The eurozone’s fragile economy combined with investors’ hunt for higher returns poses a renewed threat to the region’s financial system, according to the ECB.
“Systemic stress among euro area banks and sovereigns declined further to levels last seen before the onset of the global financial crisis in 2007,” the ECB said in its Financial Stability Review published yesterday.
“The economic recovery nonetheless remains weak, fragile and uneven — and could potentially reinforce financial stability risks against a backdrop of a global search for yield.”
A series of unprecedented stimulus measures by the ECB to stave off deflation in the 18-nation currency bloc has sent bond yields to record lows and pushed stock valuations higher. While that has led some investors to take larger risks, the policies have so far done little to spur consumer price gains and economic growth, and officials are debating whether and when to take further steps.
The ECB said its review of bank balance sheets in the eurozone, completed last month, helped push lenders to strengthen their capital positions. Still, it said the work of restoring public finances remains uneven and unfinished, and pointed to three key risks to financial stability.
The risks include an “abrupt reversal of the global search for yield, amplified by pockets of illiquidity, with signs of a growing use of leverage” by non-banks, it said. This calls for continued efforts to improve oversight of shadow banks, it said.
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