布鲁盖尔-Recent-euro_16页_585kb

Summary of "From Climate Change to Cyber-attacks: Incipient Financial-stability Risks for the Euro Area"

Core Content

This report critically analyses the European Central Bank's (ECB) November 2019 Financial Stability Review, focusing on the key financial-stability risks facing the euro area. The authors, Zsolt Darvas, Marta Dominguez-Jiménez, and Guntram Wolff, highlight several areas where the ECB's assessment could be improved, including housing markets, market expectations, safe assets, climate risks, and cybersecurity. The report also discusses the role of macroprudential and fiscal policies in addressing these risks.

Main Risks to Financial Stability

1. Housing Market Risks

• The ECB report notes that housing markets are a significant factor in financial crises.
• However, the current housing markets are less mortgage-driven compared to pre-crisis levels, and the construction sector has not expanded significantly.
• This suggests that a housing price correction would have a smaller impact on mortgage defaults and economic activity.
• House price overvaluation is still present, but the link to credit growth is weaker than before, indicating reduced financial stability concerns.
• In contrast to pre-crisis periods, construction output in most euro-area countries has not increased significantly, reducing the potential for a disruptive housing market crash.

2. Market Expectations and Interest Rates

• Market expectations of interest rates are a critical factor influencing asset prices.
• The ECB report does not sufficiently address how changes in these expectations can affect financial stability, especially if rate changes are not tied to real economic conditions.
• The ECB's assessment of the euro-area yield curve is below zero up to 14 years, suggesting that an unexpected increase in rates is more likely than a decrease.
• The report argues that the impact of interest rate hikes on equity prices depends on the underlying economic context. A strong economy could offset rate increases, while a weak one might lead to significant market declines.

3. Shortage of Safe Assets

• The supply of safe sovereign assets in the euro area has declined due to lower credit ratings and reduced issuance from the safest countries.
• Only three countries (Germany, Luxembourg, and the Netherlands) currently have AAA credit ratings for their long-term debt.
• The ECB report does not adequately address this issue, which is important for financial stability as safe assets serve as a reference for pricing and collateral.

4. Climate Risks

• Climate change poses systemic risks to the euro area, especially if market prices do not reflect these risks accurately.
• The ECB's analysis includes a section on climate-related disclosures by banks and insurers, but more work is needed on forward-looking risk frameworks and better data collection.
• Financial institutions are not fully disclosing climate risks embedded in their assets, which may lead to mispricing and increased vulnerability.

5. Cybersecurity and Hybrid Threats

• Cybersecurity and hybrid threats are significant risks to financial institutions and could have systemic implications.
• These risks are not considered in the ECB's assessment, despite their growing importance in the digital age.

Key Policy Recommendations

• Macroprudential Measures: The authors note discrepancies in macroprudential policies among EU countries, even for those with similar levels of house price overvaluation. Some countries may have over- or under-regulated their financial systems.
• Fiscal Policy: The report argues that EU policymakers need to be more proactive in using discretionary fiscal policy to prevent or mitigate the next recession. Monetary policy alone may not be sufficient due to its limited scope of action.
• Risk Weights: For climate-related assets, the report suggests that risk weights should not be reduced, as they still contain normal financial risks. Instead, risk weights for non-green (brown) assets should be increased.
• Asset Pricing and Valuation: Continued low interest rates have led to overvaluation of risky assets, which could result in sharp corrections if rates rise. The ECB should pay more attention to this issue.

Conclusion

The ECB's report is comprehensive and covers the main risks to financial stability in the euro area. However, it lacks depth in certain areas, such as the role of market expectations, the shortage of safe assets, and the growing importance of cybersecurity and climate risks. The authors emphasize the need for more nuanced analysis and policy responses to address these emerging threats, particularly in the context of a global economic slowdown and increasing financial sector vulnerabilities.