2023-05-31 09:13:15
Despite the resilience of banking institutions, the tightening of monetary policy in Frankfurt suggests a “fragile financial outlook”.
By Le Figaro with AFP
Posted update
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The sharp rise in interest rates carried out since last July to contain inflation in the euro zone might “reveal vulnerabilities” in the financial system, warns the European Central Bank in a report published on Wednesday. “As we tighten monetary policy to reduce high inflation, this can reveal vulnerabilities” by testing the resilience of businesses, households and governments, ECB Vice President Luis de Guindos said. when publishing the semi-annual report of the monetary institution on financial stability. This is despite the fact that economic conditions have “improved slightly” and energy prices have recently fallen.
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The ECB has raised its key rates to an unprecedented extent, by 3.75 percentage points since last July, and intends to raise them further to bring inflation back to the target of 2%, once morest another 7% over one year in April. Among other visible effects of this policy, a correction in the real estate markets which might “become disorderly” if the rise in mortgage rates “reduces more and more demand”, notes the ECB. This report comes following the financial turmoil in March due to bank failures in the United States and the forced takeover of Credit Suisse by UBS. “These events were a powerful reminder of the importance of ensuring that the fundamentals of the banking system are sound,” explains Mr. De Guindos in the introduction to the report.
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Banks in the euro zone, which are deemed to be solid, are seeing their loan volumes shrink and funding costs increase, which may harm their profitability. Signs of deterioration are visible in their loan portfolios exposed to commercial real estate, small business and other consumer loans, the report said. These establishments are also at the mercy of non-bank customers – funds, insurers, clearing houses, etc. – who represent 14% of their deposits, if these customers withdraw their assets in the face of a need for liquidity, warns the ECB . The States are faced with the increase in financing costs which is bad timing when refinancing the mountain of public debt accumulated during the pandemic and then the surge in energy prices. “The outlook for financial stability in the euro area remains fragile,” the report concludes.
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