segment in the EA and the United States. - CRE significance and cross-border linkages: - CRE accounts for over 20 percent of corporate loans in the EU, doubling that share in eight countries. - The CRE segment is characterized by significant cross-border linkages, particularly to Cyprus, Finland, France, Germany, Luxembourg, and Netherlands, amplifying potential spillovers from a sudden CRE price correction. - The share of CRE loans in banks’ assets ranges between 18 percent in Estonia to 3 percent in Spain, France, Luxembourg and Ireland. - On average CRE accounts for 5 percent of total assets in EU as of end-2024. ### Bank sector heterogeneity, profitability, capital, and liquidity - Profitability varies widely across business models, with G-SIBs posting lower RoE than diversified banks and showing higher reliance on fees and commissions and trading revenue income. - Banks’ capital position has strengthened gradually with larger banks displaying lower capital ratios, while liquidity ratios have remained robust after peaking before the start of the tightening cycle. - G-SIBs and universal/IBs are more exposed to liquidity risks in NBFIs and derivative markets than diversified lenders. - EA banks exhibit significant “home bias” in their government exposures; some are highly exposed in terms of total assets. ### Investment fund sector and NBFIs - The IF sector accounts for over one-fifth of total financial system assets at 120 percent of EA GDP. - The sector is highly concentrated with LU, IE, DE, FR, and NL accounting for 90 percent of assets. - The IF sector tripled since the global financial crisis despite some valuation adjustments over the last two years. - The IF sector exhibits significant intra-sectoral exposures as well as cross-sectoral exposures to insurers and pension funds. - IF exposure to MFIs takes mainly the form of deposits and debt securities; MFIs’ reliance on IF is highest through the equity channel, exposing banks to market valuation risks. ### Stress testing, liquidity, solvency, and network findings - Aggregate stress-test findings (selected results described): - Under the market risk scenario, equity drops from EUR 285.3 billion to EUR 221.3 billion. - Liquidity at risk stands at EUR 903.7 billion. - The amount of liquidity borrowed reaches EUR 400 billion. - Joint solvency-liquidity analysis highlighted: - Repo borrowing can mitigate liquidity pressures but erodes capital buffers. - “Credit sensitive” depositor outflows, higher initial margin (IM) in derivative transactions, narrower collateral frameworks, “trapped liquidity” in FX, reductions in fee and commission income, and counterparty credit risk (CCR), especially involving NBFIs, materially expand insolvency regions and amplification effects. - Network analysis results: - Risk of contagion through interbank exposures within the EA is currently low in the baseline scenario but identifies two banks with potential to amplify spillovers. - G-SIBs can induce high system-wide losses but do not appear vulnerable to shocks within the EA banking system in baseline calibration. - Combined NBFI and market risks scenario suggests the risk of contagion could be material. - NBFI/system-wide liquidity spillover stress test (system-wide analysis summary): - On a two-day horizon, some funds experience a liquidity shortfall which they can reduce significantly through repo borrowing. - On a two-week horizon, funds sell assets after using buffers and borrowing; more asset sales increase market impact on sovereign bond markets; repo borrowing mitigates sales' impact. - Stress test of reverse repos found losses potentially comparable to some CCPs’ own resources. ### Policy recommendations and responses (as presented) - For banking and CMDI reforms: - Take sequential steps in completing banking and capital markets union. - Further address liquidity in resolution, with adequate safeguards. - Ensure regulatory and supervisory frameworks adapt to deeper and more integrated capital markets under the savings and investment union initiative. - From the Risk Assessment Matrix and stress-test policy responses (selected): - Continue advocating for a stable, rules-based global trading system and pursue constructive engagement. - Diversify global partnerships and advance new free trade agreements. - Deepen the single market and avoid industrial policy that creates distortions or provokes retaliation. - Diversify energy production and secure supply chains. - Enhance liquidity support to financial institutions and markets to avoid contagion and prevent liquidity shortages morphing into insolvencies. - Ensure strong coordination between the ECB and the national authorities on financial stability risks. - Use countercyclical financial policy to support viable financial institutions. - Accelerate the energy transition and safeguard energy security through market integration. - Provide targeted support to vulnerable households if risks materialize. - Advance crisis preparedness to cyberattacks and strengthen operational resilience of the financial system. - Activate EU support lines for high-debt countries under stress and consider the transmission protection instrument (TPI) when spreads are not based on fundamentals. - Rely on bank resolution systems to address unsound banks and enhance system-wide monitoring and data sharing. ### Key projections and indicators (selected exact figures from Table 2) - Real GDP growth: - 2021: 6.3 - 2022: 3.5 - 2023: 0.4 - 2024: 0.9 - 2025 (Proj.): 0.8 - 2026 (Proj.): 1.2 - 2027 (Proj.): 1.3 - 2028 (Proj.): 1.3 - 2029 (Proj.): 1.2 - 2030 (Proj.): 1.1 - Unemployment rate (percent): - 2021: 7.8 - 2022: 6.7 - 2023: 6.6 - 2024: 6.4 - 2025 (Proj.): 6.4 - 2026 (Proj.): 6.3 - 2027 (Proj.): 6.2 - 2028 (Proj.): 6.2 - 2029 (Proj.): 6.2 - 2030 (Proj.): 6.2 - Consumer prices (year-on-year percent): - 2021: 2.6 - 2022: 8.4 - 2023: 5.4 - 2024: 2.4 - 2025 (Proj.): 2.1 - 2026 (Proj.): 1.9 - 2027 (Proj.): 2.0 - 2028 (Proj.): 2.0 - 2029 (Proj.): 2.0 - 2030 (Proj.): 2.0 - Overall fiscal balance (percent of GDP): - 2021: -5.1 - 2022: -3.5 - 2023: -3.6 - 2024: -3.1 - 2025 (Proj.): -3.2 - 2026 (Proj.): -3.4 - 2027 (Proj.): -3.5 - 2028 (Proj.): -3.5 - 2029 (Proj.): -3.6 - 2030 (Proj.): -3.7 - Gross public debt (percent of GDP): - 2021: 93.9 - 2022: 89.5 - 2023: 87.4 - 2024: 87.7 - 2025 (Proj.): 88.7 - 2026 (Proj.): 89.7 - 2027 (Proj.): 90.4 - 2028 (Proj.): 91.1 - 2029 (Proj.): 91.9 - 2030 (Proj.): 92.9 - Current account balance (percent of GDP): - 2021: 2.7 - 2022: -0.1 - 2023: 1.7 - 2024: 2.8 - 2025 (Proj.): 2.3 - 2026 (Proj.): 2.1 - 2027 (Proj.): 2.1 - 2028 (Proj.): 2.0 - 2029 (Proj.): 2.1 - 2030 (Proj.): 2.1 - Investment Funds and financial system size (selected exact values): - Size of the financial sector, December 2023 (Billion Euros, selected items): Investment Funds 17,117; Insurance corporations 8,845; Pension funds 3,587; SIs and LSIs included in totals. - Total financial system assets (2023): 80,694 (Billion Euros); (2024): 76,787 (Billion Euros). - Investment Funds (2023): 19,730 (In percent of assets 24.4; In percent of GDP 130.2). Investment Funds (2024): 17,186 (In percent of assets 22.4; In percent of GDP 117.7). - On average CRE accounts for 5 percent of total assets in EU as of end-2024. *Italic: Source: IMF staff compilation from the provided content unit (1eurea2025002 - 58).* ### 1. Institutional ### 1. Institutional ### Perimeter and Coverage - Institutions included: 95 SIs (out of 109 SIs), of which 7 are G-SIBs. - Market share: About 99 percent of the banking sector assets. - Scope of consolidation: banking activities of the consolidated banking group for banks having their headquarters in Euro Area. - Coverage of sovereign and non-sovereign securities exposures: debt securities measured through fair value (FVPL and FVOCI) and amortized cost (AC) account. ### Data and Baseline Date - Data vintage: 2024:Q4. - Supervisory data: Bank balance sheet and supervisory statistics (including FINREP and COREP), information on interest rate risk in the banking book (IRRBB), short-term exercise (STE), provided by the ECB. - Expected Default Frequency sourced from Moody’s. - Household analysis: household survey microdata from the 2021 (latest) HFCS survey, covering 83,000 households across 22 countries (EA, CZ, and HU) and 200,000 personal files. Montecarlo simulations of unemployment shocks at the person level. Projections of households’ balance sheets, consumption, and debt repayments, allowing for new issuances of maturing loans. - Market and publicly available data: ECB statistical data warehouse on funding and lending rates for new business by type of asset and funding portfolios, complemented with commercial databases such as Capital IQ. Corporate sector analysis uses data from Orbis. - Corporate PD proxies outside EA: expected default frequency will be used as proxies for corporate PDs; household PDs outside EA use a panel model. ### Institutional Summary (Liquidity perimeter) - Institutions included (liquidity analysis): 95 SIs (out of 109 SIs), of which 7 are G-SIBs. - Market share (liquidity analysis): About 99 percent of the banking sector assets. - Data and horizon (liquidity): Data vintage: 2024: Q2 updated to 2024: Q4 in April/May 2025. Data from ITS files (FINREP, COREP). - Scope of consolidation (liquidity): Consolidated group basis. Perimeter of the banking group (CRD V). Insurance activities excluded; banking associates included. --- ### Methodology and Channels of Risk Propagation - FSAP team satellite models and methodologies used. - For internally modelled exposures (IRB): projection of PiT and TTC PDs, PiT and DT LGDs, EAD, and RWA. - For SA exposures: Projection of new flows of defaulted exposures and RWA based on risk weights for performing and nonperforming loans separately. - Provisioning for IRB and SA modeled using IFRS 9 transition matrix approach. - Static balance-sheet approach, allowing the re-issuance of maturing loans at current market rates; size of portfolios (gross of NPLs) remains constant throughout the stress testing horizon (no write-offs allowed). - Traded risk: revaluation of instruments at fair value (FVPL and FVOCI, including hedging instruments) assessed using bank-specific sensitivities reported in COREP/Short-Term Exercise to market risk factors (interest rate, commodity, equity, FX, and credit spread). One-off market stress scenarios with shorter horizon aligned narratively with macro scenarios. - Interest income projected at geography-portfolio segment level using structural approach applying interest rate shocks on new business and repricing of floating rate instruments. - Funding costs projected at portfolio level using funding structure by product and maturity bucket (overnight vs. term). - Household and corporate PD analysis within EA uses micro-data at individual household (HFCS) and corporate (Datastream and CapitalIQ). LGD shocks for collateralized exposures linked to real estate price paths using smoothing factor to account for TTC regulatory approach. --- ### Stress Test Horizon and Scenarios - Stress test horizon: 2025 – 2027 (three years). - Scenarios: - Baseline scenario drawn from the January 2025 WEO macroeconomic projections. - Adverse scenario 1: A geopolitical scenario featuring an escalation of geopolitical conflicts. - Adverse scenario 2: A recessionary scenario showing a synchronized global slowdown amplified by sovereign debt distress in EA. - The two adverse scenarios rely on GFM, a structural macro econometric model of the world economy, disaggregated into 40 national economies, documented in Vitek (2015). ### Second-round Effects and Sensitivity Analysis - Household “consumption at risk” defined as the consumption of “economically vulnerable households” (for which the sum of debt service and consumption exceeds gross income) as a share of aggregate consumption. - Elasticity of unemployment to changes in consumption used to test second-round effects on default risk. - Solvency and liquidity risk interactions testing business risk will be assessed in April 2025 for the G-SIBs. --- ### Risks Covered and Behavioral Assumptions - Risks covered: - Credit (on loans and debt securities). - Market (valuation impact of financial instruments with respect to market risk factors such as interest rates, foreign exchange, credit spread, equity prices). - Interest rate risk. - Behavioral adjustment and modeling assumptions: - Interest income from nonperforming loans is not accrued. - Dividends are paid out by banks that remain profitable and adequately capitalized. - Tax rate and dividend rate both set at 30 percent. - In projecting RWAs: - Standardized portfolios: RWAs change due to shift in composition of performing and non-performing exposures; deterioration in creditworthiness modeled as credit rating downgrade linked to the initial rating and projected rise in loan losses. - IRB portfolios: through-the-cycle-PDs, downturn LGDs and EAD for each asset class/industry used to project risk weights. --- ### Regulatory and Market-Based Standards and Parameters - Two hurdle rates considered: - (i) “Minimum capital hurdle”: regulatory minimum Pillar 1 capital requirements (4.5 percent for CET1 ratio) plus Pillar 2 requirements (P2R). - (ii) “Breaching buffers hurdle”: includes the SREP capital requirements and capital buffers (CCoB, max (G-SII, O-SII), and SyRB). - The CCyB is assumed to be zero in the scenarios. - Leverage ratio during the stress test horizon assessed against the 3 percent Basel III minimum requirement. --- ### Reporting Format and Outputs (Solvency) - Output presentation includes: - Aggregate capital path for each scenario by groups of banks, categorized by business model. - Aggregate capital shortfall relative to RWAs. - Number of banks and percentage of banking assets in the system that fall below the hurdle rates. - Information on impact of different result drivers, including profit components. --- ### B. Banking Sector: Liquidity Stress Test ### Domain and Framework - Framework: Top-Down by FSAP Team. - Structural analysis: evolution of LCR, NSFR, Asset Encumbrance, Funding concentration and Collateral Swaps. - Dynamic analysis components: - (i) LCR-stress tests using more severe scenarios than regulatory ones. Breakdown by significant currency where available. - (ii) Cashflow-based stress test. Breakdown by significant currency where available. - (iii) Reverse stress test to imply outflows under which banks would not meet regulatory requirements (LCR) or become illiquid (negative CBC). - Stress test horizon: 30 days for LCR-based tests, and 1-day through 1-year for cashflow analysis. ### Types of Analyses and Scenarios - Cash flow liquidity stress tests with various stress scenarios of differing intensity. - Main risks analyzed: - (i) idiosyncratic risk due to reputational risks/decline in CET1 capital; - (ii) market upheaval and tightening of market liquidity conditions (linked to solvency adverse scenario, where possible), deposit run-offs, outflows from top funding sources. ### Buffers and Behavioral Adjustments - Different amounts of CBC using assumptions about ECB monetary policy (collateral) normalization. - Liquidity from the central bank (except lender of last resort measures) considered under different assumptions about what collateral is included into CB eligible CBC. - Buffers: capacity of banks to generate liquidity from inflows and from assets under stress (counter-balancing capacity). ### Regulatory Standards and Reporting (Liquidity) - LCR hurdle rate set at 100 percent at the aggregate currency level (per Basel III and domestic regulation). - Cashflow analysis outcomes of interest: Net Liquidity Position and the survival period. - Outputs include: - Average LCR, Net Liquidity Position and survival period. - Number of institutions with LCR below regulatory limits. - Reverse stress tests. --- ### C. CCP Counterparty Credit Risk on Reverse Repo ### Institutional Perimeter and Data - Top-down by IMF, in collaboration with ESMA staff. - Institutions included: 14 EU CCPs + 2 Tier 2 CCPs. - Market share: 100 percent. - Data and baseline date: SFTR, CCP supervisory return, 2024:Q4. ### Methodology - Type of exposures considered: bilateral reverse repo. - Conditional loss based on stressed collateral value. - Historical simulation over 5 years (2020-2024), Holding period of 5 days. Cumulative distribution function of conditional losses computed for each CCP by sampling past 5 years market conditions, with equal weights for each day. - Total loss for each day based on all possible combinations of conditionally independent defaults of counterparties. - Probabilities of default for counterparties are based on National University of Singapore, Credit Research Initiative - https://nuscri.org/en/. - Holding period of 5 days reflects common regulatory practice for VAR setup and represents time to monetize collateral after default. ### Risks, Buffers, and Outputs - Risks: Counterparty credit risk. - Buffers: Skin in the game and default fund. - Output presentation: Expected shortfall at 0.1 percent; Cover 2. --- ### D. Testing System-Wide Spillovers from NBFI Liquidity Distress ### Institutional Perimeter and Market Coverage - Top-down by IMF, in collaboration with ESMA staff. - Scope includes liquidity demand from UCITS (Lipper data), AIF, and MMF (AIFMD and MMF Regulation data), and interaction effects in bond, repo and derivative markets. Cooperation with ESMA allows analyzing margin requirements using transaction-level derivatives and repo data. - Institutions included: - 13,000 (EUR 7.1 trillion) UCITS funds with holdings data in Lipper. - 19,000 (EUR 7.4 trillion) AIF. - Around 1,000 (EUR 1.5 trillion) MMF. - EA insurance undertaking from a significant subset of EA jurisdictions. - Banks: 109 EA Significant institutions. - Market share: - Funds: 50 percent of assets under management of UCITS Funds, over 90 percent of open-ended AIF, and over 90 percent of MMF. - Insurers: about 70 percent of EA insurers’ total investment. - Banks: About 99 percent of the banking sector assets. - Data and baseline date: 2024: Q2 for stock; 2020-2024 for time series of market variables. ### Channels of Risk Propagation and Methodology - Liquidity measure based on cash and high-quality liquid assets. - Models of market depth to integrate second round effect from sales of assets, considering illiquidity of assets — calibrated based on MIFID trading disclosures. - Limited incorporation of intersectoral linkages via deposits. ### Risks and Buffers - Risks: - Severe redemption shock, with additional liquidity needs from margin calls on derivatives and collateral calls on repo. - Funding liquidity (liquidity outflows) and inability to sell assets to cope with redemptions. - Market liquidity leading to second round price effects. - Margin calls leading to second round liquidity effects. - Liquidity demand from funds to banking sector. - Buffers: Stock of liquid assets, cash, and reverse repo positions. ### Tail Shocks and Sensitivity Analysis - Size of the shock: - Market scenario calibrated based on expected shortfall at 0.1 percent of market factors marginal distributions over the holding period of the scenario (i.e., 2 or 10 days). Historical data covered January 2008 - October 2024. - Redemption shock calibrated based on historical net flows and returns data and linked to the market scenario. - Second round effects coming from price effects due to sales of assets. - Sensitivity Analysis: Access to repo market. ### Reporting Format and Outputs (NBFI System-Wide) - Output presentation includes: - Liquidity shortfall at Fund sector / strategy level, including: - Number of funds with a redemption coverage ratio (ratio of highly liquid assets to redemptions) below one. - Total net assets of funds with RCR below one, as a percentage of aggregate total net assets. - Total liquidity shortfall in sector / strategy group. - Distribution of bank liquidity pressures. - Market impact for key segments. - Net demand on repo market. - Redemptions from other funds, especially MMF and Exchange Traded Funds. --- ### Appendix I — Recommendations on Enhancing Financial Stability Data Collection, Sharing, and Transparency in the EA - Timeline legend: I: Immediately; ST: short term = less than 1 year; MT: medium term = 1–5 years. - Publish the individual insurance undertaking results of stress test exercises, starting from the 2024 Stress Test exercise. (ST) — EIOPA, NCAs - Make EIOPA the recipient of supervisory data from insurance undertakings and groups with access to national authorities to facilitate sharing of data with other EU authorities. (ST) — EC - Publish individual insurer statistics to contribute to market discipline. (ST) — EIOPA, NCAs - Ensure new reporting framework under UCITS and AIFs collects instrument-level portfolio data and sufficient and comparable information on leverage across funds, to adequately monitor systemic risks and be able to conduct macroprudential/system-wide stress testing of funds. (MT) — ESMA - Develop a harmonized approach for the measure and reporting of leverage across fund types. (ST) — ESMA, EC - Enhance data collection and powers for automatic and timely sharing of financial stability data including for non-bank financial institutions and transaction-level data. (MT) — EC - Introduce a single reporting mechanism for fund-level data and centralize data collection at ESMA. Specifically include information on: Liquidity Management Tools (LMTs), committed credit lines/temporary borrowing arrangements from banks. (MT) — EC, ESMA - Close data gaps for Tier 2 CCP regarding investment positions, including on collateral received. (MT) — ESMA - Ensure ECB’s direct and complete access to data on UCITS, AIFMD and MiFID/MiFIR data from ESMA, primarily to be able to assess vulnerabilities arising from linkages between banks and investment funds. (MT) — EC, ESMA - Ensure ESRB’s timely and automatic access to data on banks and non-banks alike to be able to deliver on its mandate for macroprudential oversight of the EU financial system. (MT) — EC, EBA, EIOPA, ESMA *Source: 1eurea2025002 - 1. Institutional (PDF chapter).* ### Appendix II. Status of Key Recommendations from the 2018 FSAP ### Appendix II. Status of Key Recommendations from the 2018 FSAP ### Supervision - Reduce the fragmentation of national legal frameworks for bank supervision (EU) — MT - Status: Partially implemented. - Actions: - The Banking Package (CRR 3 and CRD 6) includes measures designed to ensure more consistent supervision across the EU. - CRD6 (i) harmonizes the provisions for the assessment of banks’ directors and key function holders (fit-and-proper assessments); (ii) introduces a common set of rules for branches of third-country banking groups operating in member states will replace heterogeneous national approaches and strengthen the single market; (iii) and further harmonizes national powers related to the acquisition of qualifying holdings, transfers of assets or liabilities, and mergers or divisions. - However, the ECB continues to exercise supervisory powers granted under national legislation and apply different national laws which, despite some progress, remain unharmonized in several areas (e.g., licensing criteria and governance of credit institutions). - Revise legal provisions to close regulatory gaps with international standards (EU) — MT - Status: Not implemented. - Actions / findings: - Three of the deviation from Basel III capital standards identified in the 2014 Regulatory Consistency Assessment Program (RCAP) conducted by the Basel Committee have not been addressed (Danish compromise, limited scope of the Credit Valuation Adjustment capital charge, small and medium enterprise (SME) supporting factors for the part of exposures to non-retail SMS up to EUR 2,5 million, for retail SMEs and for IRB exposures to SMEs). - New deviations have been introduced permanently or temporarily in CRR 3, including: - lower risk weights for a specific subset of equity exposures under those national legislated programmes for which the only subsidies are guarantees with a guarantor that has a risk weight higher than 100 percent and specialised lending exposures in the form of project finance of physical structures or facilities, systems and networks that provide or support essential public services and meet conditions similar to those for high quality finance under Basel III revisions, - lower input floors for exposures to regional governments and local authorities, - transitional arrangements restricted to the calculation of the output floor for exposures to real estate and unrated corporates, as well as for securitisation and counterparty credit risk, to allow banks to apply reduced risk weights for these exposures but only when determining risk-weighted assets under the standardised approach as part of the calculation of the output floor. - These measures make the output floor less binding during the transition period. - The impact of these deviations from Basel is material, as shown in the EBA impact study and further detailed in the ECB confidential impact analysis. - Improve planning of supervisory resources (SSM) — ST - Status: Partially implemented. - Actions / findings: - ECB Banking Supervision reorganized in October 2020 to create a more agile and integrated structure, including creation of one new business area (D-SSR) focused on strategy, risk analysis, and a second line of defense. - The D-SSR/Strategic Planning Office is responsible for set-up, implementation, and continuous improvement of the SSM planning process and its monitoring, development of comprehensive overview of activities and resources vis-à-vis priorities, organizational readiness exercises, and proposing allocation of the SSM resource pool. - Resources for the ECB’s supervisory tasks are financed via supervisory fees borne by supervised entities. - ECB annual budget planning applies a lean process and provides an early estimation of supervisory fees using assumptions including full consumption of the allocated budget; cost metric types are based on latest available information (year-end metrics of the previous year). - Several actions taken to integrate and simplify SSM processes; improvements in annual staffing process for NCA leg of Joint Supervisory Teams and tools for organizational readiness and capacity building introduced. - Remaining issues: - Dependency on NCA staff is a vulnerability: more than half the NCAs not being able to meet their staffing commitments to the SSM. - ECB banking supervision business lines’ consultation on the budget proposed by the ECB budgetary function is pro forma and late stage. - Raise standards for handling of loan classification and provisioning (SSM) — ST - Status: Implemented. - Actions / findings: - Developments include: (i) publication of the Addendum for new Non-Performing Exposures (NPEs) as of April 1, 2018; (ii) the SREP recommendations for the stock of NPEs as of March 31, 2018; and (iii) a new automatic Pillar 1 backstop for NPEs from newly originated loans as part of the EU Banking Reform package approved in 2019. - At the onset of COVID-19, “dear CEO” letters communicated supervisory expectations on classification and provisioning; followed by extensive assessment at individual bank level, issuance of specific recommendations, and offsite supervisory follow-up. - Deep dives conducted on forbearance, UTP and IFRS 9 implementation; training provided to Joint Supervisory Teams (JSTs); dashboards for monitoring asset quality and provisioning enhanced. - Improve coordination and information sharing regarding AML/CFT (ECB, national authorities) — ST - Status: Implemented. - Actions / findings: - End of 2018, ECB/SSM set up an AML Coordination Function (ALMCO) with responsibilities to: (i) act as a central point of contact for SIs; (ii) set up a network for achieving consistent SSM-wide prudential approach; and (iii) act as an internal center of expertise on prudential issues. - In January 2019, the ECB signed an agreement for information exchange with nearly 50 national AML/CFTs authorities in Europe as mandated by the 5th review of the AML Directive. - Following the ESA review, the EBA plays a coordinating role on AML/CFT supervision issues across sectors and the EU. - ECB/SSM streamlined the information exchange process with AML/CFT authorities and implemented changes from the EBA regulatory framework (EBA cooperation Guidelines, EBA database on material weaknesses). - Based on recent external assessments (ECA report, SSM review by the EC), the information exchange process works well overall. - ECB/SSM enhanced how ML/TF risks are reflected in prudential supervision for the SREP (implementation of the SREP Guidelines), authorizations, and fit-and-proper assessments. - Transfer supervision of systemic investment firms and third-country branches to the SSM (EU) — ST - Status: Partially implemented. - Actions / findings: - Investment Firm Regulation and Directive (in force since June 2021) introduced a multi-tiered regime; largest/systemic investment firms (above EUR 30 billion at solo- or group-level) engaging in specific activities (dealing on own account or underwriting or placing financial instruments on a firm commitment basis) are authorized as credit institutions and, if criteria for significance met, fall under direct supervision of the ECB. - CRD 6 will improve regulation and supervision of third-country branches, but such branches will remain licensed and supervised by NCAs (outside the SSM) unless converted into subsidiaries and considered SIs. - Process to require establishment of subsidiaries is complicated and led by NCAs without ECB influence. - Limited information at EU or EA level on type and importance of activities of these branches, their risks, and booking models. - CRD 6 envisages further supervisory cooperation by including TCBs with larger EU footprint under EU supervisory colleges. - Ensure the availability of a full set of borrower-based macroprudential instruments (EC, ESRB) — MT - Status: Not implemented. - Actions / findings: - The ESRB proposed implementation of borrower-based measures (BBMs) in responses to the European Commission’s public consultations. - In the 2022 banking sector macroprudential policy review consultation, ESRB proposed introduction of a common minimum set of BBMs in EU legislation for residential real estate loans. - In the non-banking review, ESRB called for introduction of activity-based regulation into EU law, enabling national authorities to set BBMs and apply them to all types of lenders. - Recommendation ESRB/2022/9: ESRB recommended the EC assesses the current macroprudential framework and ensures consistent rules for addressing risks related to CRE exposures across all financial institutions when they perform the same activities. - 2024 Commission macroprudential review identified BBMs as a key area for further work; BBMs currently differ across the EU because where they exist they are exclusively governed by national law. ### Preparations for the U.K. Exit from the EU - Accelerate discussions on action to ensure continuity of service and data access (ECB, ESAs, SSM) — I - Status: Implemented. - Actions / findings: - Cliff edge effects from derecognition of U.K. CCPs were avoided. - Cooperative arrangements between the Eurosystem/ECB, the Bank of England, and relevant U.K. CCPs were adopted due to the United Kingdom’s withdrawal from the EU. - U.K. CCPs were temporarily recognized (until June 2025) for purposes of providing clearing services in the EU. - The EC adopted a decision (January 2025) to extend equivalence for UK CCPs framework for a further three years until 30 June 2028 to ensure EU financial stability in the short-term and provide clarity to EU financial market participants. - In March 2019, ECB and BoE announced activation of the currency swap arrangement for possible provision of euro to U.K. banks and of GBP to euro area banks. - ECB Banking Supervision cooperates and exchanges confidential supervisory information with U.K. prudential authorities based on the Memorandum of Understanding (MoU) concluded in 2019 for the period after Brexit. ### NPL Resolution - Prescribe rules for valuation of immovable loan collateral, including repossessed collateral (EU) — MT - Status: Implemented. - Actions / findings: - 2017 EBA guidelines on PD and LGD estimation require some level of prudence for LGD estimation to reflect that repossession value does not always reflect market value; banks required to apply an appropriate haircut to value of repossession. - The Banking Package contains requirements for determining the property value, a concept more prudent than market value, reducing divergence between jurisdictions using market value or mortgage lending value. - CRR 3 and EBA Guidelines on Loan origination and monitoring, NPL and FB, and SREP set out requirements for banks' valuation of immovable and movable properties at origination, requiring internal policies and procedures for valuation, collateral valuation for nonperforming exposures (governance, procedures, controls), valuation frequency, and valuation methodology. - Set consistent NPL definitions and reporting standards (EC, EBA, SSM) — ST - Status: Implemented. - Actions / findings: - Regulation (EU) No. 630/2019 amended Regulation (EU) No. 575/2013 and introduced clear conditions for classification of nonperforming exposures. - EBA Guidelines on SREP, Loan Origination, Default, and NPLs set out requirements for ongoing administration and monitoring of credit risk-bearing portfolios and banks' exposures, including identifying and managing problem credits and making adequate value adjustments and provisions. - Guidelines include: definition of default; technical criteria for identification of past-due borrowers; technical criteria for identification of problem borrowers (e.g. unlikely-to-pay or UtP) and thus in default status; several possible triggers banks could consider for classifying borrowers as UtP; and expectations regarding recognition of NPLs. - Establish minimum standards for insolvency and creditor rights regimes (EU) — MT - Status: Partially implemented. - Actions / findings: - 2019 Directive on Preventive Restructuring and Insolvency established minimum standards in certain areas (preventive restructuring mechanisms and debt discharge for entrepreneurs). - December 2022 Commission proposed Directive harmonizing certain aspects of insolvency law; still being negotiated. - Critical issues, such as commencement standards for insolvency and ranking of claims, are outside scope of the Directive. ### Crisis Management and Financial Safety Nets - Strengthen early action framework and advance resolution preparation (SRB, SSM, EC, NRAs) — I - Status: Partially implemented. - Actions / findings: - Operational readiness at SSM and SRB improved; initiatives to improve understanding of practical steps for resolution underway or completed. - Incremental updates include ECB’s escalation procedures and SSM-SRB MoU. - Draft Crisis Management and Deposit Insurance (CMDI) legislation includes reforms to early intervention framework and SRM’s earlier involvement in potential resolution cases, but remains subject to negotiation. - Quickly buildup MREL and iMREL, prioritizing large banks (SRB) — I - Status: Implemented. - Actions / findings: - SRB reports all significant institutions met their MREL targets as of January 1, 2024, with a few cases where a longer transition period was granted accounting for all remaining MREL shortfall. - All EU G-SIIs still comply with TLAC. - Ensure availability of liquidity in resolution (SRB, EC, Eurosystem) — ST - Status: Not implemented. - Actions / findings: - SRB has stated SRF can contribute to liquidity provision to institutions in resolution, but should not be deemed the only solution given capacity constraints for large banks. - One member state has not yet ratified the ESM treaty changes to implement the ESM backstop. - Recent crisis cases in other jurisdictions have required larger amounts of liquidity than the combined size of the SRF and ESM backstop. - Designate and make operational the SRF backstop (such as the ESM) (EU, SRB, ESM) — ST - Status: Not implemented. - Actions / findings: - Establishment of the backstop is legally embedded in the revised ESM Treaty, with entry into force pending ratification by one signatory. - The backstop will have the form of a revolving credit facility initially amounting to EUR 68 billion. - Establish an EDIS with a backstop (EU) — ST - Status: Not implemented. - Actions / findings: - Eurogroup-mandated work on EDIS suspended since 2022. - SRB publicly stated Council should decide to re-start discussions on EDIS during next legislature. - Ensure consistency of triggers for action such as resolution, liquidity assistance, and precautionary recapitalization (EC, ECB, SRB) — ST - Status: Partially implemented. - Actions / findings: - In 2018, ECB Banking Supervision adopted a new definition of solvency to be used for precautionary recapitalization, state guarantees on newly issued liabilities, and state guarantees to back central bank liquidity facilities; methodology based on forward-looking assessment of compliance with Pillar 1 and Pillar 2 capital requirements and ensures alignment with the FOLTF assessment. - Proposed CMDI reform would broadly improve alignment of triggers for crisis management tools, including precautionary recapitalization, preventive measures, and resolution. - Align state-aid loss-sharing requirements (in resolution) with the BRRD/SRMR, while introducing flexibility through a financial stability exemption (EU) — ST - Status: Not implemented. - Actions / findings: - Commission is carrying out an evaluation of its state-aid framework for banks, expected to inform potential review; evaluation was expected to be completed in the first quarter of 2024 but has not yet been published. - Further harmonize the creditor hierarchy in bank insolvency (EU) — MT - Status: Not implemented. - Actions / findings: - Proposed CMDI reform includes further harmonization of creditor claims as regards ranking of depositors in insolvency (all depositors ranking in a single tier) but not other issues (e.g., treatment of post-default interest). - Introduce an administrative liquidation tool for the SRB (EU) — ST - Status: Not implemented. - Actions / findings: - Proposed CMDI review aims to facilitate application of the already harmonized resolution framework to small- and middle-sized banks. - Pare back state-aid oversight of the use of the SRF and deposit insurance funding on a least-cost basis (EC) — ST - Status: Not implemented. - Actions / findings: - Commission’s CMDI proposal envisages a targeted simplification of the process to be followed by the Commission and the SRB in case of use of Fund or State aid in resolution while maintaining assessment of compatibility of such aid with the single market. - Buttress SRB independence and powers (e.g., permanent observer status at SSM Supervisory Board) (SSM, EC) — I - Status: Partially implemented. - Actions / findings: - Revised SSM-SRB MoU signed in 2022 states “the Supervisory Board will invite the Chair of the SRB to participate as an observer in its meetings for items relating to the tasks and responsibilities of the SRB.” - Other changes to SRB status and powers have not been pursued. ### Liquidity Management - Articulate an explicit financial stability mandate for the ECB/Eurosystem (ECB) — MT - Status: Not implemented. - Actions / findings: - Authorities consider Article 127(5) of the Treaty on the Functioning of the European Union and Article 25 of the ESCB Statute suffice. - Following the latest Strategy Review, ECB has taken steps to integrate financial stability analysis into monetary policy-making to preserve focus on primary objective of price stability while taking into account spillovers or interactions with financial stability matters. - Intensify “horizon scanning” involving supervisory and operational functions (ECB, SSM) — I - Status: Partially implemented. - Actions / findings: - Elements of horizon scanning already built into supervisory and monetary policy processes; additional elements to be considered in future work. - Ongoing work on TARGET emergency credit facility to consider harmonization of conditions across various credit facilities available to CCPs (with and without banking license) and potential safeguards and enhancements of cooperation/information-exchanges with relevant CCP supervisors. - For non-euro area CCPs, internationally agreed “No Technical Obstacle” principles considered sufficient basis for possible arrangements between ECB and non-euro area central banks. - Further harmonize and ultimately centralize ELA arrangements (ECB) — ST - Status: Partially implemented. - Actions / findings: - ECB regularly reviews rules and procedures for ELA as laid down in the ELA agreement; ELA agreement first published in June 2017; last ELA review finalized in 2020: Q4. - ELA framework has evolved and expanded with more elements covered to ensure provision of ELA by NCBs does not interfere with Eurosystem monetary policy. - Topics related to communication and disclosure, solvency definition, or provision of foreign currency are under review with view toward consistent approach; centralizing ELA would have substantial benefits and should be pursued as key element of completing the BU. - Manage the transition from crisis-related policy settings and develop the future operational framework (ECB) — MT - Status: Implemented. - Actions / findings: - ECB implemented changes to operational framework for steering short-term interest rates in October 2024. - Major changes: narrowing of the corridor to 15 bps between rates applied to the Main Refinancing Operation and the Deposit Facility, and move to a demand driven approach where liquidity is provided on demand (weekly basis through the main refinancing operation) at a fixed rate. - Announced intention to construct a portfolio of long-term refinancing operations and securities with details to be announced later. ### Appendix III. Forthcoming Roles and Responsibilities of AMLA - Timing and scope: - AMLA will begin the direct supervision of high-risk financial institutions in 2028. - Initially up to 40 high-risk financial institutions in at least six member states through joint supervisory teams led by an AMLA staff member and supported by staff of relevant national supervisors. - Powers and operational arrangements: - AMLA is empowered to take various administrative measures and impose pecuniary sanctions for serious, repeated, or systematic breaches by obliged entities it directly supervises. - Most financial institutions will remain supervised at the national level; AMLA will play an indirect supervisory role to ensure consistency and quality across the EU. - AMLA will only intervene and act in exceptional circumstances following indications of serious, repeated, or systematic breaches; in such cases it will request the supervisor to take specific actions or request the Commission to authorize a transfer of supervisory tasks and powers. - AMLA will coordinate with national AML/CFT supervisors and Financial Intelligence Units (FIUs), manage a central AML/CFT database, develop and maintain a harmonized AML/CFT supervisory methodology, and enforce consistent AML/CFT supervisory approach across member states. *Source: Appendix II. Status of Key Recommendations from the 2018 FSAP (1eurea2025002).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1eurea2025002.pdf_