European Central Bank: Financial System in Eurozone Fragile

Last Updated: 1. Dezember 2023By

The main task of the ECB is to maintain price stability. In this way, the central bank makes its own contribution to securing and increasing the prosperity of the people. However, last year the ECB was unable to implement the desired price stability. In March, inflation in the EU was 10.9% – prices have therefore risen sharply and cannot be described as stable in any way.

Interest rate increases were intended to restore stability, which apparently succeeds at least in appearance. In October, inflation was „only“ 3.6%. That is still high, because the ECB aims for a 2% inflation rate for price stability, but inflation is developing in the right direction.

Warning of fragile financial system Now the ECB has released its Financial Stability Report and warned that the financial system in the Eurozone is fragile. „The weak economic outlook and the consequences of high inflation are putting pressure on people, businesses and governments‘ ability to service their debts,“ ECB Vice President Luis de Guindos is quoted by The Stability Report is issued by the ECB twice a year. The reference to a fragile financial market system is definitely a cause for concern.

In order to combat high inflation, the ECB had increased interest rates ten times in the last few months. This was initially good news for both banks and savers, but now the banks are being hit. In the Stability Report it says that the rapidly rising interest rates are a risk especially for banks in the Eurozone.

Why banks are facing a big challenge Advantageous for the banks, however, is that they themselves would get more interest when they parked their money with the ECB. The times of punishment interest rates are definitely over. In addition, the banks earn more due to the higher lending rates. However, it could become problematic that many long-term loans with a relatively low rate of interest are on the books of the banks.

In addition, demand for new loans has decreased in recent months. People are keeping their money together because everything has become more expensive. Construction costs, for example, have risen enormously – the dream of owning one’s own four walls, for which a loan would have to be taken out at the bank, is currently being postponed by many due to the great uncertainty.

„Banks in the Eurozone are benefiting from rising interest rates, but are facing headwinds due to higher financing costs, poorer quality of assets and lower loan volumes,“ the ECB Stability Report is quoted on

The currency stewards are of course trying to exclude a possible escalation. The banking system is „well positioned“ it says. In addition, there are high capital buffers, for example for possible setbacks on the real estate market.

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