(Finance) – Euro area banks remained resilient but the sector’s low stock market valuationsand “suggest that investors are concerned about the sustainability of profitability over time”. The European Central Bank states this in the latest half-yearly report on financial stability, which indicates three levels of challenge for banks.
First, concerns about the quality of their portfolio assets are growing as signs of losses on some loans increase, particularly in commercial real estate. Second, the ECB continues, banks’ financing costs appear destined to remain high, even if the reference rates (which reflect those established by the ECB itself) are starting to fall. Finally, the third element of challenge, the banks’ revenues could be damagedwhile operating revenue will weaken with loan growth remaining subdued and lower revenue from variable rate mortgagesthere. According to the ECB, overall the eurozone banking sector is well equipped with liquidity levels to manage these risks, also given the solid capital positions. To maintain the resilience and strength of banks in an uncertain macroeconomic environment, the institution notes that it would be appropriate for macro prudential authorities to maintain current additional capital margins to ensure that they are available in the event of adverse developments. In parallel, it is necessary to implement a broad macro-prudential supervision framework for non-bank finance and a more integrated supervision at European level of these entities, which play an increased role in mitigating risks to financial stability. A resilient non-bank financial sector will support progress towards the capital markets union, contributing through a stable source of financing for the real economy.
Overall, financial stability conditions in the euro area have improved in the last six months, while the risks of a fall into recession have decreased, the markets remain exposed to possible negative repercussions at a macroeconomic and financial level and to problematic developments at a geopolitical level. The European Central Bank states this in its latest six-monthly report on financial stability. The tightening of financial and financing conditions – to which the monetary tightening of the ECB itself has contributed – is testing the resilience of the most vulnerable families in the eurozone, of businesses and of public finances, while the contraction of real estate markets in various countries creates pressure on companies in the sector.
According to the semi-annual report, presented today with a press conference by Vice President Luis de Guindos, who signed the editorial of the study, the financial stability of the eurozone has benefited from the improvement of the economic outlook, with inflation continuing to ease and the investor confidence which improved at the same time. However “the prospects remain fragile, given thatand the possibilities of economic and financial shocks are high in a context of increased geopolitical uncertainties and on the policies that will be pursued at a global level”. In this context, according to De Guindos it is appropriate to “further strengthen the resilience of the financial system” to equip it to face to growing uncertainty. The improvement in the climate of confidence among investors reflects expectations of monetary policy easing – clearly by the ECB itself, which has launched repeated signals of a first rate cut in June without however committing itself to a progressive path reductions -.
The institution’s report warns, however, that in light of the vulnerability of financial markets to further adverse shocks, “the climate could change rapidly.” For example, strong geopolitical tensions could trigger volatility and “create the potential for out-of-scale market reactions that could be amplified by non-bank firms with structural liquidity fragilities.”