ECB Reports Examine Health of Financial Sector in EU

The financial stability review for May 2022 highlights that the financial stability conditions in the euro area have worsened as a consequence of the Russian invasion of Ukraine. The key themes include rising inflation, house price corrections, re-merging credit risks, possible tightening of credit standards (see results of SESFOD survey for more information), and rising cyber risks, with such risks collectively adding up to the renewed concerns on bank asset quality and profitability. The report notes that, over the medium term, the resilience of the financial system would be reinforced by creating more macro-prudential space through an increase in the amount of releasable buffers, complemented by enhancing the effectiveness of the existing countercyclical capital buffer (CCyB). The report then goes on to discuss the ongoing review of macro-prudential framework and the ECB proposals in that respect. The financial stability review also includes two special features on risks stemming from climate change and from crypto-assets. The feature on crypto-assets notes the importance of closing regulatory and data gaps in the crypto-asset ecosystem to mitigate systemic risks. The feature on risks stemming from climate change notes the evidence of better disclosure by non-financial corporations and increasing awareness of climate-related risks in financial markets. However, progress of banks has been more limited. The findings can inform evidence-based international and European policy debates around climate-related corporate disclosure, standards for sustainable financial instruments. and climate-related prudential policies. It is also noted that further investments in the transition to a net-zero economy would also have a positive impact on medium-term growth and energy security.

The survey results on credit terms and conditions are based on responses from a panel of 27 large banks, comprising 14 euro area banks and 13 banks with head offices outside the euro area. The results show that the overall credit terms and conditions offered by banks to counterparties tightened slightly from December 2021 to February 2022. The survey participants were expecting overall credit terms to tighten further during March 2022 to May 2022. With respect to the credit terms and conditions in early March 2022 versus those reported in the previous year, the overall terms and conditions for securities financing and OTC derivatives transactions have tightened across all counterparties and against most types of collateral, except domestic government bonds. The survey respondents reported stronger demand for funding against government bonds, but weaker demand for funding against most other collateral types. 

Related Links

• Press Release on Financial Stability Review
• Financial Stability Review
• Survey on Credit Terms and Conditions

Keywords: Europe, EU, Banking, SESFOD, Credit Risk, Credit Terms And Conditions, OTC Derivatives, Lending, Financial Stability Review, Systemic Risk, Basel, ESG, Climate Change Risk, Macro-Prudential Policy, Crypto-Assets, Disclosures, Greenwashing, Non-Bank Financial Institutions, ECB