EU ESAs Release 2024 Annual Report on Financial Risk, Sustainability & Digital Resilience

Key Takeaways

• Joint Risk Assessments: The ESAs’ Joint Committee issued two major risk reports in 2024, highlighting concerns around economic slowdown, interest rate uncertainty, and geopolitical tensions. Credit risks, particularly in high-yield debt and real estate, were flagged, with warnings of potential asset quality deterioration in the banking sector.
• Sustainable Finance Progress: The ESAs focused on the Sustainable Finance Disclosure Regulation (SFDR), recommending clearer product categories (e.g., “sustainable” and “transition”) and a sustainability indicator. They also noted improvements in transparency but identified gaps in the explanations for excluding Principal Adverse Impact (PAI) from investment decisions.
• Digital Resilience Under DORA: The ESAs continued to implement the Digital Operational Resilience Act (DORA), focusing on frameworks to help the financial sector recover from digital disruptions. Key achievements included a feasibility study for an EU Hub for major incident reporting and the development of a BigTech monitoring matrix.
• BigTech and AI Regulation: The ESAs closely monitored the increasing role of BigTechs in financial services, developing a monitoring matrix for tech companies like Amazon and Alphabet. They also conducted workshops on the regulatory challenges of AI in finance, including insurance risk assessments and anti-money laundering.
• Consumer Protection and Financial Literacy: The ESAs emphasized financial education, particularly in the digital era, and continued to monitor compliance with the PRIIPs Regulation. Administrative sanctions for non-compliance were reported, reflecting ongoing efforts to protect consumers.

Deep Dive

The European Supervisory Authorities (ESAs), European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority (EIOPA), have released their 2024 annual report, offering a detailed overview of their work across key areas of financial regulation, from joint risk assessments to sustainable finance and digital resilience. Throughout 2024, the ESAs’ Joint Committee (JC) focused on assessing cross-sectoral risks to financial stability, producing two significant reports, one in Spring and another in Autumn.

The Spring report outlined the challenges facing financial markets, including slower economic growth, an unpredictable interest rate environment, and ongoing geopolitical tensions. Despite strong financial market performance driven by expectations of interest rate cuts, the report warned that these uncertainties could trigger unexpected market corrections. It also raised concerns about the potential rise in credit risks, particularly within high-yield debt and real estate sectors, with the possibility of asset quality deterioration in the banking sector.

By the Autumn, the outlook remained clouded with uncertainty. The report highlighted ongoing risks associated with global inflation, monetary policy, and geopolitical tensions. In response, the JC emphasized the importance of financial institutions remaining adaptable and vigilant to mitigate the impacts of high interest rates and inflation on the real economy, as well as the potential operational risks posed by cyber threats.

Progress and Ongoing Challenges

Sustainable finance remained a prominent topic in 2024, particularly regarding the Sustainable Finance Disclosure Regulation (SFDR). The ESAs published a joint opinion in June as part of the European Commission’s review of the SFDR framework, suggesting the introduction of clearer categories for “sustainable” and “transition” financial products. Additionally, they recommended the development of a sustainability indicator for products like investment funds and pensions.

To further assist stakeholders in navigating the SFDR, the ESAs updated their Q&A guidance in July, addressing queries related to the practical application of the regulation, such as the calculation of Principal Adverse Impact (PAI) indicators and taxonomy alignment.

The ESAs also published their third Annual Report on PAI disclosures, identifying positive progress in transparency but also noting areas where improvements are needed. Specifically, the report pointed out shortcomings in how some market participants explain why PAI considerations were excluded from investment decisions.

Strengthening Financial System Defenses

The implementation of the Digital Operational Resilience Act (DORA) was a key focus in 2024, with the ESAs working alongside other European authorities like ENISA, the ECB, and the ESRB. The primary objective was to establish frameworks and guidelines to ensure the financial sector can withstand and recover from digital disruptions, including cyberattacks.

One significant milestone was the feasibility study on creating an EU Hub for reporting major digital incidents, which will be published in January 2025. The ESAs also worked to ensure supervisory convergence regarding the implementation of DORA, preparing for the creation of an Oversight Forum in 2025 to monitor resilience across the sector.

As BigTechs increasingly enter the financial sector, the ESAs continued to monitor their activities, focusing on their direct and indirect provision of financial services within the EU. In collaboration with national authorities, the ESAs developed a “BigTech monitoring matrix” to track the market’s evolving landscape, capturing data on companies like Amazon and Alphabet.

In addition, the ESAs hosted several workshops on Artificial Intelligence (AI) in financial services, addressing key regulatory concerns surrounding AI use cases in areas like insurance risk assessments, creditworthiness evaluations, and anti-money laundering efforts. These discussions aimed to better understand the regulatory and supervisory implications of AI’s growing role in finance.

Refining the Regulatory Framework

Consumer protection remained a priority, with the ESAs organizing workshops to promote financial education in the digital era. In November 2024, a full-day workshop focused on financial literacy and how to effectively communicate with consumers who may not be as digitally savvy.

The ESAs also continued to monitor compliance with the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, reporting administrative sanctions related to non-compliance. These efforts underscore the ESAs’ commitment to ensuring that consumers are well-protected in the financial markets.

Securitization also remained a focus in 2024, with the ESAs working to address potential obstacles in the Securitization Regulation (SECR). Some of the areas of focus included refining definitions for sponsors, transparency requirements, and retention criteria for Collateralized Loan Obligations (CLOs). The ESAs also conducted a data-gathering exercise to understand the scope of the private securitization market within the EU, helping inform future regulatory decisions.

The 2024 annual report highlights how the ESAs are addressing a range of emerging risks and challenges in Europe’s financial sector. As the landscape continues to evolve, their work in areas such as sustainable finance, digital resilience, and innovation will remain critical in shaping the future of financial regulation.

While challenges persist, particularly around economic uncertainty, technological disruption, and consumer protection, the ESAs' efforts in 2024 have laid the groundwork for a more resilient, sustainable, and well-regulated financial system in 2025 and beyond.

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