Financial Stability Review

Macro-financial and credit environment

Major policy support prevented an even sharper economic contraction, but the risk of an uneven and protracted recovery looms. While government schemes shielded firms and households so far, they entailed large budget deficits which raise public debt sustainability risks in the medium term.

Financial markets

Monetary and fiscal policy measures eased financial conditions and stabilised financial markets. In view of the uncertain economic outlook and weaker corporate credit quality, the strength of some asset prices points to growing vulnerability to market corrections.

Euro area banking sector

Euro area banks are well capitalised, but weak profitability prospects weigh on their valuations. Although declines in profitability have been partially offset by cost-cutting and lending has remained stable thanks to state guarantees, credit risk is on the rise leading to possible asset quality concerns going forward.

Non-bank financial sector

Amid renewed investment fund inflows, the sector has provided significant financing to firms during the recovery from the initial coronavirus shock. However, structural vulnerabilities persist, while increased risk-taking and profitability challenges in parts of the sector threaten to erode its resilience.

Macroprudential policy issues

Continued uncertainty linked to the pandemic calls for authorities to develop contingency plans. Macroprudential policy must continue to focus on avoiding asset sell-offs, supporting capital buffer usability and developing an effective framework for the non-bank financial sector.

Special Features

The combination of fiscal, monetary and prudential measures has provided vital support to the economy in the face of the pandemic, but how could their withdrawal affect financial stability?

The low interest rate environment is expected to persist for even longer than expected. How might this affect banks’ lending margins?