In a speech at the International Swaps and Derivatives Association Annual General Meeting, European Central Bank Vice-President Luis de Guindos assessed euro area financial stability amid heightened macro-financial uncertainty linked to trade tensions and geoeconomic fragmentation. He said euro area financial stability has remained sound through recent market turbulence, but highlighted three vulnerabilities that will feature in the European Central Bank’s Financial Stability Review due next week and argued for maintaining resilience across banks and non-banks. First, the European Central Bank sees financial market risks from elevated valuations, compressed credit spreads and concentration, against a backdrop of US trade policy uncertainty that has risen to more than 60 times its historical average and drove the CBOE Volatility Index to around three times its historical average after US import tariffs announced on 2 April. Second, escalating trade tensions, high funding costs and weak growth could raise credit risks for euro area firms and households, with particular exposure in export-oriented and tariff-sensitive sectors such as steel and automotive. Third, sovereign vulnerabilities could increase as some fiscal positions remain weak and higher defence and infrastructure spending adds to financing needs, with higher debt servicing costs posing risks for countries with high short-term refinancing needs and elevated debt levels. He said euro area banks are well capitalised with solid profitability and robust asset quality, but the credit risk outlook is expected to deteriorate and lower net interest income could weigh on profitability, reinforcing the case for keeping macroprudential capital buffer requirements at resilience-supporting levels while reducing unwarranted complexity in the framework. For non-bank financial intermediation, he noted that market functioning has held up and non-banks have continued to absorb a large share of sovereign issuance, but warned that liquidity mismatches, margin call dynamics and rising synthetic leverage could amplify stress, especially in open-ended funds, insurers, pension funds and hedge funds. He called for a comprehensive macroprudential policy framework for non-banks focused on monitoring and tackling leverage, improving liquidity preparedness for margin and collateral calls, and mitigating liquidity mismatches in investment funds, supported by stronger EU-wide supervisory coordination and global cooperation to limit regulatory arbitrage.
European Central Bank 2025-05-15
European Central Bank warns trade tensions could trigger market and sovereign shocks and urges macroprudential framework for non-banks
European Central Bank Vice-President Luis de Guindos discussed euro area financial stability at the International Swaps and Derivatives Association meeting, noting resilience amid uncertainty. He highlighted vulnerabilities from elevated valuations, trade tensions, and fiscal positions, stressing robust macroprudential policies for banks and non-banks. De Guindos called for enhanced EU supervisory coordination and global cooperation to address liquidity mismatches and leverage in non-bank financial intermediation.