The European Central Bank issued several warnings about the banking sector in its Financial Stability Review (FSR) this week, as it drew attention to corporate zombification, a new capital markets exodus and an undesirable tightening in lending standards.
Emerging markets’ vulnerability to a reassessment of risk
Prepared by by Irina Balteanu and Livia Chiṭu
Financial conditions in emerging market economies (EMEs) have weathered the COVID-19 crisis well so far, despite an intense but short-lived stress episode at the onset of the pandemic. Financial conditions in EMEs have rebounded strongly since March 2020; they currently stand at levels similar to before the pandemic thanks to lower bond spreads and higher equity prices. Capital flows have also recovered, with market segments typically judged to be riskier by foreign investors, such as equity and local currency debt, recording strong inflows in the second half of last year. This rebound helped to relieve pressures on financial systems and support activity in EMEs. Nevertheless, recent concerns about rising bond yields and higher than expected inflation in advanced economies have translated in a tightening of financial conditions and slowdown of capital flows to EMEs. In this
ECB warns of creeping corporate zombification rte.ie - get the latest breaking news, showbiz & celebrity photos, sport news & rumours, viral videos and top stories from rte.ie Daily Mail and Mail on Sunday newspapers.
Risk of spillovers from US equity market corrections to euro area markets and financial conditions
Prepared by Magdalena Grothe, Tobias Helmersson, Dominic Quint and Danilo Vassallo
US equity market prices have surged over the last year, prompting concerns about stretched valuations and the potential risk of market corrections. Cyclically adjusted price/earnings (P/E) ratios for the United States have reached historically high levels over the last year (see
Chart A, left panel). In the past, periods of elevated valuations relative to earnings have tended to be followed by substantial market downturns. In view of these developments, this box examines the implications of a possible correction in US stock prices for euro area financial conditions and financial stability.
Date
Prepared by Katharina Cera, Linda Fache Rousová, Angelica Ghiselli, Christoph Kaufmann and Sean O’Sullivan
During the March 2020 market turmoil, investment funds shed assets on a large scale – but was this selling commensurate with the outflows they faced or was it much larger? This box finds evidence of the latter, highlighting that the less regulated non-UCITS funds tended to engage in more procyclical selling and cash hoarding than UCITS funds.
[1] While it can be rational for fund managers individually to sell assets in excess of current outflows when uncertainty about future redemptions is high, such cash hoarding may be detrimental to the stability of financial markets from a macroprudential perspective.