ECB Publishes Results of Financial Stability Review in May 2019
ECB published results of the financial stability review in May 2019. The financial stability review assesses developments relevant for financial stability, including identifying and prioritizing the main sources of systemic risk and vulnerabilities for the euro area financial system. This review contains three special features related to macro-prudential policy, climate change, and contagion risks. The review highlights that bank profitability prospects are subdued, given the slow progress in addressing structural issues.
In addition to its usual overview of current developments relevant for euro area financial stability, this review includes three special features aimed at deepening the financial stability analysis of ECB and broadening the basis for macro-prudential policymaking. The first special feature assesses financial stability risks stemming from climate change, with focus on examining the exposure of financial institutions to climate-risk-sensitive assets. The second special feature sets out new ways to model the risk of contagion spreading through the euro area banking sector, while the third feature considers how macro-prudential policy responses might take account of changes in macroeconomic conditions. By providing a financial system-wide assessment of risks and vulnerabilities, the review provides key input to the macro-prudential policy analysis of ECB.
The review highlights that bank profitability is expected to remain low in the euro area. However, capital adequacy of euro area banks remains strong, implying widespread resilience to plausible adverse scenarios. To return to sustainable profitability, euro area banks need to tackle a number of structural challenges—such as low cost-efficiency, limited revenue diversification, and still high stocks of legacy assets in some countries. Additionally, the review reports on continued high risk-taking in the non-bank and fund sector. There are signs that more funds are increasing their leverage and their exposure to higher-yielding assets with commensurately higher credit risk. The global leveraged loan sector, which has grown significantly in recent years, is susceptible to weaker corporate earnings. The review sets out how this sector could pose risks to financial stability, particularly given uncertainties about ultimate exposures to the riskiest parts of collateralized loan obligations.
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Keywords: Europe, EU, Banking, Securities, Financial Stability Review, Macro-Prudential Policy, Capital Adequacy, Systemic Risk, ECB
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