European Financial Watchdog Advocates for System-Wide Stress Test of Financial System
The European Securities and Markets Authority (Esma) is pushing for a comprehensive stress test of the financial system, its chief, Verena Ross, told the Handelsblatt in an interview. While the EU already conducts stress tests for banks, insurance companies and clearing houses, Ross believes that a system-wide test could provide a better understanding of the relationships between different actors in the European financial sector and potential concentration risks.
Although Esma is not currently actively pursuing this goal, Ross noted that the authority would closely examine the recent system-wide, exploratory scenario exercise conducted by the Bank of England in 2023. In this exercise, the Bank of England simulated a shock to the global financial markets and inquired about the responses of banks, insurance companies, pension funds, hedge funds, asset managers and clearing houses.
The discussion on the need for a similar exercise in the EU is being led by the European Systemic Risk Board (ESRB), a body that brings together bank, insurance and capital market supervisors. If a system-wide stress test were to be conducted in the future, Ross said that several authorities, including Esma, would likely participate. According to Ross, the supervisory authorities need additional information for a thorough analysis of the broader capital market, with some areas, such as investment funds, lacking sufficient data.