–Adds Comments On What Authorities Must Do To Address Growing Danger

FRANKFURT (MNI) – The European Systemic Risk Board, which is
chaired by the president of the European Central Bank, warned on
Wednesday that risks to the stability of the European financial system
have risen “considerably” since it last met in June and that there is
now a growing risk that the Eurozone debt crisis will spread across the
EU and globally.

“Since the previous ESRB General Board meeting on 22 June 2011,
risks to the stability of the EU financial system have increased
considerably,” the ESRB said in a written statement.

The “key risks,” it said, are weakening growth prospects in Europe
and worldwide, as well as a possibility that the sovereign debt crisis
could impinge further on the ability of banks to fund themselves.

“The high interconnectedness in the EU financial system has led to
a rapidly rising risk of significant contagion,” the statement
continued. “This threatens financial stability in the EU as a whole and
adversely impacts the real economy in Europe and beyond.”

The ESRB, which became operational at the beginning of this year,
was created to monitor macroprudential risks in the Eurozone, to alert
European regulators, and to propose plans for addressing them.

The Board urged political authorities to take “decisive and swift
action” to address the burgeoning crisis.

Such action, it said, should include rapid implementation by
Eurozone governments of the decisions taken by their leaders at the July
21 summit, including a new E109 billion bailout plan for Greece and new
authority for the European Financial Stability Facility to buy sovereign
bonds in the secondary market and recapitalize banks.

It also means reducing public deficits and debt, enacting
“growth-enhancing” structural reforms, and communicating in a more
coordinated, consistent fashion the ESRB said.

“Authorities must act in unison with a total commitment to
safeguard financial stability,” the statement said.

The ESRB also urged national regulators to coordinate efforts to
boost banking sector capitalization, including recourse to backstop
facilities and “transparent and consistent valuation of sovereign
exposures.”

“If necessary, this could benefit from the possibility for the
European Financial Stability Facility to lend to governments in order to
recapitalise banks, including in [non-bailout] countries,” the Board
added.

The ESRB said it was working on “other risks which may either
individually or collectively threaten the resilience of the financial
system.” Among them is the danger posed by currency fluctuations to
unhedged borrowers who have taken out loans in foreign currencies. The
Board noted that it is working on policy proposals to address this issue
in a “holistic” fashion.

The ESRB said it is also studying the dangers that can arise from
the marketing of “complex products to retail investors,” which it said
has “emerged as a potential source of concern.”

Also on the ESRB’s radar screen: the risks of high-frequency
trading and some exchange-traded products. It said that the impact of
high-frequency trading on liquidity and its possible amplification of
market shocks needed to be studied further.

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