From the Regulators

Outlook for financial stability remains uncertain: ECB

By James Langton |

It its latest Financial Stability Review, the European Central Bank warns that risks and vulnerabilities persist in the financial system.

The ECB says that the extraordinary remedial actions taken by central banks and governments, which are aimed at addressing liquidity stresses and strengthening capital positions, have been successful in stabilizing the euro area banking system. “Over time, once fully implemented, these measures should lower the cost of bank credit and facilitate its provision to the economy,” it adds.

“That said, in order to revive the process of efficient financial intermediation, financial institutions will need to play their part in the adjustment process by taking advantage of these measures,” the ECB notes.

It also says that a number of risks and vulnerabilities remain which the financial system may have to cope with, notably the possibility of: further deterioration in the U.S. and the euro area housing markets and the impact this may have on banks’ loan quality and the value of securities backed by mortgage-related assets; a deeper and more prolonged economic slowdown than currently expected that could cause a sharper and broader deterioration in borrowers’ ability to service their debt; a more pronounced deleveraging by banks, due to persistently high funding costs and concerns about the adequacy of capital buffers, which could negatively affect the flow of credit extended to the broader economy; and, a surge in financial market volatility caused by a further unwinding of positions by hedge funds.

“All in all, given the risks that lie ahead, banks will need to be especially watchful in ensuring that they have adequate capital and liquidity buffers in place to cushion the challenges ahead,” it counsels.