Euro zone financial sector stress has fallen to levels not seen since before the global financial crisis began in 2007, but the sector remains fragile, the European Central Bank said on Wednesday.
In its semi-annual Financial Stability Review, the ECB said the key risks to euro zone financial stability are economic and financial shocks, tensions in government debt markets, global financial market turbulence and bank funding challenges in the euro zone periphery.
“Indicators measuring systemic stress have fallen back to close to their pre-crisis levels,” the ECB said in the report.
“Stress indicators and euro area fundamentals suggest alleviation of financial market tensions, especially on the banks’ funding side.”
Data published separately on the ECB’s Internet site showed that the systemic stress indicator hit in late September its lowest level in the euro era and has remained close to those levels since.
But the central bank said that with a crunch period of bank funding approaching, risks of banks cutting their balance sheets are increasing.
“With sizeable amounts of bank debt maturing over the coming months, persistently high funding costs for a set of challenged banks could amplify pressures for deleveraging of a disorderly nature – with an associated negative impact on economic welfare and growth.”