ECB’s de Guindos: Tighter Financial Conditions Increase Risk Posed by Financial Vulnerabilities

16 November 2022

By David Barwick – FRANKFURT (Econostream) – Tighter financial conditions increase the risk posed by financial vulnerabilities of sovereigns, households and companies, European Central Bank Vice President Luis de Guindos said Wednesday.

In the foreword to the ECB’s latest Financial Stability Review, de Guindos said that [h]ouseholds and firms across the euro area are already feeling the effects of higher inflation and weaker economic activity, amid the ongoing energy crisis prompted by the war in Ukraine.’

According to de Guindos, financial stability risks have increased as the economic and financial backdrop as worsened. ‘This year has seen notable declines in financial asset prices across many regions and asset classes, an increase in market volatility and, at times, strained market liquidity’, he said.

Some market participants have also faced sudden and big margin calls, he noted, as changes in asset prices incorporate growing uncertainty about how monetary policy in major economies will get inflation back under control.

‘As financial conditions tighten, the vulnerabilities of more-indebted sovereigns, households and corporates are at greater risk of coming to the fore’, he said.

Policy support warded off widespread corporate defaults and joblessness in the face of the pandemic, he said, protecting banks from a surge in non-performing loans.

‘While they are now benefiting from near-term gains derived from higher interest rates and margins, deteriorating growth prospects point to rising risks in the medium term’, he said. ‘With the present macroeconomic environment, where monetary policy is focused on lowering inflation, it is crucial for governments to be targeted in the support they provide to vulnerable sectors, while avoiding policies that could interfere with the monetary policy normalisation process.’