The European Central Bank (ECB) sees heightened threats to financial stability in the eurozone. The reasons for this include the “remarkable exuberance” on the financial markets, writes the central bank in its financial stability report, which was presented on Wednesday. The wording, inspired by former Fed chief Alan Greenspan’s famous remark about “irrational exuberance” during the dot-com bubble, underscores the growing concern that fiscal and monetary stimuli to combat the crisis are increasingly imbalances. This triggered concerns about "abrupt corrections" in asset prices. The report also points to "exuberance" in cryptocurrencies, some of which are bought to protect against inflation:"The rise in the Bitcoin price dwarfs earlier financial bubbles such as the tulip mania and the South Seas bubble in the 16th and 17th centuries."

Significantly higher insolvency rates cannot be ruled out

In some countries in the euro area in particular, “significantly higher insolvency rates than before the pandemic cannot be ruled out,” says the ECB. That, in turn, could put a strain on states and banks that supported companies during the pandemic. "A higher debt burden on companies in countries with larger service sectors could increase the pressure on governments and banks in these countries," said ECB Vice President Luis de Guindos. When asked, he explained that sectors such as gastronomy and tourism were particularly hard hit. In countries where tourism plays a major role, the risks from this economic sector are also above average for banks. Summer 2021 is preparing to be better than 2020 for the tourism industry, but not comparable to 2019.De Guindos also pointed out risks for banks, especially from the financing of commercial real estate.

Institutes should prepare for higher failures

For banks, possible credit risks could only materialize with some delay, warned the ECB.

The institutes should equip themselves with increased provision.

The central bank is also paying close attention to the close links between states and banks through government bonds.

In this context, she points to the increased national debt.

"National political measures to support households and businesses during the pandemic have increased total government debt in the euro area by 14 percentage points to 100 percent of gross domestic product."

In addition, one must keep an eye on guarantees and implied obligations of states, the importance of which had become clear in earlier crises.

Historically, contingent liabilities have occurred in waves and could represent a significant source of risk for states.

In particular, the global financial crisis and the sovereign debt crisis in the euro area had shown that the associated fiscal costs averaged around 5 percent of economic output and in some European countries even exceeded 10 percent of gross domestic product.

“The costs were exacerbated by the sharp decline in GDP growth that accompanied the creation of contingent liabilities,” writes the ECB.

Climate change harbors risks for banks 

Climate change could also pose significant risks to financial stability, the report said. The central bank writes that the dangers could affect up to a third of banks' credit exposures to non-financial corporate customers. For banks, climate change poses both physical ("The company is too close to the sea") and so-called transitory risks through regulation ("The state could at some point ban internal combustion engines").

If you look at the individual risks, around 10 percent of the banks in the euro zone are invested in companies that are exposed to strong or increasing climate risks in connection with heat and water, such as possible floods, water shortages or the consequences of forest fires. According to ECB experts, if emissions are not effectively reduced in the longer term and if businesses and economies fail to adapt to climate change, the importance of such risks could increase: “An increase in related or composite events can increase the impact of the respective risks and lead to an accumulation, whereby the possibilities for diversification are limited. "