FRANKFURT (Reuters) – A largely unregulated shadow banking sector and anemic profitability among traditional lenders are among the euro zone’s biggest financial vulnerabilities, the European Central Bank said in a biannual stability assessment on Wednesday.
Overvalued residential real estate prices also require policy intervention while a cooldown in a previously red-hot commercial property market raises the prospect that investors will pull out, increasing the risk of a crash, the ECB added.
With ultra-low ECB rates weakening bank earnings, boosting borrowing and encouraging excessive risk-taking, euro zone financial vulnerabilities have been on the rise for years. Rates are likely to stay low well into the next decade, potentially fuelling further distortions.
The rapid growth in shadow banking – a wide array of financial institutions from insurers to investment funds – has been especially concerning for regulators as these entities face looser regulation and authorities lack the power to curb many of their activities.
“The ongoing search for yield across non-banks may exacerbate the build-up of vulnerabilities, not least by lowering financing costs for riskier borrowers,” the ECB said. “Credit and liquidity risks appear to have increased over recent years.”
Shadow banks are growing at the expense of traditional lenders, which are saddled with a heavy regulatory burden, the legacy of the global…