ECB: Financial Stability Risks Remain Elevated and Have Become More Uneven

19 May 2021

By David Barwick – FRANKFURT (Econostream) – The uneven economic impact of the pandemic has exacerbated financial stability risks in the euro area, the European Central Bank said on Wednesday.

In a press release accompanying the publication of its May 2021 Financial Stability Review, ECB Vice President Luis de Guindos was quoted as saying that ‘[a]s the euro area emerges from the third wave of the pandemic, risks to financial stability remain elevated and have become more unevenly distributed.’

‘A higher corporate debt burden in countries with larger services sectors could increase pressure on governments and banks in these countries’, he said. ‘Extensive policy support, particularly for corporates, could gradually move from being broad-based to more targeted.’

Although measures taken to offset the impact of the pandemic depressed corporate insolvencies, it ‘cannot be ruled out’ that the withdrawal of this support would lead to ‘considerably higher insolvency rates’, the ECB said. This risk is more acute in ‘certain’ countries and could negatively impact sovereigns and banks, it said.

Buoyant equity and real estate markets raise concerns about sudden corrections, while risen US benchmark yields mean financing conditions are vulnerable to shifts that would have repercussions for a wide range of economic agents, the ECB pointed out.

Although markets are more positive about banks, the latter continue to show weak profitability and face uncertain demand for loans, the ECB said. Credit risk could yet materialise, it cautioned, calling for more loan loss provisions. ‘Effective NPL solutions and full use of available capital buffers are needed to support the recovery’, the central bank said.

The ECB warned of the exposure of non-banks both to corporates with poor fundamentals and to ‘a yield shock given their material bond portfolio duration, exposure to US markets and high degree of liquidity risk.’