Deutsche Bank AG (DB) shares led rivals lower Wednesday after the European Central Bank warned that low interest rates could lead to excessive risk taking that could threaten the single currency area's financial stability and noted deteriorating earnings prospects for regional lenders.
The ECB said downside risks to the global economy had increased, largely as a result of trade disputes, but noted that while its program of near-zero interest rates and excess liquidity has supported Eurozone growth, it could also encourage excessive risk-taking from investment funds, insurance companies and pension funds, the so-called 'shadow banking system' which the Bank said play an increasingly important role in real economy financing.
"While the low interest rate environment supports the overall economy, we also note an increase in risk-taking which warrants continuous and close monitoring", said Luis de Guindos, Vice-President of the ECB. "Authorities should use available tools to address the build-up of vulnerabilities where possible."
The Bank's regular Financial Stability Review, published Wednesday in Frankfurt, also warned that profitability prospects for the region's lenders have "deteriorated further", adding that return on equity calculations are expected to face further pressures from the weak economic outlook, cost inefficiencies and persistent over capacity in the banking sector.
"Bank profitability prospects have weakened against the backdrop of the deteriorating growth outlook and the low interest rate environment, especially for banks also facing structural cost and income challenges," the ECB said. " Moreover, misconduct costs continue to be an additional factor weighing on bank equity valuations, while inconsistent disclosures may be making it difficult for markets to price banks' climate-related risks."
Deutsche Bank shares were marked 2% lower in Frankfurt and changing hands at €6.45 each following publication of the ECB report, while domestic rival Commerzbank AG (CRZBY) was seen 1.8% lower at €5.04 each.
The Stoxx 600 Banks index, the sector benchmark, was seen 1.43% lower at 135.50 points while the broader Stoxx 600 index slipped 0.75% to a two-week low of 402.49 points.
Last month, former ECB President Mario Draghi defended the use of negative interest rates in monetary policy during his final press conference in Frankfurt, adding he was proud of the fact that he and his colleagues have always pursued their mandate for maintaining a 'just below 2%' inflation rate.
Draghi, whose eight year term at the helm of the central bank ended with the appointment of former International Monetary Fund Managing Director Christine Lagarde, said the negative rate applied to overnight deposits, which was increased to -0.5% in September, had a positive effect on the broader economy.
Draghi said the deeper negative rate move was, in part, designed to "cement" the accommodative stance the ECB has adopted since the global economic downturn triggered by U.S.-China trade tensions, but has nonetheless moved the Eurozone "in the right direction".