The growing “compromise” in the housing market, junk bonds, and crypto assets has created vulnerabilities that will be revealed if higher-than-expected inflation leads to interest rates rose sharply, The European Central Bank has warned.
The eurozone economy’s recovery this year from the coronavirus pandemic has reduced short-term risks to the financial system, but it has also resulted in accumulation of long-term risks, the ECB said Wednesday during its twice-annual financial stability review.
“Particular concern concerns rising pockets in credit, property and housing markets as well as higher debt levels in the corporate and public sectors,” the ECB said.
Rising inflation and falling real interest rates have led investors to take on greater risk in their search for returns, which has driven parts of the real estate, debt, and crypto asset markets.” increasingly susceptible to regulation,” it warned.
“The correction in markets could be triggered by a weaker-than-expected economic recovery, spillovers from adverse developments in emerging market economies, an increase in tensions in non-financial corporate sector or a sudden correction in market expectations regarding the future path of its currency.
Eurozone inflation rose to a 13-year high of 4.1% in October – well above the ECB’s 2% target. Central banks, however, have guess Inflation will fall back below target in the next few years and said they do not expect a rate hike next year.
But it noted on Wednesday that there was “a risk that recent strains in global supply chains and a rise in energy prices could have a more lasting impact on inflation than expected”.
House prices in the EU rose 7.3 per cent year-on-year in the second quarter, the fastest rate since just before the 2008 financial crisis, the ECB said. “makes many Europeans real estate market “Vulnerable to adjustment” and warns of “decline in lending standards.”
It said these developments “strengthen the case” for national authorities to introduce more “macro privacy policy measures”, such as limits on bank lending or higher capital requirements. for mortgages.
“More exotic market segments, such as the crypto market, are also still subject to speculative volatility,” the ECB said. It also expressed concern about the link between conventional financial markets and stablecoins, a cryptocurrency that is nominally pegged to underlying assets to limit price movements.
Rapid growth in size and usage stablecoins “Calls for urgent implementation of regulatory, supervisory and supervisory frameworks,” it said.
The ECB said the non-banking financial sector “continues to face high credit risk” due to increased investments in riskier “junk bonds” rated below investment. It added: “If bond yields rise, valuation losses could trigger outflows from hedge funds which – when combined with low liquidity buffers – could force bond funds into liquidation. assets to meet investor acquisitions.”
The central bank said its own extremely loose monetary policy, which cut interest rates to negative levels and bought trillions of euros in bonds, increased “the incentive to engage in risk-taking”. more risk, this can become excessive and lead to build-up systemic risk”.
However, it said the main tools to address these risks are macro-security rules rather than “winding down” by tightening monetary policy more than necessary to achieve it. inflation target.
In the first day of this month, US Federal Reserve warns that tensions in China’s real estate sector caused by financial difficulties at heavily indebted property group Evergrande “pose a number of risks to the US financial system”. But the ECB has played down these worries, saying: “So far, the impact on global growth forecasts and financial markets has been limited, as foreign exposure appears to be relatively low. small”.
