BANKS in the Eurozone remain vulnerable to external shocks, the European Central Bank (ECB) said today at the presentation of its semi-annual Financial Stability Review, dpa news reported.

“The weak economic outlook along with the consequences of high inflation are straining the ability of people, firms, and governments to service their debt,” ECB Vice President Luis de Guindos said.

“It is critical we remain vigilant as the economy transitions to an environment of higher interest rates, coupled with growing uncertainties and geopolitical tensions.”

Financial institutions have benefited from the rapid rise in interest rates since July 2022 because they earned money from higher lending rates and received interest themselves when they deposited money with the ECB.

However, the ECB said banks in Germany, for example, have many long-term loans with relatively low interest rates on their books, and demand for new financing has tended to decline in recent months. On the property markets, it said the turnaround in interest rates has put an end to years of rising prices, while higher financing costs were becoming a burden for commercial properties.

Banks in the Eurozone “see profitability benefit from rising interest rates but face headwinds from higher funding costs, worsening asset quality and lower lending volumes”, the ECB reported.

Overall, it said the Eurozone banking system was “well placed to withstand these risks”.

However, the ECB believed the recently increased capital buffers, for example, for possible setbacks on the property markets, should be maintained. – Bernama, November 22, 2023.