ECB’s de Guindos: Potential for Vicious Circle Between Banks, Sovereigns, Companies

25 February 2021

By David Barwick – Frankfurt (Econostream) – European Central Bank Vice President Luis de Guindos warned Thursday of the possibility of a vicious circle emerging between banks, sovereigns and corporates.

In a presentation for an IESE Business School Alumni Learning Programme webinar, de Guindos, according to a copy made available by the ECB, said that bank profitability had improved but, like valuations, was still low.

The outlook for banks remained ‘very challenging’, with models suggesting ‘some risk of under-provisioning’, though these did not account for the extent to which policy support had offset credit risk, he noted.

De Guindos’ presentation observed that there was the potential for a ‘vicious circle’ to develop between banks, sovereigns and companies. It called the vulnerabilities of banks and other companies ‘clearly linked, and also closely intertwined with sovereigns, as well as depending on policy support’.

The withdrawal of that support would need to be ‘balanced and cautious’, he said. ‘Risks of an early withdrawal are higher than the risks associated with keeping support measures in place for too long. But care needs to be taken to avoid moral hazard.’