ECB Financial Stability Review: Uncertainty Around Financial Stability Remains

16 May 2024

By Isabel Teles – FRANKFURT (Econostream) – Despite having progressed since last November, the outlook for financial stability in the euro area is still fragile, according to the May 2024 Financial Stability Review published on Thursday by the European Central Bank.

‘Financial stability conditions have improved somewhat since the previous issue of the Financial Stability Review was published. This includes some positive economic surprises and faster than expected disinflation, underpinning expectations in financial markets of a soft landing. That said, despite improved baseline expectations, the likelihood of tail events appears elevated’, the ECB said.

The ECB emphasised that the materialisation of downside risks to economic growth, more persistent inflation outturns and geopolitical stress could expose existing vulnerabilities.

‘In such an environment, the scope for adverse economic and financial surprises is elevated, and the risk outlook for euro area financial stability remains fragile accordingly’, ECB Vice President Luis de Guindos said in the foreword to the FSR, adding it was necessary to have ‘shock-absorbing capacity’ to address the risks and maintain price stability.

Despite progress in bringing inflation down, the FSR said that risks such as the escalation of geopolitical tensions could impact supply chains and lead to renewed inflationary pressures in the euro area.

Domestic price pressures remained high, and wage growth could still surprise upwards as the tightness in the labour persisted, the ECB said.

In addition to that, the FSR noted that inflation could be affected by the conduct of monetary policy in other jurisdictions.

‘Globally diverging monetary policy paths could also lead to higher inflation via their impact on the euro exchange rate and import prices’, the ECB said.

Euro area banks had been resilient, and the FSR advised macroprudential authorities to ‘maintain existing capital buffers to ensure that they are available to banks in the event of headwinds, together with borrower-based measures that ensure sound lending standards.’