Bucharest, 28/05/2021 - At the beginning of the first quarter of 2021, the composite indicator of systemic risk (CISS) remains low, both in Romania and in the European Union, indicating a stable investment climate, according to the most recent Report on trends and risks in the financial markets, prepared by the Financial Supervisory Authority.
The indicator shows that there are no macroeconomic tensions, but in the context of the spread of new strains of COVID-19 and the delay in implementing the vaccination process, its value could increase slightly, being affected by the volatility of the financial assets it measures.
According to OECD forecasts, the growth of the European economy will take place gradually, in 2021, as decisions on limiting the spread of the SARSCov-2 virus will take effect.
At the same time, the Financial Stability Review recently published by the ECB, indicates that many Euro Area investment funds, insurers and pension funds are exposed to a further rise in yields or a correction in credit markets.
Investment funds have rebalanced their portfolios by transferring investments from bonds to shares, in the context of rise in yields. However, the orientation process towards gains in recent years has led non-bank financial institutions to increase their duration risk, related to bond portfolio. This increases the sensitivity of their assets to higher interest rates, although for insurance companies and pension funds, losses from revaluation of assets could be offset by a decrease in the value of debt, given the long-term negative gap of the assets of the two sectors.
Non-bank financial institutions also have high exposures to firms with weak foundations, with more than a quarter of their holdings having negative credit ratings. Nearly half of them also have BBB rating, slightly above high yield status. At the same time, starting with November 2020, investment funds have reduced their liquidity reserves, with cash reserves and liquid asset holdings being at pre-pandemic levels, creating vulnerabilities in the event of high-volume redemptions. The liquidity risk of investment funds has increased in recent years, in terms of the orientation towards high gains. This underlines the importance of strengthening the non-bank financial sector, including from a macro-prudential perspective.