The current environment of low interest rates and elevated political and economic uncertainties poses substantial risks to the banking and insurance sector. Many banks struggle with asset quality concerns and attempt to mitigate discrepancies between returns and their respective funding costs. Costs of banks’ equity exceed respective returns on equity, while insurers predominantly face reinvestment risks, as available long-term interest rates may eventually not suffice to fund the contractually guaranteed returns of the outstanding policies. In the asset management industry, low returns on assets directly translate into low returns on fund shares, potentially further reinforced by the reduction of clients’ returns through fees charged by the fund industry and the costs of distribution. In late 2016, tendencies for increasing risk premia materialised in financial markets. So far, yields in the EU in general have reacted moderately, with the search for yield continuing in some asset classes. Increasing price volatilities and lingering liquidity concerns increased risks around the adequate valuation of asset prices. Valuation risk for financial instruments and volatility remains high, as episodes of high volatility continue to occur and political risks are elevated. Persistent conduct of business risks and rising cyber risk act as additional drivers. A steepening of the yield curve, as recently observed, may benefit the profitability of banks, insurers and pension funds, but may also pose additional valuation concerns. In the EU banking sector, the impact on earnings may only be seen over time since liabilities often reprice at a faster rate than assets. Moreover, high levels of non-performing loans (NPL), inefficiencies, overcapacities, and a lack of conclusive business strategies to improve profitability prospects all weigh on the sector despite some improving prospects for interest income. For the insurance sector, a sudden substantial increase of the interest rate might expose companies to an increasing probability of lapses. Interconnectedness, in particular via asset price contagion and direct financial exposure, adds to financial sector risks. […]