ECB warns of further economic risks in financial stability report

ECB warns of further economic risks in financial stability report

A euro currency symbol sits on display in the visitor centre at the European Central Bank (ECB) building in Frankfurt, Germany, on Monday, Nov. 4, 2019. TPhotographer: Alex Kraus/Bloomberg via Getty Images

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Signs of excessive financial risk-taking as well as slowdown in bank profitability are some of the biggest challenges in the euro area, the European Central Bank (ECB) said on Wednesday.

The euro zone has been struggling to grow in the aftermath of the sovereign debt crisis of 2011. The ECB, which oversees monetary policy across the 19-member region, has adopted several stimulus measures since then to boost the economy. In 2018, the ECB decided to scale back some of that stimulus amid improved data. However, the central bank returned to its easing stance in full force in September this year as prices and growth rates are treading water.

“Downside risks to global and euro area economic growth have increased and continue to create financial stability challenges,” the ECB said in a press release Wednesday.

The central bank had already warned in May of “persistent downside risks,” which included global trade uncertainty and the U.K.’s departure from the EU.

“While the low interest rate environment supports the overall economy, we also note an increase in risk-taking which could, in the medium term, create financial stability challenges”, Luis de Guindos, Vice-President of the ECB said in a statement.

According to the central bank, institutions such as investment funds and insurance companies have been more risk-taking in the current low interest rate environment. This means that in case of a sudden market shock, for instance, stress among these institutions could spread to the wider financial system – leading to losses for companies and individuals.

The ECB also cited risks in the property market. Riskier firms are taking on more borrowing and property prices continue to rise in “a number” of euro area countries.

Meanwhile, the ECB report also states that bank profitability in the euro area is likely to deteriorate. The report states that past misconduct by banks has weighed on global bank profitability. “While US banks were particularly hit by misconduct costs in the immediate aftermath of the global financial crisis, European banks have been more exposed since 2015.”

The euro area is set to grow 1.1% this year and 1.2% in 2020, according to ECB forecasts released in September.

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