ECB Vice President Luis de Guindos: Geopolitical Risks Continue to Cast Shadow on Financial Stability Outlook

In the “Financial Stability Review” report concerning the Eurozone issued by the ECB, despite falling inflation and improving economic expectations, it was indicated that financial markets continue to remain vulnerable to adverse shocks such as escalating geopolitical tensions.

The report emphasized the rapid changeability of the recent optimistic sentiment in the markets, warning that geopolitical tensions could jeopardize financial stability.

It stated, “Tight financial conditions are testing the resilience of households, businesses, and governments in the Eurozone, while the downturn in the real estate market is challenging property firms.”

The report noted that the Eurozone banking system, thanks to its strong capital and liquidity position, is well-equipped to manage these risks. However, it highlighted ongoing difficulties for banks, particularly regarding asset quality, funding, and revenues, despite low market valuations.

The report highlighted signs of increasing losses in some credit portfolios, particularly in commercial real estate financing, and suggested that financial institutions’ funding costs may remain high even as interest rates decline.

Presenting the report, ECB Vice President Luis de Guindos remarked on the high probability of adverse economic and financial surprises, stating, “As a result, the risk outlook for Eurozone financial stability remains fragile.”

De Guindos warned that in a market focused on near-perfect pricing, sensitivity could rapidly change, emphasizing, “Geopolitical risks continue to overshadow the financial stability outlook.”

He added, “Despite diminishing recession risks and declining inflation, it remains essential to further enhance the resilience of the financial system in light of global economic and geopolitical uncertainties.”

source prepared by Melisa Beğiç

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