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Financial News: ECB: Risks To Financial Stability Increased Amid Rising

ECB: Risks To Financial Stability Increased Amid Rising Inflation

11/16/2022 - 07:05:00 (RTTNews)

(RTTNews) - Risks to the financial stability in the euro area increased amid rising inflation and low economic growth, the European Central Bank said in its Financial Stability Review, released on Wednesday.

The ECB observed that financial conditions tightened as central banks took measures to combat inflation.

With rising inflation and low economic growth, households, firms and governments that hold more debt became vulnerable. Moreover, they are adding to financial market stresses and testing the resilience of investment funds.

"All of these vulnerabilities could unfold simultaneously, potentially reinforcing one another," the review said.

Profits of corporate sector are likely to decline amid rising energy and input costs and high funding costs. If the outlook deteriorates further, the ECB said an increase in the frequency of corporate defaults cannot be excluded, particularly among energy-intensive firms.

As firms and households find it increasingly challenging to service their debts, banks could face higher credit losses in the medium term, the bank noted. The banks may need larger provisions due to asset quality deteriorations.

The central bank urged governments to maintain their support measures to firms and households to be temporary and targeted at those most affected.

The ECB added that diminished market liquidity lifted risk of disorderly asset price adjustments, which could test investment fund resilience.

Overall, the euro area banking system is well placed to withstand many risks, the bank said. Given the deterioration of the economic and financial outlook, targeted macroprudential policies could help to strengthen the resilience of the financial system.

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