EM crises, low rates are risks for European financial stability: EU

By Francesco Canepa

FRANKFURT (Reuters) - Low interest rates and heightened volatility in emerging markets have become key risks for Europe's financial stability, a European Union watchdog said on Thursday.

The European Systemic Risk Board, which was set up in response to the global financial crisis and is responsible for macro-prudential supervision, said measures to curb risk may be needed in some countries and sectors to counter the side effects of low interest rates.

"The global environment of low interest rates and low risk premia, while necessary to support the still sluggish nominal growth, is one common driver of the current risk situation and may have unintended effects on some economic sectors or in some countries that may require the adoption of targeted macroprudential measures," the ERSB said in a statement after a board meeting.

Macro prudential tools are targeted, often temporary measures aimed at preventing asset bubbles. They include capital buffers that banks need to hold or limits on specific forms of lending.

They have already been adopted by a number of central banks in Europe. The Bank of England, for example, introduced a limit last year on how much most people can borrow to buy a home.

The ESRB, which is chaired by European Central Bank President Mario Draghi, also warned about the implications for global investor confidence turbulence in emerging markets, where an economic slowdown in China and the prospect higher U.S. interest rates has caused turmoil in recent months.

"Although direct bank exposures to emerging markets are significant in only a few EU countries, other transmission channels – such as broader confidence effects on the global economic recovery as well as second-round market effects – could prove to be more substantial," it said.

(Reporting By Francesco Canepa,; editing by Larry King)

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