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May 24, 2018

ECB published the results of its biannual Financial Stability Review (FSR) in May 2018. The FSR assesses developments relevant for stability in the euro area financial system and covers shadow banking activities involving non-bank financial intermediaries, financial markets, and market infrastructures. This issue of FSR also examines developments in the regulatory framework of the financial system.

The review includes three special features aimed at deepening ECB’s financial stability analysis and broadening the basis for macro-prudential policy making. The first special feature presents a new composite financial stability risk index (FSRI) aimed at predicting large adverse shocks to the real economy in the near term. The second feature introduces a composite cyclical systemic risk indicator (CSRI) designed to signal risks of a financial crisis over the medium term. The third feature analyzes the distribution of interest rate risk in the euro area economy, using balance sheet data and information on derivative positions from significant credit institutions.

The FSR identifies four main risks to financial stability in the euro area over the next two years. These risks are related to:

  • Spillovers from a disruptive repricing of risk premia in global financial markets
  • Potential hampering of the ability of banks to intermediate amid weak financial performance compounded by structural challenges
  • Public and private debt sustainability concerns amid historically high debt levels
  • Liquidity risks that could emerge in the non-bank financial sector, with contagion to the broader system

 

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Keywords: Europe, EU, Banking, Securities, Financial Stability Review, Systemic Risk, Shadow Banking, Interest Rate Risk, ECB

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