The election of Donald Trump as US President has heightened risks to European financial stability, according to a top central banker.
The huge market movements in the aftermath of Trump’s surprise victory have exacerbated “significant” vulnerabilities in the European banking sector, according to Vitor Constancio, vice-president of the European Central Bank (ECB).
While he said that the spillover effects were “uncertain”, Constancio confirmed that Trump’s election threatens EU stability, while upcoming political events – such as Italy’s constitutional referendum and next year’s French presidential election – could damage stability further.
“This risk has been present for quite some time but it has been aggravated recently in particular after the US elections,” said Constancio.
In the Financial Stability Review published today the ECB highlighted the “resilience” of Eurozone banks, while also stressing that the banking sector “remains vulnerable”.
Eurozone banks have struggled for profitability since the Eurozone crisis as their balance sheets are weighed down by massive books of non-performing loans and low interest rates limit their ability to charge for loans.
Constancio also hit back at critics of the ECB’s policies of ultra-low and in some cases negative interest rates, saying that they were not to blame for the struggles of Europe’s banking sector.
“The low interest rate environment cannot explain everything. We have in particular in Scandinavian countries – say in Sweden – a situation where interest rates are much lower and more negative than in the euro area. In spite of that the Swedish banks have a return on capital, a return on equity of 11.6 per cent, compared with an average of five per cent in the euro area,” said Constancio.