Low eurozone rates prompting ‘excessive risk-taking’

Frankfurt am Main, Germany (AFP) — Historically low eurozone interest rates likely to persist into the foreseeable future are causing increased risk-taking that could threaten financial stability, the European Central Bank (ECB) said Wednesday.

“While the low interest rate environment supports the overall economy, we also note an increase in risk-taking which could… create financial stability challenges,” ECB vice-president Luis de Guindos said in a statement.

“Signs of excessive risk-taking” were spotted by the Frankfurt institution among non-bank financial players like “investment funds, insurance companies and pension funds.”

Many “have increased their exposure to riskier segments of the corporate and sovereign sectors,” it said.

Extremely low or negative yields on debt from safer borrowers have prompted investors to seek out riskier bets in search of returns.

But while the ECB’s twice-yearly update to its risk assessment shifted focus from May’s trade war concerns, “downside risks to global and euro area economic growth have increased” in the meantime, it warned.

Such dangers included “persistent uncertainty, an escalation in trade protectionism, a no-deal Brexit and weak performance of emerging markets,” notably China, the ECB said.

An economic downturn could crash prices for riskier and less liquid assets as actors like asset managers or hedge funds sell up in a hurry.