布鲁盖尔-From-climate-change-to-cyber_16页_586kb

Summary of "From climate change to cyber-attacks: incipient financial-stability risks for the euro area"

Core Content

This report, authored by Zsolt Darvas, Marta Dominguez-Jiménez, and Guntram Wolff, critically analyses the European Central Bank's (ECB) November 2019 Financial Stability Review. It evaluates the main financial-stability risks facing the euro area, including economic growth, sovereign debt, household and corporate debt, risky assets, the banking sector, the non-banking financial sector, climate change, and cybersecurity threats.

The report highlights that while the ECB's assessment is comprehensive, certain areas require further attention. It also suggests that EU policymakers should consider more proactive fiscal measures to address financial stability concerns, especially in light of the ECB's limited ability to respond to cyclical downturns.

Main Points and Key Findings

1. Economic Growth and Global Uncertainty

• The euro area is experiencing a modest economic slowdown, with growth projections of 1.1%, 1.2%, and 1.4% for 2019, 2020, and 2021 respectively.
• Global geopolitical risks, particularly the US-China trade conflict, are seen as the most prominent downside risks.
• A global economic slowdown could reduce household incomes and corporate profits, threatening debt sustainability, especially in countries with high non-financial sector debt.
• The trade agreement between the US and China in January 2020 may only be a temporary pause in the trade conflict, with most tariffs still in place.

2. Sovereign Debt Sustainability

• Sovereign debt positions are largely sustainable, with the euro area’s fiscal position expected to remain expansionary.
• However, a more severe economic downturn could pose risks, particularly if risk premiums rise.
• Political uncertainty and global pessimism could undermine the current favorable financing conditions.
• The ECB notes that countries with less sustainable debt positions need to exercise caution, especially in the context of potential refinancing needs.

3. Household and Corporate Debt

• Household debt remains broadly stable at 95% of disposable income and 58% of GDP, though there is significant variation across countries.
• The Netherlands, Spain, Portugal, and Ireland have seen recent deleveraging, while France has been re-leveraging.
• Household repayment capacity is robust, but a significant downturn could challenge this.
• Corporate debt is high but stable, with some countries exceeding the 75% of GDP threshold.
• The performance of credit default swaps (CDS) indicates that the market perceives low credit risk for corporate bonds.
• However, increased issuance of BBB-rated corporate bonds and high leverage ratios raise concerns about potential downgrades and risk premiums in case of economic weakness.

4. Risky Assets and Low Interest Rates

• Riskier assets, such as equities and corporate bonds, are heavily influenced by low interest rates.
• The ECB estimates that half of the increase in aggregate equity prices since the euro-area sovereign debt crisis can be attributed to lower benchmark yields.
• The search for higher yields has led to increased demand for longer-maturity and lower credit-quality assets, which can be pro-cyclical and increase financial vulnerability.
• The ECB warns that continued low yields may lead to misaligned valuations and a potential sharp price correction.

5. Banking Sector Resilience

• Euro-area banks face weak profitability due to low net interest income and declining net fee and commission income.
• The banking sector has high cost-to-assets and cost-to-income ratios, though some banks have improved through digitalization and cost-cutting.
• In an adverse scenario, banks could face significant losses (over 15% of equity), large falls in lending, and a drop in CET1 capital ratios.
• The ECB concludes that the banking system remains largely resilient, but the likelihood of more severe scenarios is a concern.

6. Non-Banking Financial Sector

• The non-banking financial sector, including insurance companies, pension funds, and investment funds, accounts for 56% of total financial sector assets.
• Despite growth in balance sheets, profitability is challenged by low yields.
• Non-banking institutions are increasingly investing in riskier, longer-duration, and less-liquid assets, which may increase vulnerability.
• Emerging market exposure is rising, though it remains relatively small and carries foreign exchange risk.

7. Climate Change and Financial Stability

• Climate change-related risks have the potential to become systemic, especially if not properly priced in financial markets.
• The ECB highlights the need for a forward-looking framework and better data to assess these risks.
• Financial institutions disclose less than 30% of climate risks embedded in their assets, despite significant exposure.
• There is a statistically significant correlation between climate risk disclosures and market valuations for pension funds, but not for banks.

8. Cybersecurity and Hybrid Threats

• The ECB does not consider cybersecurity and hybrid threats in its financial stability assessment.
• These threats are identified as significant risks to financial institutions and could have systemic implications.

9. Macroprudential Policies and Housing Markets

• Macroprudential policies vary significantly across EU countries, even for those with similar levels of house price overvaluation.
• The report suggests that some countries may have overreacted, while others have not taken sufficient measures.
• Housing markets have become less sensitive to mortgage credit compared to pre-crisis, which could reduce the impact of a house price correction on financial stability.

10. Recommendations

• Policymakers should be better prepared to use discretionary fiscal policy to prevent or mitigate the next recession.
• Risk weights on green assets should not be reduced, as they still pose financial stability risks.
• Risk weights for brown (carbon-intensive) assets should be increased to reflect their higher risk profile.
• There is a need for a more reliable supply of safe sovereign assets to support financial stability.
• Greater emphasis should be placed on market expectations of interest rates and their impact on asset prices.
• Asymmetric economic recovery in the euro area could lead to divergent interest rate policies, which may harm southern European countries.

Conclusion

The report underscores the need for a more comprehensive and forward-looking approach to financial stability in the euro area. It calls for improved macroprudential policies, better fiscal responses, and increased attention to climate and cybersecurity risks. The ECB's current assessment is seen as a starting point, but it lacks depth in certain areas, particularly regarding the role of safe assets and the implications of market expectations. The authors argue that addressing these issues is crucial for maintaining financial stability in the face of global uncertainty and evolving economic conditions.