Market correction risks intensify, threaten banks

FRANKFURT — The European Central Bank warned that the risk of an abrupt global market correction on the back of rising political uncertainty has intensified, posing a threat to banks, stability and economic growth.

“More volatility in the near future is likely and the potential for an abrupt reversal remains significant,” the central bank said in its twice-yearly Financial Stability Review published on Thursday. “Elevated geopolitical tensions and heightened political uncertainty amid busy electoral calendars in major advanced economies have the potential to reignite global risk aversion and to trigger a major confidence shock.”

The U.S. elections capped a period of unexpected political results that started with the U.K.’s vote to leave the European Union. Donald Trump’s victory increased volatility and heralds profound economicpolicy changes whose implications for the euro area are still hard to gauge, the ECB said. While the currency bloc’s economy and financial system have remained resilient so far, more political instability in coming months may put pressure on weak banks and countries with high sovereign debt.

“We are in a new phase of weaker world trade” ECB Vice President Vitor Constancio said at a press conference in Frankfurt. “If, on top of that, there would be a wave of protectionist measures, world trade, and world growth would suffer.”

Mr. Constancio confirmed that despite the risk build-up, the ECB still sees euro-area growth around 1.6% in 2017, with inflation rising to about 1.25% in the spring. Even so, he stressed that some of the region’s lenders remain weak and need to continue addressing excessive costs and a high burden of non-performing costs.

“Vulnerabilities remain significant for euro-area banks,” the central bank said in its report. “Profitability prospects overall remain low across the euro area in a subdued economic growth environment.” -- Bloomberg