The President of the European Central Bank (ECB) Christine Lagarde on Thursday called on euro zone states to “remain proactive” in the face of risks to financial stability, against a backdrop of high interest rates due to inflation.
“So far, the European financial system has avoided the worst scenario in which serious systemic risks would materialize at the same time,” Ms. Lagarde admitted on Thursday. “But policymakers must remain proactive and alert to financial stability risks as they arise,” she added.
The central banker spoke as president of the European Systemic Risk Committee (ESRB), attached to the ECB, which in September 2022 issued a warning to European finance without precedent for more than ten years.
The committee then called on banks to “prepare” for “extreme risk scenarios”, made more likely since the outbreak of war in Ukraine and the rapid reversal of the trend in interest rates in the face of inflation.
Bank profitability affected by rising financing costs
Over the past year, the tremors in the global financial system have certainly occurred outside the euro zone, with the failure of regional banks in the United States, the sovereign bond crisis in the United Kingdom and, more recently, the fluctuations prices of US Treasury bonds.
In the medium term, however, the profitability of banks “will be affected by the increase in financing costs, linked to the increase in key rates (of the ECB), and by a considerable drop in loan volumes,” warned Ms. Lagarde.
Additionally, the “sustained combination of low growth and higher debt servicing costs will continue to strain vulnerable households and businesses, which could lead to an increase in defaulted loans,” according to the first guardian of the euro.
More generally, the list of “hot spots” in the financial system “remains long”, she said, citing as an example money market funds and investment funds, particularly those invested in illiquid assets. .