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    Non-bank financial markets doubled in the seven years before the war in Ukraine. The main risks to which they are exposed today, in the ASF's report on the stability of non-bank financial markets

Non-bank financial markets doubled in the seven years before the war in Ukraine. The main risks to which they are exposed today, in the ASF's report on the stability of non-bank financial markets

Bucharest, 20 July 2022 - The cumulative asset size of the three non-bank financial markets in Romania (insurance market, private pension market and capital market) doubled from 2014 to the end of 2021, reveals the latest Report on the stability of non-bank financial markets, conducted by the Financial Supervisory Authority (ASF).

Relative to Gross Domestic Product (GDP), the system's assets represented 14.1%, the highest level ever, certifying the recovery from the health crisis generated by the COVID-19 pandemic. The outbreak of war in Ukraine earlier this year, however, triggered a new period of high volatility. All seven main risks considered by the ASF specialists remain at a high level, with four of them increasing compared to the previous period.

"All these factors keep several risks at a high level, with further shocks potentially leading to amplified tensions and significant corrections in international and local financial markets:

Macroeconomic risk - As new sources of risk generated by the crisis caused by the armed conflict between Russia and Ukraine are expected to affect the global economy and the prospects for recovery and consolidation of the economies of the countries in 2022, generating a slowdown in the pace of economic growth and a rapid increase in inflation.

Market risk - with increasing likelihood of materialisation, in the context of continued decoupling of asset values from economic fundamentals amid increasing contagion and worsening macroeconomic prospects, coupled with the high degree of uncertainty manifested in the context of the current crisis and reduced consumer and investor confidence, which may lead to asset price erosion.

Operational risk - with an upward trend, amid the intensification of large-scale cyber attacks in the context of the military conflict between Russia and Ukraine," the ASF report said.

In the same vulnerable macroeconomic context, the trend and probability of credit risk materialisation were assessed to be increasing, with the level remaining medium to high.

The other risks remain in this category: liquidity risk, with an increasing trend and probability of materialisation, solvency risk and profitability risk.

In terms of the particularities of each of the three non-bank financial markets, it should be noted that the capital market managed a strong recovery after the COVID-19 crisis and then a relative stabilisation after the shock of the war in Ukraine. As of April 2022, volatility indicators have returned to pre-Ukraine war levels, but risks remain high. The private pension market grew in 2021, but saw a decline in returns in the first part of 2022, and managers will change their investment strategy given the current inflationary environment and the decline in the value at which government securities trade on the secondary market. The high degree of concentration in the insurance market continues to be a vulnerability both in terms of exposure by insurance class and in terms of significant market shares held by a relatively small number of insurance companies.

A possible source of stability for all three non-bank financial markets is the focus on green finance, a segment that has been the focus of attention both in the PNNR (National Recovery and Resilience Plan) and more generally at European level.

"In view of European and local efforts to encourage green finance in order to move towards a real sustainable economy, ASF has examined the opportunity to relax prudential requirements for green finance. There are currently no legislative or prudential investment restrictions on green finance applicable to institutional investors supervised and regulated by ASF. Thus, investment funds, private pension funds and insurance companies can contribute to the development of the green economy by investing parts of their portfolios in green financial instruments. In this context, the legal framework for investment has proven to be very flexible for each category of institutional investors, allowing for an efficient and diversified portfolio allocation across several asset classes, depending on the individual investment policy of each investor, allowing to encourage and support the development of the green economy through specific non-bank financial market mechanisms," the report notes.

The report on the stability of non-bank financial markets can be found HERE.




About the Financial Supervisory Authority

The Financial Supervisory Authority is the national authority, established in 2013 by GEO 93/2012 approved by Law 113/2013, for the regulation and supervision of the insurance, private pension and capital markets. The FSA contributes to strengthening the integrated framework for the functioning of the three sectors, which total more than 10 million participants. More information can be found at www.asfromania.ro.