The risks to financial stability in the European Union remain elevated due to ongoing geopolitical uncertainty, according to a new report by the European Systemic Risk Board (ESRB).
The ESRB explained that despite the agreement between the United States and the European Union on tariffs, trade uncertainty has been partly reduced but not eliminated.
It stressed that authorities must closely monitor the impact of the agreement on the behaviour of European businesses, households, and the financial sector.
In its latest quarterly market review, the ESRB observed an increased appetite for risk, leading to asset valuations reaching historic highs that now appear inconsistent with underlying macroeconomic fundamentals.
The report warned that investor optimism could quickly turn into risk aversion if economic or political uncertainty intensifies.
However, the findings of recent stress tests on European banks indicate that the sector remains resilient to potential challenges.
On the issue of public debt risks, the ESRB highlighted weak medium-term growth prospects and deteriorating primary fiscal balances in some countries, often linked to political uncertainty.
It cautioned that worsening security threats could further increase defence spending, thereby adding to fiscal pressures.
With regard to cryptocurrencies, the ESRB announced that it will soon publish a report addressing stablecoins, crypto-investment products, and multifunctional financial groups.
The report under preparation underlines the vulnerabilities embedded in schemes with issuers located outside the European Union and calls for an immediate policy response.
It also highlights that differing regulatory approaches may result in inequalities in prudential supervision.
Finally, the ESRB approved the release of a report by its Advisory Scientific Committee on artificial intelligence and systemic risk.
The upcoming report recognises the benefits of artificial intelligence, but examines how reliance on a small number of providers or uniform models may generate common exposures in financial markets and amplify existing or new risks.
The report is expected to be published in the coming weeks.
