- Financial markets underestimate geopolitical risks, which increases the chance of sudden sell-offs.
- Eurozone banks are well capitalized, but overall risks remain high.
- Unexpected shocks can spread quickly due to tensions and market overvaluations.
- The weakening of banking regulations can significantly reduce banks’ resistance to adverse developments.
Financial markets are underestimating geopolitical risks, increasing the likelihood of sudden sell-offs, she said on Wednesday Claudia Buchová, Head of Banking Supervision of the European Central Bank (ECB). TASR informs about it based on a Reuters report.
Eurozone banks are well capitalized and have all the necessary reserves, but risks remain high, Buchová said. Geopolitical uncertainty “is not sufficiently reflected in market indicators of financial stress, which could lead to a sudden overestimation of risks”, she pointed out.
Shocks could occur unexpectedly and spread quickly due to geopolitical tensions, overvaluations in some market segments, growing links with non-banking financial companies and the risk of sudden changes in market sentiment, Buchová explained.
Head of ECB banking supervision at the same time warned against loosening regulations in the banking sector. These protective measures must be maintained, whereas fragmentation or weakening of standards could threaten banks’ ability to withstand adverse developments, Buchová emphasized.
