October 9, 2017 / 10:59 AM / 2 years ago

Sharp selloff could pose threat to banks - Dutch Cenbank President Knot

AMSTERDAM, Oct 9 (Reuters) - Ultra-loose monetary policy in the euro zone has run its course as the economy is improving, and excessive risks seem to be building up in financial markets making the financial sector vulnerable to a sudden correction, the Dutch central bank DNB said on Monday.

“Markets seem resilient at the moment, but the low level of volatility and the overvaluation in a range of investments make me feel uneasy,” DNB-governor Klaas Knot told reporters at the presentation of DNB’s biannual financial stability report.

“The picture resembles that of the period before the financial crisis.”

DNB labelled the threat of a sudden downturn in markets, brought on by a return of risk aversion, as an “acute” risk for the international financial sector, capable of starting a new financial crisis in weaker euro countries and beyond.

To prevent a further build-up of risks, Knot reiterated a call to fellow board members at the European Central Bank (ECB)to start phasing out monetary stimulus measures.

The “time has come,” he said. “Economic growth has been above potential for months and the threat of deflation is gone.”

ECB-policymakers are expected to decide on the fate of the central bank’s bond-buying programme later this month, possibly slowing the pace from current levels of 60 billion euros per month.

Whatever the decision, any restriction in ECB-policy will be gradual, Knot said. “Interest rates will stay very low for a very long time, even if we decide to phase out our bond buying program at our next meeting. Nobody at the ECB is talking about raising interest rates yet.” (Reporting by Bart Meijer; Editing by Peter Graff)

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