Europe warns of rising risks in the Financial system
The European Central Bank (ECB) warned that a toxic combination of recession, soaring inflation, expensive borrowing costs and lower liquidity is threatening to cause turmoil in financial markets in the Eurozone that consists of 19 member countries.
According to the ECB's biennial financial stability report that released on November 16, the probability of recession of the Eurozone and the UK in 2023 has increased to 80%. On November 16, the UK said that annual inflation in October of this country increased by 11.1% - the highest level in 41 years.
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The growing likelihood of a recession in the Eurozone, soaring energy prices and high inflation due to Russia's war in Ukraine also increase the risk of losses for banks in the region.
The EBC report says that high inflation, a growing recession and higher financing costs are posing growing challenges to households, businesses and governments that are heavily indebted and can lead to multiple bankruptcies and extreme volatility in financial market. All of these can appear simultaneously and potentially reinforcing each other.
This year, turmoil in the UK government bond market and a cash crunch of energy trading companies in Europe have shown how the Eurozone financial system is increasingly vulnerable to sharp market fluctuations.
The ECB called on global regulators, under the coordination of the Financial Stability Committee, based in Switzerland, to accelerate efforts to address the vulnerability of the non-banking financial sector in the face of tight liquidity.
The cash holdings of investment funds in the Eurozone have increased since the start of the year, but according to the ECB, its liquid asset holdings remain relatively low. Risks remain high as hedge funds could, in an adverse scenario, exacerbate market correction through cyclical asset selling.
While many banks are benefiting from improved margins thanks to rising interest rates, the ECB warns that as the economy weakens and credit risks increase, this could affect their profit outlook in the medium term.
Europe warns of rising risks in the Financial system
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