The European Central Bank said that financial stability in the euro area is at risk as investors step up their search for higher returns and weak economic growth weighs on banks’ balance sheets.
While “legacy” risks from the global financial crisis persist for both banks and sovereigns, new threats are emerging from “a continued global search for yield, which has left the financial system more vulnerable to an abrupt reversal of risk premia,” the ECB said in its semi-annual Financial Stability Review published today.
Even so, “financial stress indicators have remained low and stable” over the past half year, it said.
Central banks across the world have kept interest rates at record lows to rekindle growth after the financial crisis, depressing bond yields and leaving investors searching for more attractive assets.
At the same time, regulators have tightened rules and the ECB is conducting a bank balance-sheet assessment to identify weaknesses before assuming supervisory powers in November.
Euro-area countries have attracted capital from emerging markets, with U.S. exchange-traded funds recording net inflows to Spain of more than 1.3 billion euros ($1.8 billion) since the beginning of the year.
“Such flows might prove to be fickle, absent prospects of strong absolute returns differentiated by underlying country and bank-specific macroeconomic prospects,” the ECB said.
“Continued action by sovereigns is needed to address public debt sustainability challenges -– notably progress in restoring the soundness of public finances while working to boost macroeconomic growth prospects.”
Slow Recovery
The euro-area economy is struggling to turn what ECB President Mario Draghi described this week as “a slowly consolidating recovery” into solid growth strong enough to boost inflation to the ECB’s goal of just under 2 percent.
Annual consumer-price gains in the single-currency bloc have remained below 1 percent since October. Officials will take their next policy decision on June 5.
At the same time, progress toward the establishment of a single supervisor for the region’s banks has been “fast and substantive,” Vice President Vitor Constancio said in the foreword of the report.
The ECB said that while euro-area banks continue to operate in a “low profitability or loss-making environment,” they must continue to work to “mitigate” investors’ skepticism while at the same time ensuring that the deleveraging process doesn’t “unduly” lead to a reduction in credit to the economy.
“Although some tentative signs of a leveling-off in the pace of non-performing loan formation have emerged in some countries, the turning point does not appear to have been reached yet,” the ECB said.
“Amid continued downside risks to a fragile euro-area economic recovery, high private-sector indebtedness in many countries, coupled with only slowly improving income and earnings prospects, may weigh on borrowers’ debt servicing capabilities.”
bloomberg.com
While “legacy” risks from the global financial crisis persist for both banks and sovereigns, new threats are emerging from “a continued global search for yield, which has left the financial system more vulnerable to an abrupt reversal of risk premia,” the ECB said in its semi-annual Financial Stability Review published today.
Even so, “financial stress indicators have remained low and stable” over the past half year, it said.
Central banks across the world have kept interest rates at record lows to rekindle growth after the financial crisis, depressing bond yields and leaving investors searching for more attractive assets.
At the same time, regulators have tightened rules and the ECB is conducting a bank balance-sheet assessment to identify weaknesses before assuming supervisory powers in November.
Euro-area countries have attracted capital from emerging markets, with U.S. exchange-traded funds recording net inflows to Spain of more than 1.3 billion euros ($1.8 billion) since the beginning of the year.
“Such flows might prove to be fickle, absent prospects of strong absolute returns differentiated by underlying country and bank-specific macroeconomic prospects,” the ECB said.
“Continued action by sovereigns is needed to address public debt sustainability challenges -– notably progress in restoring the soundness of public finances while working to boost macroeconomic growth prospects.”
Slow Recovery
The euro-area economy is struggling to turn what ECB President Mario Draghi described this week as “a slowly consolidating recovery” into solid growth strong enough to boost inflation to the ECB’s goal of just under 2 percent.
Annual consumer-price gains in the single-currency bloc have remained below 1 percent since October. Officials will take their next policy decision on June 5.
At the same time, progress toward the establishment of a single supervisor for the region’s banks has been “fast and substantive,” Vice President Vitor Constancio said in the foreword of the report.
The ECB said that while euro-area banks continue to operate in a “low profitability or loss-making environment,” they must continue to work to “mitigate” investors’ skepticism while at the same time ensuring that the deleveraging process doesn’t “unduly” lead to a reduction in credit to the economy.
“Although some tentative signs of a leveling-off in the pace of non-performing loan formation have emerged in some countries, the turning point does not appear to have been reached yet,” the ECB said.
“Amid continued downside risks to a fragile euro-area economic recovery, high private-sector indebtedness in many countries, coupled with only slowly improving income and earnings prospects, may weigh on borrowers’ debt servicing capabilities.”
bloomberg.com
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