The financial stability report is published twice a year by ECB in order to draw attention to the potential risks in the Euro area. We note down the key points of the second report of 2019.
The report published by ECB was focused on the difficulties in the financial stability setting of the Euro area.
- The low interest rate environment encourages the actors to take risks and supports economic activity in accordance with the current economic conditions and downside risks. Thus, it was aimed to support economic activities.
- Some of the non-bank financial institutions should adopt a macroprudential policy action for the signs of excessive financial risk-taking.
- ECB stressed the increase in flexibility of the Euro area banking sector in recent years. However, the report also showed that the progress we saw in basic profitability and the new cyclical headwinds may hamper banks’ ability to respond to downside risks to growth.
- It also added that in some countries, usage of macroprudential instruments, such as the countercyclical capital buffer, more efficiently could vanish the risky factors in financial stability in the Euro area.
ECB analyzed and classified the risk for downside trend in the yield curve as medium systematic risk and put the inflation in safe haven-assets as the reasons for this problem.
Secondly, it expressed concerns about the sustainability of public and private sector debts. In the relevant section, reasons such as expectations of poor growth, increase in real estate prices and the releveraging were identified as the reasons for the concerns.
In addition, ECB addressed the issue of increasing challenges that adversely affect bank profitability. He stressed that 75 percent of the major banks in the euro area can provide a return on equity below just 8 percent. Factors such as the elimination of interest margins increased credit risk costs and stagnating capital positions were included in the occurrence of such a problem.
In the last section, the risks posed by non-bank financial institutions are highlighted and analyzed in the potential risk class. According to the report, increases in risk-taking actions of non-bank institutions may pose a risk to capital market finance and it was also put forward the reasons underlying this potential risk in its financial stability reports such as profitability and payment difficulties, high loans and time risk and liquidity adequacy.