ECB’s Villeroy sees risks from banking, emerging markets

Bloomberg

Supervisors need to keep a close eye on shadow banking and emerging market debt a decade on from the fall of Lehman Brothers, Bank of France Governor Francois Villeroy de Galhau said in a radio interview.
As banks have pulled out of riskier businesses since the financial crisis, specialised investors have stepped in to swell the European Union’s shadow-banking system to more than $49 trillion in assets at the end of 2017, or about 40 percent of the bloc’s financial system, according to the European Systemic Risk Board.
“One of the main risks we have to look at today is outside the banking system, it’s what we call shadow banking, which has been less regulated,” Villeroy told France Inter, echoing calls by ECB chief Mario Draghi this week.
“It’s the big investment funds, they are partly American. We have to strengthen things in this area because it’s been a bit forgotten as regulation has been strengthened.”
The ECB Governing Council member, who is seen by economists as a potential successor to Draghi in a year, also pointed to risks from emerging market debt, citing crises in Turkey and Argentina in recent weeks.
Corporate and household debt was at 190 percent of worldwide gross domestic product in 2001, rising to 210 percent in 2007 as the financial crisis began. Since then it has continued rising to 240 percent, he said.
“Advanced economies have seen it reduce a bit, and it has risen a lot in emerging countries,” Villeroy said.
Asked if he saw a “risk of contagion,” the central bank governor said: “Today, we don’t see it. I think of China, where Chinese authorities have the means to act, but we have to be extremely vigilant: everywhere rising debt means rising risks.”

ECB to lower euro-area growth outlook on global demand
Bloomberg

The European Central Bank is set to tweak its forecasts lower for euro-area economic growth as global trade tensions damp external demand, according to officials familiar with the latest projections.
The predictions for output have been cut slightly starting this year, the people said, asking not to be named because the assessment is still confidential. The UK and Turkey are among nations dragging on demand, though the US outlook is still positive, the officials said.
The darker outlook comes at an awkward time for the Governing Council as it prepares to wind back stimulus, though the adjustments probably aren’t big enough to derail those plans yet. The path of inflation, the primary consideration for monetary policy, is largely unchanged, the officials said.