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Financial stability risks also increased in 2022 and 2023.
Bank stocks significantly outperformed the wider market over much of the EFSIR review period. But this trend ended in March, when developments in the United States and Switzerland prompted investors to reassess risks in the banking sector more generally.
In principle, rising interest rates bolster the profitability of banks because rates on loans tend to rise faster than deposit rates. But tighter financing conditions are gradually weakening the financial soundness of parts of the private sector and sovereigns, with implications for asset quality on bank balance sheets.
In general, we believe EU banks are resilient. Our strong regulatory framework applies equally to all our banks and liquidity and capital levels are strong.
That is not say that there might not be valuable lessons to be learnt from events elsewhere in the world. We must remain vigilant, and the EU is actively participating in follow-up discussions at international level.
So, I am pleased that the speakers in our first panel today will discuss this in more detail and share their insights on recent developments in the global banking sector.
Another financial stability concern relates to sovereign debt sustainability.
Sovereign-debt concerns have so far remained in check due to policy actions and the benign impact of inflation on debt-to-GDP ratios. The EU’s aggregate government debt-to-GDP ratio declined in the last quarters of 2022. However, this trend cannot be assumed to continue in the medium term.
Elsewhere, financial market developments can be viewed as warning signs. The yield curves of the major currencies are inverted; banks have tightened credit standards significantly; and the amount of net lending of euro-area banks is very subdued. So, as usual, “no room for complacency”.
And what about financial integration?
Past crises have taught us that financial integration with a proper and well-balanced regulatory framework is the best way to achieve robust economic growth and development. And this is even more relevant in the current geopolitical context.
This year we celebrate the 30th anniversary of the Single Market. And an integrated financial-services market is one important pillar of the Single Market.
The analysis in the EFSIR shows that financial integration has progressed, when viewed from a medium-term perspective. But adverse economic conditions have led to a reversal of the positive trend in integration indicators in the more recent period.
Most indicators of integration declined during 2022. But let’s not lose sight of the overall picture. These indicators remain around the levels of 2019-2020, prior to the COVID-19 pandemic.
Nevertheless, we must continue our efforts to further advance financial integration. In particular, we need to continue to make progress on the CMU and the banking union - and we will discuss these topics further during the day.
I will now say a few words on the special chapters of the EFSIR report.
Given the current economic uncertainty and risks, it is important that banks can deal with any increase in non-performing loans (NPLs).
The first special focus chapter in EFSIR takes a closer look at how NPLs have developed in the EU and the policy measures that have been taken.
Over the past years, banks and policymakers, at national and EU level, have made commendable efforts to tackle NPLs and reduce the outstanding stocks.
These efforts have resulted in an encouraging reduction in NPL levels across the EU, as shown in the chart.
The average NPL ratio is at its lowest level since the global financial crisis, standing at 1.8% in the third quarter of 2022. In addition, banks have also gradually built-up provisions for NPL books.
That being said, concerns about bank asset quality re-emerged due to the possible impact of the COVID-19 pandemic. The consequences of Russia’s invasion of Ukraine, the disruptions in trade and the subsequent unexpected surge in inflation have added to these concerns....
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