ECB’s Makhlouf: Higher Risk from Liquidity Problems as Pandemic Persists

11 February 2021

By David Barwick – FRANKFURT (Econostream) – The pandemic’s duration is increasing the risk that cracks in the financial system will emerge, European Central Bank Governing Council member Gabriel Makhlouf suggested on Thursday.

In a speech at the European Financial Forum, Makhlouf, who is Governor of the Central Bank of Ireland, said that the near-term outlook had ‘deteriorated and become more uncertain’. Although vaccines ‘offer great hope’, vaccination will take time and new strains of the coronavirus are not well understood.

‘But the more prolonged the need for measures to contain the pandemic, the greater the risk that liquidity problems will evolve into solvency pressures for affected businesses, increased risk of financial difficulties for households, and greater challenges for the financial system and wider economy’, he said. ‘We cannot be complacent about potential risks to financial stability.’

Eurozone banks’ resilience thus far will be tested as asset quality deteriorates, he said, especially with the withdrawal of fiscal support measures. Weak profitability is a well-known issue already, he noted.

‘The increased vulnerabilities have clear messages’, he said. ‘For authorities, now is not the time to unwind either fiscal or monetary support. And for the financial sector, as it moves from absorbing the shock to supporting the recovery, a key focus must be on managing risk, while rebuilding resilience.’