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Financial News: ECB Warns Financial Stability Risks Rising Amid Global

ECB Warns Financial Stability Risks Rising Amid Global Trade Tensions

05/29/2019 - 10:32:00 (RTTNews)

(RTTNews) - Risks to financial stability in the euro area are rising amid a slowing global economy and escalating trade tensions, the European Central Bank warned on Wednesday.

Uncertainty surrounding the global economic growth outlook have led to "bouts of high volatility in financial markets", the bank said as it released the latest Financial Stability Review report.

Slower than expected growth and a possible worsening of trade tensions could trigger further falls in asset prices, the report warned. "If downside risks to the growth outlook were to materialize, risks to financial stability may arise," ECB Vice-President Luis de Guindos said. "The growth outlook is central to all the main risks to financial stability."

Riskier segments of the corporate sector, such as the global leverage loan sector, appear to have high repricing risks, the FSR said. Vulnerable sovereigns are set to face higher financing costs once the downside risks to growth materialize and that could lead to the unearthing of debt sustainability worries, the report added. Some countries may also face rollover risks as the sovereign risk may be reassessed. The FSR said the bank profitability in the euro area is expected to remain low and the return on equity is likely to average around 6 percent over the next 2-3 years, which is well below the nearly 8-10 percent investors expect.

"That said, euro area banks' capital adequacy remains strong, implying widespread resilience to plausible adverse scenarios," the ECB said.

"Notwithstanding this near-term resilience, the FSR highlights that any change in the credit rating outlook could lead to higher medium-term funding costs for banks."

The report also raised concern over the increased risk-taking in the non-bank financial sector and warned that a renewed subdued asset repricing could trigger large outflows and lead to forced sales, thus adding more stress on the less liquid markets.

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