(Bloomberg) — European Central Bank Executive member Isabel Schnabel said that investor and other financial market participants are possibly underestimating risks.
“Unfortunately we cannot fully rule that out,” she said Friday in Amsterdam when discussing the question whether markets have become complacent.
Speaking at a farewell symposium for former Dutch central-bank chief Klaas Knot, Schnabel said “it would not be the first time” that this happens. “And we also know that risk sentiment can change very quickly and then we can get all types of non-linearities,” she added.
Her comments follow warnings from the Bank for International Settlements that recent gains in financial markets don’t adequately reflect dangers from unsustainable sovereign debt and disrupted world trade and that they’re “vulnerable to repricing.”
At the end of August, the then No. 2 of the International Monetary Fund, Gita Gopinath, also argued against complacency over levels of borrowing in the global economy, saying that bond markets are “in a fragile place.” She also cautioned against drawing comfort from the lack of a financial crisis in recent years.
With stock-market valuations in particular in the US elevated, there are currently some concerns that further interest-rate cuts by the Federal Reserve could fuel risk taking by investors, leading to exuberance in financial markets. Fed Chair Jerome Powell remarked last month that “equity prices are fairly highly valued.”
In a speech at the conference, Schnabel highlighted two areas that pose a risk to the economy and banks: the non-bank sector and stablecoins. The panel also discussed other dangers such as high public debt and private credit.
There are concerns that a broad adoption of stablecoins could threaten the stability of the entire financial system. In the US, President Donald Trump has pushed a raft of crypto-friendly policies, including the so-called Genius Act, which establishes a regulatory framework for stablecoin issuers.
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