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Global risk repricing endangers financial stability 

November 30, 2016

European Central Bank

The euro area financial system has shown resilience in the face of repeated bouts of financial market turbulence over the past six months according to the latest Financial Stability Review of the European Central Bank. However, risks to euro area financial stability related to possible global asset market corrections have intensified.

Compared with the previous assessment, the review sees the possibility of further asset price changes, triggered by political events in advanced economies, amid existing vulnerabilities in emerging markets.

The financial stability implications for the euro area stemming from changes in US economic policies are highly uncertain at this point in time. The euro area economy may be directly impacted via trade channels and by possible spillover effects from higher interest and inflation rate expectations in the US.

Vulnerabilities remain significant for euro area banks. Profitability prospects overall remain low across the euro area in a subdued economic growth environment. Banking sector structural challenges stem from high stocks of non-performing loans (NPLs), high operating costs and excess capacity, with different incidence across countries.

In recent weeks, banks’ stock prices have recovered somewhat, as investors’ fears of ever-tighter bank regulation have been receding and increases in euro area bond yields have contributed to a steepening of yield curves. Read more

 
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