ECB’s Knot: Tail Risks to Financial Stability Call for Building Resilience

22 July 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Monday said that the financial system needed to be strengthened to face underlying vulnerabilities.

In a letter to G20 Finance Ministers and Central Bank Governors written in his capacity of Chair of the Financial Stability Board, Knot, who heads De Nederlandsche Bank, said, ‘While the memory of past turmoil fades and optimism over a soft landing for the global economy grows, it is important to emphasise that tail risks remain. Indeed, key underlying financial system vulnerabilities have not gone away, so we must maintain our focus on building resilience.’

Among the areas which required further attention were debt levels of government and private sector borrowers, vulnerabilities in non-bank financial intermediation, and sustainability related risks.

‘Combined with rich asset valuations in some markets, these vulnerabilities raise the potential for sharp price corrections in the event of a shock’, he said. ‘Such shocks could be more likely amid heightened geopolitical uncertainty, which highlights the importance of enhancing international collaboration.’

Divergencies in global monetary policies could be challenging for emerging markets and developing economies (EMDEs), he noted.

‘A separate concern relates to possible further use of foreign currency-pegged stablecoins, which may exacerbate challenges for monetary policy and capital flow management in some EMDEs’, he said.