ECB warns against riskier investments through low interest rates

It was the topic of financial market stability, which was particularly close to the heart of the Vice-President of the European Central Bank (ECB) on Wednesday. There is an increasing willingness to take risks, said Luis de Guindos on the occasion of the presentation of the biannual report. The low interest rate environment is supporting the overall economy. In the medium term, however, this could "lead to challenges for financial stability".

The key interest rate in the euro area has been at a record low of zero percent since March 2016. The negative interest rates, which the central bank also demands for funds parked with it, are increasingly being consumed by the financial system. In the meantime, some institutions are also passing on these associated costs to corporate customers and wealthy savers with assets of more than € 100,000.

According to Handelsblatt, Commerzbank, for example, demands negative interest rates for some of the 70,000 corporate customers from the first euro onwards. The Volks- und Raiffeisenbank in Fürstenfeldbruck, Bavaria, has been charging de facto negative interest rates since 1 October - even for new private customers. The rule applies to overnight money accounts to protect existing customers.

Course slides could threaten the financial system more

However, the low interest rates also affect the institutions themselves in the euro area. Investment funds and insurers, in particular, might therefore be tempted by the ECB experts to take excessive risks. This is also to be feared in individual real estate markets.

Unexpected course corrections could have consequences for the entire financial system. Rising residential property prices in some countries are also worrying the ECB. On average, prices in the euro area are overvalued by more than seven percent. There are clear differences between the individual countries.

Previously, the International Monetary Fund had already urgently warned against riskier investments by low interest rates. "The decision makers have to act urgently," the organization demanded. Their current interest rate policy could even aggravate the economic crisis in the long term.

In turn, the ECB is concerned about the high debt levels and budget deficits in some eurozone countries. Should the economy weaken significantly, countries with fragile financial markets could once again come into focus. In addition, the earnings prospects of the banks would have continued to deteriorate.

Accordingly, the ECB has also identified another risk for banks: "Banks' return on equity in the euro area is expected to remain under pressure, both due to the weaker economic outlook and persistent cost inefficiencies and overcapacities," write the monetary authorities. Despite this restriction, they believe that the banking sector as a whole is robust.