|
|
Global financial market tensions also extended to euro area banks. Volatility increased significantly in the first months of the year as investors grew increasingly concerned about banks’ ability to generate sustainable profits in a low growth and interest rate environment. European Central Bank (ECB) monetary policy measures announced in March, coupled with better macroeconomic data, subsequently helped to restore market confidence.
Euro area financial institutions have made steady progress in strengthening their balance sheets and building up their resilience to adverse shocks in recent years. Despite this progress, both cyclical and structural challenges remain. Cyclical challenges relate to the subdued economic recovery, while structural challenges relate to high operating costs and a large stock of non-performing loans. In particular, high unresolved stocks of non-performing exposures in some countries are dampening banks’ lending capacity and their profitability.
Risks extend also to the real economy. In particular, concerns remain about euro area sovereign debt sustainability despite relatively benign financial market conditions. In particular, political risks have increased considerably in almost all euro area countries in recent years. Higher political uncertainty may further delay structural reforms and possibly exert renewed pressure on more vulnerable sovereigns.
There are also risks that stem from outside the traditional banking sector. Over the past few years assets managed by investment funds have expanded rapidly. Parts of the investment fund sector perform significant liquidity transformation and are also highly interconnected with other parts of the financial system. The Review also reports that investment funds have gradually increased their exposure to the riskier segments of the financial markets. Higher stress in parts of the investment fund sector has the potential to spread rapidly to other financial sectors owing to high interconnectedness.
The ECB has singled out four systemic risks to financial stability over the next two years:
The Review also contains three special features. The first special feature presents the general case for setting macroprudential margins and haircuts on derivatives and securities financing transactions. The second examines systemic implications of the bail-in tool under the Bank Recovery and Resolution Directive. The third reviews recent trends in business model characteristics and discusses how they affect bank stability and performance.