The financial system in the euro area is fragile, warns the ECB. Increased interest rates, geopolitical conflicts and a weak economy are responsible. She sees risks for one industry in particular.
The European Central Bank (ECB) has presented its financial stability report – and warns that the financial system in the euro area is fragile. “The weak economic outlook and the consequences of high inflation are weighing on the ability of people, companies and governments to service their debts,” said ECB Vice President Luis de Guindos at the presentation of the report, which the central bank presents twice a year.
Headwind for banks
The rapidly rising interest rates are a risk, especially for banks in the euro area. You would now receive more interest yourself and earn higher interest on loans; However, banks in Germany have many long-term loans with relatively low interest rates on their books, and demand for new financing has tended to decline in recent months.
“Euro area banks are benefiting from rising interest rates, but face headwinds from higher financing costs, poorer asset quality and lower loan volumes,” the ECB concluded. Overall, the euro area banking system is “well positioned to withstand these risks.” However, the ECB believes that the increased capital buffers, for example for any setbacks on the real estate markets, should be maintained and the planned reforms to banking regulation under Basel IV should be fully implemented.
Too early to beat inflation
ECB President Christine Lagarde recently warned that it was too early to declare victory over inflation. Monetary policy is in a phase in which one must pay close attention to the various forces that influence the further development of inflation. “There is still a journey ahead of us,” Lagarde said and reiterated that future interest rate decisions by the ECB depend on the further development of the economic data.
In order to get inflation under control, the ECB had raised key interest rates ten times since July 2022. Banks now receive four percent interest on deposits.