Financial Stability Review
The Financial Stability Review provides an overview of potential risks to financial stability in the euro area. It aims to promote awareness in the financial industry and among the public of euro area financial stability issues.
It is published twice a year.
Next release: 19 May 2021 (provisional)
the outlook for financial stability
Key vulnerabilities for the euro area financial system
Strength of some asset prices and possible market corrections
Growing fragilities in non-financial sectors
Weaker bank profitability amid expected higher credit losses
Renewed risk-taking by non-banks
Overview
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?
What is financial stability?
Financial stability can be defined as a condition in which the financial system – which comprises financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances.
This mitigates the likelihood of disruptions in the financial intermediation process that are systemic; that is, severe enough to trigger a material contraction of real economic activity.
Financial stability can be defined as a condition in which the financial system – which comprises financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of financial imbalances.
This mitigates the likelihood of disruptions in the financial intermediation process that are systemic; that is, severe enough to trigger a material contraction of real economic activity.