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Europe's central banks warn about bubbles critics say they helped create

FRANKFURT (Reuters) - Three of Europe’s top central banks raised warning signals on Wednesday about the risk of financial bubbles that their ultra-easy monetary policies are blamed for creating.

A money changer counts Euro banknotes at a currency exchange office in Nice, France November 17, 2017. REUTERS/Eric Gaillard

The European Central Bank, Germany's Bundesbank and Denmark's Nationalbank highlighted pockets of vulnerability ranging from excessive property prices in some countries to complacent investors and easy lending by some banks. (Graphic: Interest Rates -

Critics have long blamed these phenomena on the central banks’ own ultra-low interest rates, aimed at spurring lending and risk-taking, and massive cash injections, such as the ECB’s 2.55 trillion euro ($3 trillion) bond-buying program.

Germans in particular have been protesting that too much stimulus risks doing more damage than good -- a view that was reiterated by the country’s central bank on Wednesday.

“Risks have built up, in particular, during the prolonged period of low interest rates –- the valuations of many investments are very high,” the Bundesbank warned in a report.

“There is a danger that low interest rates and the favorable economic conditions in Germany might cause market participants to underestimate risks,” it added.

The Bundesbank, as part of the euro zone system, cannot in itself do anything about loose monetary policy.

Some German property prices may be as much as 30 percent overvalued while low banking profitability, a side effect of record low ECB rates, could increase the incentive for lenders to take on even more risk in hope of better returns, the central bank warned.

Neighboring Denmark, though not in the euro zone but closely aligned with ECB policy, had a similar warning.

“Several banks are stepping on the accelerator by easing credit standards and granting loans to more vulnerable customers,” Danish central bank chief Lars Rohde said, arguing that some the country’s largest banks do not have sufficient capital to meet buffer requirements.

The European Central Bank has extended its bond-buying stimulus program into its fourth year, albeit at a reduced pace, even as growth on its best run for a decade and many financial assets are at record highs.

Its vice president, Vitor Constancio, defended the decision on Wednesday, saying the ECB had to primarily focus on bringing inflation back up to its target of almost 2 percent and that there was no evidence of generalized bubbles in the euro zone.

But he acknowledged that the ultra-easy policy had played a role in bringing market volatility, a measure of investors’ sensitivity to bad news, to record lows.

“I can agree that has had some impact but central banks were doing their job and there are no policies without collateral effects,” Constancio said. “The institutions have to take the policy measures that correspond to their main mandate.”


The central bank warnings highlight the ECB’s main dilemma: the Europe’s richer countries no longer need extraordinary stimulus but Mediterranean countries like Italy, Greece and Spain are just now starting to enjoy the benefits of the bloc’s economic expansion, now into its 19th quarter.

Even the ECB warned that increased risk taking could inflate and possibly burst bubbles.

“Continued risk premia compression and signs of increased risk-taking behavior in financial markets are sources of concern as they may sow the seeds for large asset price corrections in the future,” the ECB said in a biannual stability report.

Top vulnerabilities for the euro zone also include an abrupt repricing of global risk premia, weak bank sector profitability, renewed public debt concerns and liquidity risks in the non-bank financial sector, the ECB argued.

Still, it took a relaxed view on the overall level of financial vulnerability, arguing that solid growth is actually increasing financial resilience and most risks were contained.

It also said that property prices for the bloc as a whole were broadly in line with fundamentals, even if prime commercial property prices have continued to rise above their long-term averages.

“Nevertheless, global risks in particular may trigger financial asset market corrections with negative repercussions on financial stability,” the ECB added.

Editing by Jeremy Gaunt