Through the bi-annual Financial Stability Review issued in November, the European Central Bank (ECB) warned of potential side effects of its loose monetary policy, highlighting how years of unprecedented stimuli designed to bolster the economy is contributing to an erosion of financial stability.

Through the bi-annual Financial Stability Review issued in November, the European Central Bank (ECB) warned of potential side effects of its loose monetary policy, highlighting how years of unprecedented stimuli designed to bolster the economy is contributing to an erosion of financial stability.

The Review goes to the heart of the challenge faced by the ECB, which has only just decided to increase stimuli amid a weakening euro-area economy. The Governing Council cut rates deeper below zero in September and announced fresh asset purchases. The ECB cautioned that its new round of quantitative easing, set to continue until inflation returns to the target of just-below 2%, will further limit the amount of high-quality government bonds available to private equity investors and could in turn lead to collateral shortages in the euro-area repo market, hampering short-term lending between banks.

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