Macro-financial risks ease, cyber threats rise, ESRB warns

At its June 25 meeting, the European Systemic Risk Board (ESRB) General Board noted the announced Memorandum of Understanding to end the war in the Middle East.

A sustained reopening of the Strait of Hormuz would reduce tail risks to the global economy and EU financial system.

While macro-financial risks were assessed as abated, the Board cautioned that overall risks to financial stability in the EU remain elevated.

Persistent vulnerabilities include subdued growth and high public debt in some areas.

Financial sector concerns involve high valuations of riskier assets, liquidity mismatches, and leverage in investment funds.

Crucially, the Board highlighted that frontier artificial intelligence (AI) models significantly increase systemic cyber risk to the EU financial system.

Against persistent vulnerabilities, market sentiment could shift quickly if Middle East tensions flare up.

Higher inflation concerns might trigger increased government bond yields and large asset price falls.

Forced asset sales by highly leveraged investors, such as hedge funds, could amplify these declines and create spillover effects.

Rising bond yields and low growth would increase fiscal pressures, limiting fiscal space to cushion the economy.

The General Board also discussed post-trade fragmentation in EU equities, identifying it as a barrier to the savings and investments union.

The ESRB today released its 56th risk dashboard, providing quantitative and qualitative systemic risk indicators.