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It also said the financial system could face stress from a sudden reversal of the recent strong gains in markets. Stock and bond markets have rallied globally in recent months as investors cheered the efforts of major central banks to steady the world economy. During such rallies, traders put their money in higher risk investments
-- such as stocks -- as they search for higher returns. Interest rates are very low due to benchmark rate reductions by central banks, meaning conservative investments such as a savings account or U.S. Treasury bonds yield little. Trouble would arise, however, if that willingness to seek out more risk suddenly goes into reverse. The ECB warned that banks should make sure they have enough financial padding to absorb potential losses in case of a sharp drop in financial markets.
[Associated
Press;
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