INDUSTRY NEWS ROUND-UP ECB highlights financial stability threats The European Central Bank (ECB) has identified a growing appetite for financial risk in Europe. In its latest Financial Stability Review the ECB notes that systemic stress in the euro area has remained low while gradual economic growth was achieved.This is partially attributed to its own actions to calm fears of a prolonged period of low inflation. Low nominal growth is identified as a continuing challenge. Meanwhile, systemic vulnerabilities in the financial sector emerging from both the markets themselves and institutions, including insurers have been identified as sources of vulnerability. The ECB singled out four risks to financial stability for the next year and a half: reversal of global risk premiums; weak profitability prospects for banks and insurers; a rise of debt sustainability concerns in the sovereign and corporate sectors; and progressive stress and contagion within the growing shadow banking sector. Risk management and bonuses still not addressed Large financial institutions across the globe are still failing to deal with the connection between risk and bonuses at board level, despite the advent of heavier regulatory regimes around the world. The latest biennial risk survey conducted by Deloitte indicates that only 60 per cent of boards in major institutions have open Only half of respondents believed the risk management team had a responsibility to assess financial incentives against culture. Worldwide, 71 major financial institutions were included in the survey. Tougher regulation to address risk culture, such as the introduction of stress tests in the US to assess risk management, have been discussions about risk management. brought in since the financial crisis. Deflation in UK for first time in 50 years The UK has entered deflation for the first time since 1960, but most economists believe this will only be for a brief time and will actually promote growth. Tumbling oil prices and the strong pound have lowered the costs of imports.Combined with a supermarket price war, these factors have contributed to a fallin prices. It means Britain joins other oil-importing nations that have already experienced deflation: the Eurozone has experienced price falls of 0.13 per cent since January 2014. Analysts say that the risk of entering a deflationary spiral in which consumers delay purchases in expectation of lower prices and businesses hold back from investing is low. A short period of deflation is likely to benefit the economy byboosting consumer spending. The Bank of England expects inflation to remain around zero for some time, with price rises forecast to return by the end of the year. IMF: attack culture of excessive risk-taking Warning on new risk models for bank trading The worlds biggest banks look likely to protest against new risk-calculation models, which they warn will treble the capital needed in their trading business. Rules that will alter how banks assess risk in their trading are currently being finalised by a series of global policy-makers, who aim to have the new models in operation by the end of the year. However, three of the most powerful financial lobbying groups have written to the Basel Committee warning that the proposed measures will destabilise financial markets. There is also concern among regulators that a rise in US interest rates this year could bring the 30-year market in bonds to a rapid close, increasing volatility across credit and currency markets. The lobbyists are also pushing for the Basel Committee to carry out another quantitative study this year to look in more detail at the likely effect of the changes. To date, three studies have been carried out, so policy-makers may be reluctant to accept any further delays. Banks must do more to attack corporate cultures that encourage excessive short-term risk-taking, the head of the International Monetary Fund (IMF) has warned. Speaking in Washington, Christine Lagarde acknowledged that much had been done to crack down on banks and bankers in order to avoid a repeat of the turmoil that stemmed from the 2008 financial crisis. However, she also said that risks to financial stability were still prevalent, with the culture of the financial sector partly to blame. Lagarde suggested that pay practices should encourage the long-term performance of banks, rather than short-term gains. Since the financial crisis, global regulators have placed an increasing emphasis on the conduct of banks and risk management issues, as concerns arise about new systemic risks caused by banking. Lagarde said: Regulation alone cannot solve the problem. Whether something is right or wrong cannot be simply reduced to whether or not it is permissible under the law. What is needed is a culture that induces bankers to do the right thing, even if nobody is watching