MNI POLICY: ECB Notes "Challenges" To Financial Stability

By Luke Heighton

     FRANKFURT (MNI) - The eurozone's financial stability environment remains

"challenging," the European Central Bank (ECB) said Wednesday, noting the side

effects of negative interest rates, increasing downside risks to growth and

signs of excessive risk-taking.

     "While the low interest rate environment supports the overall economy, we

also note an increase in risk-taking which warrants continuous and close

monitoring," ECB Vice-President Luis de Guindos said following the publication

of the November 2019 Financial Stability Review.

     "Authorities should use available tools to address the build-up of

vulnerabilities where possible," he added, amid continuing euro area uncertainty

related to U.S.-China trade tensions, the continued slowdown in global and

European economic activity, and Brexit.

     Non-banks, such as investment funds, insurance companies and pension funds,

continue to take on more risk and have increased their exposure to riskier

segments of the corporate and sovereign sectors, the FSR found, while there are

"pockets of vulnerability" in the non-financial corporate sector and some

property markets.

     The euro area economic outlook has deteriorated since the last Financial

Stability Review in May, with growth expected to remain subdued for longer, the

FSR continued. Meanwhile, riskier firms are being encouraged to borrow by low

funding costs. "In the event of a sudden repricing of financial assets, growing

credit and liquidity risk in some parts of the euro area non-bank financial

sector - coupled with higher leverage in investment funds - may lead non-banks

to respond in ways that cause stress to spread to the wider financial system."

     Euro area banks' profits continue to decline, while their return on equity

is expected to face further pressure from both a weaker economic outlook and

persistent cost inefficiencies and overcapacity. "Even so, the banking sectors'

solvency position remains robust with a Common Equity Tier 1 ratio of over 14%.

And even under an adverse stress scenario, the aggregate solvency ratio is

expected to remain above 11%," the FSR concluded.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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