Excessive risk-taking and falling bank profitability cloud euro zone’s growth - ECB

Signs of excessive financial risk-taking as well as slowdown in bank profitability are some of the biggest challenges in the euro area, the European Central Bank (ECB) said.

“Downside risks to global and euro area economic growth have increased and continue to create financial stability challenges,” the ECB said in a press release Wednesday.

The central bank had already warned in May of “persistent downside risks,” which included global trade uncertainty and the U.K.’s departure from the EU.

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

According to the central bank, institutions such as investment funds and insurance companies have been more risk-taking in the current low interest rate environment. This means that in case of a sudden market shock, for instance, stress among these institutions could spread to the wider financial system – leading to losses for companies and individuals. The ECB also cited risks in the property market. Riskier firms are taking on more borrowing and property prices continue to rise in “a number” of euro area countries.