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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.

May 2020
Financial Stability Review
The coronavirus has brought
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


May 2020
Financial stability review

Overview

The financial system has faced an enormous economic shock in the wake of the coronavirus pandemic. Wide-ranging policy measures have helped to avoid an immediate systemic financial crisis and are supporting the recovery, but medium-term vulnerabilities have risen.

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.


Macroprudential Bulletin
Spotlight on financial stability