European Systemic Risk Board warns of growing market vulnerabilities and pushes for system-wide stress testing and closing regulatory gaps

In a European Parliament ECON hearing, Christine Lagarde, Chair of the European Systemic Risk Board (ESRB), set out the ESRB’s priorities and updated lawmakers on the Board’s latest assessment of EU financial stability risks. She emphasised a system-wide approach to macroprudential policy, including advancing a top-down system-wide stress test, and reiterated the need to close regulatory gaps affecting non-bank financial intermediaries and crypto-assets such as stablecoins. Lagarde also argued that any simplification of post-2008 reforms should preserve access to high-quality, comprehensive data, noting that the ESRB has proposed streamlining EU reporting frameworks through new technologies and standardisation without reducing data integrity. On risks, the ESRB General Board highlighted that adverse macroeconomic or trade-related shocks and geopolitical tensions could stress EU firms and households and trigger a disorderly market correction. Vulnerabilities cited included stretched valuations in some riskier asset classes, concentration in certain segments such as US technology, and non-bank fragilities including liquidity mismatches in open-ended funds, pockets of high leverage among hedge funds and opacity in private markets. The Board noted the continued resilience of the EU financial system, pointing to stress test results and high bank capital and liquidity buffers, while flagging limited signs of worsening credit risk and concern that recent changes to Solvency II have led to less prudent regulatory requirements.