In its monthly analysis of financial stability in the euro area, the European Central Bank recommends that macroprudential authorities maintain the existing capital buffer requirements and borrower-based measures in order to preserve banking resilience and ensure sound lending standards.
Against a backdrop of geopolitical uncertainty and disruptions in energy supply, the Frankfurt-based institution noted in May that equity valuations were high compared with historical standards and that corporate bond risk premia were compressed globally.
“There is a fair risk that financial market sentiment could deteriorate, as downside risks related to geopolitical, fiscal and macro-financial developments appear underestimated”, the ECB noted on Wednesday in a statement.
The monetary institute also warned about non-bank actors’ exposure to the risks of a widespread market downturn. The combination of “low liquidity buffers, [...] high portfolio valuations and concentrated exposures on non-banks’ balance sheets increase the risk of forced asset sales that could amplify market stress”, it said.
“While not a systemic concern per se in the euro area, opaque and interconnected private markets warrant close monitoring owing to spillover risks, especially from the United States”, the ECB noted.
See the ECB’s monthly financial stability review: https://aeur.eu/f/m28 (Original version in French by Bernard Denuit)