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The review finds that measures of systemic stress remained contained amid periods of stress related to turbulence during the summer in Greece, followed by a sizeable correction in Chinese asset prices.
While euro area banks have limited direct exposure to emerging market economies outside Europe, exposures have been gradually increasing in the euro area investment fund industry. As large emerging market economies have grown in their share of global economic output and financial market activity, so too has their role as drivers of global confidence.
The report also highlights improvement in the shock-absorbing capacity of the euro area banking system in the first half of the year. Both profitability and solvency positions of banks have improved. Challenges that euro area banks still face include a weak macroeconomic recovery, low profitability and a large stock of non-performing loans. Sovereign and private sector debt also remains high in several euro area countries. These factors continue to constrain banks’ lending capacity and ability to build up further capital buffers. Looking ahead, banks – as well as insurers – may need to further adjust their business models to cope with persistently weak economic conditions, along with an environment of historically low interest rates across the maturity spectrum.
The review also notes that financial stability risks stretch beyond traditional entities such as banks and insurers. The shadow banking sector continues to expand robustly at the global and euro area level. Vulnerabilities are likely to be accumulating below the surface as investment funds take more risk on their balance sheets.
The ECB has singled out four risks to financial system stability over the next two years: