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27 Nov 2013
ECB: Increased risks to financial stability despite decline in systemic risk
FXstreet.com (London) - In its bi-annual Financial Stability Review released today, the European Central Bank said that the risks to global financial stability had increased since its last report.
The report pointed to the potential effects of a changing monetary policy stance from the US Federal Reserve. More hawkish than expected minutes from the Fed’s October meeting suggested that US policymaker may be closer to tapering the central bank’s USD85bn-a-month asset purchase programme than thought. However, recent disappointing labour market statistics could push any tapering well into 2014.
In its report, the ECB said that changes in Fed policy “might be a harbinger of further realignment of risk premia with fundamentals in bond markets, or even an overshooting.”
The report added that “reduced cash buffers, combined with low secondary market liquidity in emerging and corporate bond markets, could amplify future asset price developments.”
The report stated that “stable and predictable macroeconomic policies, as well as efforts such as forward guidance to reduce market uncertainty surrounding central banks’ reaction functions,” were essential for a smooth exit from current non-traditional monetary policies implemented by the ECB.
Despite the potential for greater market instability, the ECB report stated that: “Measures of systemic stress in the banking sector have declined markedly” since 2011.
Negative rates played down
As well as the ECB’s Financial Stability Report, ECB Vice-President Vitor Constancio said today that the central bank would only move implement negative deposit rates in extreme circumstances.
The ECB cut the main refinancing rate by25 basis points to 0.25 percent earlier this month, but held deposit rates. Negative rates would mean essentially charging banks to hold a cash buffer with the ECB overnight. Speaking at a press conference, Constancio noted that this policy had been implemented in Denmark.
"It's different nevertheless to consider this for a big economic area like the euro area," he said. "Only in extreme situations, I think, could that measure be considered."
The report pointed to the potential effects of a changing monetary policy stance from the US Federal Reserve. More hawkish than expected minutes from the Fed’s October meeting suggested that US policymaker may be closer to tapering the central bank’s USD85bn-a-month asset purchase programme than thought. However, recent disappointing labour market statistics could push any tapering well into 2014.
In its report, the ECB said that changes in Fed policy “might be a harbinger of further realignment of risk premia with fundamentals in bond markets, or even an overshooting.”
The report added that “reduced cash buffers, combined with low secondary market liquidity in emerging and corporate bond markets, could amplify future asset price developments.”
The report stated that “stable and predictable macroeconomic policies, as well as efforts such as forward guidance to reduce market uncertainty surrounding central banks’ reaction functions,” were essential for a smooth exit from current non-traditional monetary policies implemented by the ECB.
Despite the potential for greater market instability, the ECB report stated that: “Measures of systemic stress in the banking sector have declined markedly” since 2011.
Negative rates played down
As well as the ECB’s Financial Stability Report, ECB Vice-President Vitor Constancio said today that the central bank would only move implement negative deposit rates in extreme circumstances.
The ECB cut the main refinancing rate by25 basis points to 0.25 percent earlier this month, but held deposit rates. Negative rates would mean essentially charging banks to hold a cash buffer with the ECB overnight. Speaking at a press conference, Constancio noted that this policy had been implemented in Denmark.
"It's different nevertheless to consider this for a big economic area like the euro area," he said. "Only in extreme situations, I think, could that measure be considered."