The European Central Bank (ECB) has announced, after the episodes experienced in March, that the financial system continues to be vulnerable to disorderly adjustments in the valuation of assets. He also recalled that the rise in interest rates, although they have positive effects for the banking sector, can put families, companies, governments and the real estate sector to the test.
According to the document, the prospects for financial stability in the region “remain fragile” in the context of recent banking tensions outside the monetary union. Still, the document notes that in this environment “euro area banks react resiliently to recent tensions outside the euro area.”
In the macroeconomic section, the ECB has recognized that economic conditions have improved slightly, but growth prospects remain uncertain, together with persistent inflation and the tightening of financial conditions, which in the long run weighs on company balance sheets. homes and governments. In addition, it warns that an unexpected deterioration in economic conditions or greater financial restrictions could lead to disorderly price adjustments in the financial or real estate markets or in both.
“As we hold the monetary policy to reduce high political inflation, this may reveal vulnerabilities in the financial system,” ECB Vice President Luis de Guindos warned at the presentation of the report, stressing the “fundamental” importance of controlling such vulnerabilities and fully implement “the banking union to keep them under control”. In any case, the vice president of the ECB has stressed that price stability “is crucial” for sustainable financial stability.
Regarding Euro Area Banks, The ECB Considers They Have Also Proven Resilient To Recent Stresses Due To Limited Exposures, Supported By Strong Capital And Liquidity Positions Following Efforts By Regulators And Supervisors In the last years. “It will be essential to preserve this resilience amid some concerns about the ability of banks to accumulate capital,” which may affect their profitability.
In addition, the central bank notes, there are already signs of deteriorating asset quality in loan portfolios exposed to commercial real estate, smaller companies and consumer loans, which could force banks to set aside more funds for cover losses and manage your credit risks. In addition, it warns that an unexpected deterioration in economic conditions or greater financial restrictions could lead to disorderly price adjustments in the financial or real estate markets or in both.
In this way, although for the moment the investment funds have not been greatly affected by recent bank tensions in the United States and Switzerland, the ECB AD reports that this could change if the funds suddenly require liquidity, forcing them to sell assets quickly.
Impact on the evolution of real estate prices
In particular, the ECB report warns that the euro area real estate markets are undergoing a correction, including a considerable increase in price increases in the residential segment, reducing the overvaluation of the sector. “Although the price adjustments have been orderly so far, they could become disorderly if the higher mortgage rates reduce demand more and more,” the institution points out.
It also points out that the commercial real estate segment continues in recession, facing tighter financing conditions and an uncertain economic outlook, as well as weaker demand after the pandemic, and warns that the ongoing destruction could test the resistance investment funds with interests in the commercial real estate sector.
