* Investors are aware of potential for correction
* Concerned about shadow banks, high frequency trading
* Banks can withstand stress tests
FRANKFURT, Nov 17 (Reuters) - No asset price bubble is building for the time being and investors are aware that current low interest rates are an exceptional situation that will not last, Bundesbank board member Joachim Nagel told a German newspaper.
Record low interest rates — the European Central Bank cut its main refinancing rate by a quarter-point to 0.25 percent this month — are a big challenge for market participants, driving many to seek alternative investments, Nagel told Euro am Sonntag in an interview published on Sunday.
Global stock markets have hit record highs helped by low interest rates, even as economies continue to stutter, and real estate prices in many markets have climbed as investors seek protection against the threat of future inflation.
“I don’t see a bubble forming but every investor must be aware of the potential for a correction, especially when volatility returns to the markets,” said Nagel, who is in charge of markets at the German central bank.
Nagel has previously addressed concerns about a bubble forming in Germany’s property market, telling a German newspaper in September that while prices have risen substantially in some urban areas, they did not pose a risk to financial stability.
Central banks need to give the clear signal to capital markets participants that they should not assume the current situation will be sustained, Nagel said.
Nagel declined to comment on this month’s credit easing by the ECB but said that the Bundesbank has pointed out that the ample liquidity currently in the market is not without risks for financial stability.
He also said he had concerns about financial market regulation, particularly that some risks had migrated off banks’ balance sheets and onto those of non-bank financial institutions known as shadow banks, to escape tight banking rules. High-frequency trading was a further area of concern, he said.
Asked if bank stress tests planned for next year could push lenders into financial straits and thus prompt renewed intensification of the financial crisis, Nagel said: “Of course, there is speculation about that but I think they can withstand them.
“The stress test is a chance for banks to show that they are well prepared for future crises and that they have used their time wisely,” he said.
Reporting by Jonathan Gould; editing by Keiron Henderson