The AMF announced that is publishing its report on the main risks to markets, savings, collective investments and financing of the economy. Released at the mid-point of the year, the mapping highlights the risks of a swift increase in interest rates, asset repricing and weakening of international coordination in financial market regulation.
The AMF has published its 2017 risk mapping as US monetary policy continues its gradual normalisation, a decade on from the outbreak of the subprime crisis. Three policy rate hikes by the US Federal Reserve in the last twelve months, coupled with the outcome of the American presidential election (owing to President Trump’s expansionary programme), have prompted long-term interest rates to start heading upwards on both sides of the Atlantic. Accordingly, some of the risks flagged in 2016 have receded, including risks to the soundness of financial institutions, as interest margins have been partly restored. The successful resolution of Banco Popular speaks to headway made in the management of banking risk in Europe. And stock markets have shown resilience in a persistently uncertain geopolitical setting, with market indices performing strongly in the last 12 months.
However, in preparing the 2017 report, the AMF has noted that some risks have become more pronounced, while new risks have emerged:
- Risk of a sharp market correction: high valuations and low volatility do not reflect the level of economic growth or the prevailing sense of uncertainty, including at the geopolitical level;
- Risk of a sharp increase in interest rates amid rising private debt and low risk premiums. In this environment, the European Central Bank’s policy will have a decisive impact on the euro area. Some emerging countries may find the cost of debt unsustainable in the event of a substantial increase in long-term interest rates or domestic currency depreciation (because their debt is denominated in foreign currencies);
- Risk of regulatory competition and reduced international cooperation, with voting results (US elections, UK Brexit vote) opening up a period of uncertainty that financial markets do not appear to have priced in. The supervision, recovery and resolution of central counterparties (CCPs) represent a key issue in this regard, insofar as counterparty risk is now largely concentrated with CCPs;
- Cyber-risk in a persistently uncertain geopolitical environment.