Trade war biggest risk to financial stability: ECB

A growth slump that could be caused by rising trade tensions is the biggest risk to financial stability in the eurozone, the European Central Bank said Wednesday.

"A potential trade war is perhaps the main risk, the main threat to the economic environment globally and simultaneously for financial stability," ECB vice-president Luis de Guindos said in a Frankfurt press conference.

Among other factors such as Brexit and weakness in emerging markets, trade tensions between Brussels, Washington and Beijing were behind a slowdown in the euro area in the second half of 2018.

Growth rebounded in the first three months of this year, to 0.4 percent quarter-on-quarter, but with the United States and China still locked in a tariff battle knock-on effects continue to roil the single currency bloc.

And the White House persists in dangling the prospect of trade taxes on imports from the EU like cars.

A growth blow could impact all four main financial stability risks identified by the ECB in its twice-annual review.

Those include a "disorderly" increase in the premium lenders charge on risky debt, and growing concerns about debt sustainability for some companies and highly-indebted countries like Italy.

"Whenever tensions between the Italian government and the European Commission come down, the spreads narrow" between yield on Rome's bonds and those of reference countries like Germany, de Guindos said.

"The lesson I think that is quite evident is it's very important to meet and to respect the fiscal rules" that apply to eurozone members, he added.

He also noted that Italy had a "good track record" of managing its debt pile.

Other risks identified by the ECB include eurozone banks' low profitability, which could suffer further if growth slows.

And non-bank financial players like asset managers are taking bigger risks, with a cash pile that has more than doubled since 2008, to 13.8 trillion euros ($15.4 trillion) -- making for potentially massive losses if risk premiums change suddenly.

De Guindos highlighted that the ECB also included a chapter on climate change risks to financial stability, days after voters handed environmentalist parties increased representation in the European parliament.

"We believe this is something that is going to become systematic and structural" for financial stability, the central banker said.

The financial system could suffer from both "physical risks" like natural disasters, and "transition risks" as the economy undergoes the costly switch to reduced carbon emissions.

"We are trying to weigh and combine the exposure of the financial system with the carbon footprint of different polluters in order to have a clear picture of where the risks are allocated," de Guindos said.