ECB’s de Cos: ‘New and Enhanced Risks to Financial Stability’

11 May 2023

By David Barwick – FRANKFURT (Econostream) – The rapid change of the environment to one of high price pressures and increasing borrowing costs presents greater financial stability risks, European Central Bank Governing Council member Pablo Hernández de Cos said Thursday.

In a speech at a conference in Madrid, de Cos, who heads Banco de España, said, ‘The macrofinancial risk landscape has changed in recent months and continues to evolve. In a relatively short period of time we have moved from low inflation and low interest rates to persistent high inflation and rising interest rates. This shift poses new and enhanced risks to financial stability.’

European banks were still being favoured by monetary policy tightening, ‘as the interest rate pass-through on the asset side still significantly exceeds the pass-through on the liability side.’

However, he said, slower growth and higher interest rates could negatively affect asset quality and lending, making it harder for banks to achieve profits. Moreover, higher funding costs would reduce margins, he said.

‘The impact of these factors is expected to become more pronounced over time and more likely the longer the high-interest rate period continues’, he said.

Given high uncertainty, ‘including in relation to the degree of future monetary policy tightening, banks ought to implement a prudent provisioning and capital planning policy, and carefully preserve their current levels of resilience’, he said.