MNI POLICY: Growth Central to Eurozone Stability: ECB May FSR

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

release.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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