1 of 2 | Luis De Guindos, the vice president of the European Central Bank, said regional banks remain exposed to risks from policies meant to curb inflation. File photo by Kevin Dietsch/UPI | License Photo
May 31 (UPI) -- Efforts to control inflation in the European economy run the risk of creating "vulnerabilities" in the banking sector, where conditions remain fragile, the vice president of the European Central Bank said Wednesday.
The ECB highlighted potential economic risks in the May 2023 Financial Stability Review published Wednesday.
Concerns about the health of the global financial sector emerged in the wake of the collapse of Silicon Valley Bank in California in March. Looming fears about a repeat of the recession from the mid-2000s spread to other financial institutions, leading to a shotgun wedding of sorts between troubled Credit Suisse and Swiss investment bank UBS.
Luis de Guindos, vice president of the European Central Bank, said Wednesday that efforts to keep prices stable are essential for a healthy market, though that could result in some collateral damage.
"(A)s we tighten monetary policy to reduce high inflation, this can reveal vulnerabilities in the financial system," he said. "It is critical that we monitor such vulnerabilities and fully implement the banking union to keep them in check."
Banking officials told U.S. lawmakers there were subject to a contagion effect, with depositors pulling billions of dollars out of their accounts in a matter of hours amid fears of a broad-based collapse. But officials weren't convinced.
"The simplest explanation is best," said Sen. Sherrod Brown, D-Ohio, the chairman of the Senate Banking Committee. "It is first and foremost the bankers' fault that the banks crashed."
In Europe, ECB President Christine Lagarde expressed concern that downside risks from "recent financial market tensions " raised doubts about the bank's estimate that headline inflation would fall from around 8% to 2% by 2025.
"Some of this uncertainty will recede as the fallout from recent events in financial markets becomes clearer," she said. "But faced with overlapping shocks and shifting geopolitics, the level of uncertainty will most likely remain high."
So far, however, her deputy said banks in the EU have been resilient to the stresses witnessed in the U.S. and Swiss financial sectors, through policymakers need to ensure that resilience is preserved.
Banks, it was suggested, may need to set aside more funds to cover any losses and manage their credit risks appropriately.