2019 Financial Stability Report

The main risk factors affecting the

Unregulated non-banks such as finance

companies (e.g. car dealerships) could

stability of the ECCU financial system are

spread contagion to the rest of the financial

identified below:

sector. Their exposure to unsecured credit

(i)

Increasing share of non-bank

could weaken their balance sheets and

financial

institutions

in

credit

ultimately have a negative impact on bona

intermediation – Non-bank financial

fide financial institutions.

institutions have increased their share of

(ii) Low interest rates - Interest rates

credit intermediation over the last few years.

continue to fall not only globally but also

Not only credit unions but also finance

at the ECCU level. Lower interest rates

companies. Competition continues to

can affect financial stability through a

increase in the credit market driven by a

range

of

channels,

including:

search for higher yields and maintaining or

(i) encouraging investors to seek higher

expanding market share, amid pressures

returns by taking on greater risk;

from technological advancements. This

(ii) increasing the value of long-term

could lead to a downward spiral in

assets (and liabilities) and increasing the

underwriting standards. Further, with

volatility of asset values; and

limited market size added to the opacity in

(iii) increasing debt and leverage, in part

information on borrowers, the financial

because assets become more expensive

position of lenders could weaken the

to purchase.

financial sector, which is already confronted

with too much debt and slow growth. The

Low interest rates can therefore have

growth of non-bank financial intermediation

a range of financial stability

- which has allowed firms to improve risk-

consequences. Several particularly

sharing and diversify their funding sources -

pertinent consequences for the ECCU

can also be associated with increased risk-

include: exacerbating existing financial

taking and rising interconnectedness

system vulnerabilities due to high levels

between financial sectors, which may act as

of household debt; encouraging

a contagion channel in the event of distress.

households to shift to riskier, higher-

yielding

investments

without

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