Europe gets warning of ‘severe risks’

Europe’s top financial regulators have issued an unprecedented warning about “severe risks to financial stability” after concluding Russia’s invasion of Ukraine could create a toxic combination of an economic downturn, falling asset prices and financial market stress.

The European Systemic Risk Board (ESRB), which is responsible for monitoring and preventing dangers to the region’s financial system, issued the alert after meeting last week and deciding the energy crisis triggered by the war in Ukraine had put the financial system in a precarious position.

This is the first “general warning” about risk the ESRB has issued since its creation in 2010 on the eve of the eurozone sovereign debt crisis.

The authority, which is chaired by European Central Bank president Christine Lagarde, called on regulators in the 30 countries it oversees to prepare for a potential crisis by requiring the financial institutions they supervise to build up bigger buffers of capital and provisions that can absorb losses.

Concerns about the health of Europe’s financial system have increased since the Ukraine conflict pushed energy prices up, driving inflation to multi-decade highs, prompting central banks to raise interest rates aggressively and triggering a sell-off in bond and equity markets.

The ESRB identified three key sources of systemic risk: “The deterioration of the macroeconomic outlook, risks to financial stability stemming from a (possible) sharp asset price correction and the implications of such developments for asset quality.

“Rising mortgage rates and the worsening in debt-servicing capacity due to a decline in real household income can be expected to exert downward pressure on house prices and lead to a materialisation of cyclical risks,” it warned.

It also listed rising default risk in the commercial property sector, cyber attacks on financial institutions and the increased cost of high government debts as interest rates rise among other areas of concern.