MNI BRIEF: FinStab Fragile as Rates, Conditions Tighten - ECB

Europe’s financial stability remains “fragile,” the European Central Bank said Wednesday as it published the May 2023 Financial Stability Review, with households, companies, governments and property markets facing higher interest rates and tightening financial conditions, while disorderly market adjustments also remain a concern.

“Price stability is crucial for durable financial stability,” ECB vice president Luis de Guindos said, adding that tighter monetary policy makes it more likely that vulnerabilities in the financial system will be revealed. Uncertain growth prospects remain a source of downside risk, with firms that emerged from the pandemic with bigger debts and weaker earnings harder hit. Some households may already find their purchasing power impacted by high inflation and tougher loan repayment conditions, further dragging down consumer spending.

Stretched valuations, tighter financing conditions and lower liquidity might increase the risk of any market adjustment becoming disorderly, particularly in the event of renewed recession fears. Euro area banks have so far proved resilient, though they may be affected by falling profit margins while also requiring greater loss provisioning.