European Central Bank raises crypto and pandemic concerns

Releasing the latest update of its bi-annual financial stability review, the European Central Bank (ECB) has added its voice to those of other major financial institutions warning of the potential volatility associated with cryptocurrency investment.

According to the ECB, beyond core markets, some more exotic market segments, such as crypto-asset markets, also remain subject to speculative bouts of volatility, with the growing popularity of stablecoins increasing interlinkages between crypto-asset and conventional financial markets.

In his foreword to the latest review, Luis de Guindos, vice-president of the ECB, noted that the recent economic recovery in the euro area has also brought a recovery in corporate activity that has reduced many of the worst fears about economic scarring and rising credit risk.

Instead, he said, risks of high rates of corporate defaults and bank losses are now significantly lower than six months ago. Across the euro area, he added, reliance on policy support schemes has been shifting and a number of schemes have expired without creating disruption.

Nonetheless, de Guindos raised several key areas of concern, noting that risks stemming from the pandemic have not disappeared entirely, not least because vaccination progress has remained slow in many areas of the world, while global supply chain pressures and rising energy prices pose new challenges to the strength of the recovery and the outlook for inflation.

Pandemic-related losses are likely to continue materialising for some time, amid a legacy of higher debt, he suggested.

“Meanwhile, a number of vulnerabilities have intensified,” he added.

“The markets for equity and risky assets have maintained their striking buoyancy, making them more susceptible to corrections. There have been examples of established market players exploring more novel and more exotic investments. In parallel, euro area housing markets have expanded rapidly, with little indication that lending standards are tightening in response.”

To access the full report click here.

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