ECB Publishes Financial Stability Review for November 2021
The European Central Bank (ECB) published the financial stability review for November 2021. The assessment report highlights that the near-term pandemic-related risks to financial stability have declined as economy rebounds. However, tighter macro-prudential policies can help address growing vulnerabilities, notably those in the housing markets in some countries. It will also be essential to enhance the regulatory framework for the financial sector, including full, timely implementation of the Basel III reforms and a stronger policy framework for the non-bank financial sector.
Market sentiment toward euro area banks has remained favorable, as the near-term profitability outlook has improved. Looking ahead, bank profitability remains hampered by structural challenges of euro area banks. Bank profitability has improved overall since the start of 2021 on the back of lower loan loss provisions and stronger revenue streams from investment banking, but the profitability outlook continues to depend on the path of overall economic recovery and the pandemic. While the non-performing loan (NPL) ratio has dropped to levels last seen before the global financial crisis on account of further progress made in NPL sales, asset quality concerns may resurface as government support measures are gradually withdrawn, reinforcing the need for effective NPL solutions. The risk of price corrections has also increased in some real estate and financial markets. Vulnerabilities in residential real estate markets have grown, especially in countries with valuations that were already elevated prior to the pandemic.
Consolidation via mergers and acquisitions (M&A) could be one potential avenue for helping the sector to return to more sustainable levels of profitability. Looking ahead, euro area banks also face increasing urgency to meet digital transformation needs and to manage the implications of the transition to a greener economy. The review notes that climate change-related vulnerabilities call for policies to support an orderly transition. The financial stability review also contains the following three special features:
- The first special feature analyzes bank lending behavior during the pandemic to gain insights into banks’ propensity to use capital buffers and the impact of the regulatory capital relief measures implemented by the authorities. The micro-econometric analysis performed in this special feature shows that the banks that had limited capital space above regulatory buffers adjusted their balance sheets by reducing lending which could be interpreted as an attempt to defend capital ratios. This suggests that they were unwilling to use capital buffers. While more research is desirable, also on macro aspects, these findings suggest that more releasable capital could enhance macro-prudential authorities’ ability to act countercyclically when a crisis occurs.
- The second special feature is focused consolidation in the banking sector. Most M&A activity has had a domestic focus and has involved smaller targets and consolidation seems, on average, to have had a moderately positive impact on the profitability of the banks involved. The analysis notes that cross-border M&A transactions have been concentrated within a few small groups of euro area countries, supported by prior financial links and geographical proximity. Such transactions tend to be followed by a stronger improvement in profitability than domestic mergers, although this effect has diminished since the global financial crisis.
- The third special feature is focused on creditor coordination in resolving non-performing corporate loans. This special feature proposes a strategy to overcome creditor coordination failures and costs, through the use of data platforms providing ex ante transparency to NPL investors. These, together with NPL securitization, could substantially reduce the gap between the value of the loans carried on banks’ balance sheets and the prices offered by investors for NPL portfolios.
Related Links
Keywords: Europe, EU, Financial Stability Review, COVID-19, Financial Stability, Macro-Prudential Policy, NPLs, Credit Risk, Basel, Banking Union, Transition Risk, Climate Change Risk, ECB
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Previous Article
EBA Assesses Impact of NSFR on Functioning of Precious Metal MarketsRelated Articles
ISSB Sustainability Standards Expected to Become Global Baseline
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
BCBS Assesses NSFR and Large Exposures Rules in US
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
Global Agencies Focus on ESG Data, Climate Litigation and Nature Risks
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
ISSB Standards Shine Spotlight on Comparability of ESG Disclosures
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
EBA Issues Several Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
BCBS Proposes to Revise Core Principles for Banking Supervision
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
US Proposes Final Basel Rules, Transition Period to Start in July 2025
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
FSB Report Outlines Next Steps for Climate Risk Roadmap
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.