improves financial stability, beacon on geopolitical risks

The euro area banks have remained resilient but the low stock market valuations of the sector “suggest that investors are concerned about the stability of the sector over time profitability”. The European Central Bank states this in the latest semi-annual report on financial stability, which indicates three levels of challenge for banks.

Eurozone, ECB: financial stability improves

First, concerns about the quality of their portfolio assets are growing as signs of losses on some loans increase, particularly in commercial real estate. Second, continues the ECB, banks' financing costs appear destined to remain high, even if the reference rates (which reflect those established by the ECB itself) are starting to fall. In the end, third challenging element, banks' revenues could be damaged while operating revenues will weaken with loan growth remaining subdued and with lower revenues from variable rate mortgages.

According to the ECB, the banking sector as a wholeor the eurozone it is well equipped with liquidity levels to manage these risks, also given the solid capital positions. To maintain the resilience and strength of banks in an uncertain macroeconomic environment, the institution notes that it would be appropriate for macro prudential authorities to maintain current additional capital margins to ensure that they are available in the event of adverse developments. In parallel, it is necessary to implement a broad macro-prudential supervision framework for non-bank finance and a more integrated supervision at European level of these entities, which play an increased role in mitigating risks to financial stability. A resilient non-bank financial sector will support progress towards the capital markets union, contributing through a stable source of financing for the real economy.

Lighthouse on geopolitical risks

Overall, the report finds that financial stability conditions in the euro area have improved nhe last six months, while the risks of a fall into recession have diminished, but the markets remain exposed to possible negative repercussions at a macroeconomic and financial level and to problematic developments at a geopolitical level.

The tightening of financial and financing conditions – to which the monetary tightening of the ECB itself has contributed – is testing the resilience of the most vulnerable families in the eurozone, of businesses and of public finances, while the contraction of real estate markets in various countries creates pressure on companies in the sector.

“Prospects remain fragile”

According to the semi-annual report, presented at a press conference by vice-president Luis de Guindos, who signed the editorial of the study, the financial stability of the eurozone has benefited from the improvement of the prospects economical, with inflation continuing to ease and investor confidence improving in parallel. However “the prospects remain fragile, given that the possibilities of economic and financial shocks are high in a context of increased geopolitical uncertainties and the policies that will be pursued at a global level”. In this context, according to De Guindos it is appropriate to “rfurther strengthen the resilience of the financial system” to equip him in the face of growing uncertainty.”