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By Luke Heighton
FRANKFURT (MNI) - Uncertainty surrounding global economic growth prospects
has contributed to bouts of high volatility in financial markets, according to a
European Central Bank report, while "weaker than expected growth and a possible
escalation of trade tensions could trigger further falls in asset prices."
May's Financial Stability Review (FSR) identified three areas of core
concern for the eurozone:
-- The materialisation of downside risks to economic growth could spark
greater financial market volatility.
-- Persistent downside risks to growth emphasising the need to strengthen
the balance sheets of highly indebted firms and governments
-- Subdued bank profitability prospects related to slow progress in
addressing structural issues.
Repricing risks "appear particularly high in riskier segments of the
corporate sector," the review said. The global leveraged loan sector remains
susceptible to weaker corporate earnings, while financing costs for vulnerable
sovereigns are likely to increase and debt sustainability concerns become more
prevalent if downside risks to growth materialise.
Bank profitability is expected to remain low across the euro area, with the
ECB estimating an aggregate return on equity of around 6% over the next 2-3
years. "A large share of euro area banks will not be able to meet the expected
returns required by investors (of around 8-10%). That said, euro area banks'
capital adequacy remains strong, implying widespread resilience to plausible
adverse scenarios," the report noted
"A renewed sudden repricing of financial assets could trigger large
outflows and possibly result in forced asset sales by investment funds, thereby
amplifying stress in less liquid markets."
The FSR assesses developments relevant for financial stability, including
identifying and prioritising the main sources of systemic risk and
vulnerabilities for the euro area financial system.
"If downside risks to the growth outlook were to materialise, risks to
financial stability may arise. The growth outlook is central to all the main
risks to financial stability," ECB Vice-President Luis de Guindos said in the
--MNI London Bureau; tel: +44 203-586-2225; email: email@example.com