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.
huge social and economic disruption
Key vulnerabilities for the euro area financial system
Tightening of financial conditions
Significant increases in debt burdens
Weaker bank intermediation capacity and profitability
Liquidity concerns among vulnerable non-banks
Macro-financial and credit environment
Fiscal policies are reducing the near-term crisis impact, but reinforce concerns about medium-term public debt sustainability. Firms face cash-flow problems and higher financing costs, while households’ resilience may be tested by weaker income prospects and possible property market corrections.
Financial markets
Against a backdrop of extreme market volatility and increases in risk premia, financial conditions tightened considerably. Central bank measures have helped to restore investor confidence and liquidity, but corporate and sovereign credit risk is on the rise.
Euro area banking sector
Bank valuations have reached historical lows and market funding conditions have tightened. Although banks have increased their loss absorbing capacity, asset quality and profitability is expected to deteriorate amid a weakening of the economic outlook.
Non-bank financial sector
Large investment fund outflows tested the sector’s resilience, while insurers are facing a double hit from falling asset prices and low interest rates. Market movements have been amplified by vulnerable non-banks with high exposure to risky non-financial firms and less liquid assets.
Macroprudential policy issues
Macroprudential authorities and supervisors acted swiftly to ease regulatory capital requirements for banks and support the continued flow of credit. Continuing progress towards completing the banking and capital markets union in Europe and developing tools for non-banks remain priorities.
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.