ECB Financial Stability Review: Euro area financial stability vulnerabilities remain elevated in a volatile environment

Risks to euro area economic growth have shifted to the downside as inflation has moved closer to 2%

Economic growth remains fragile, while concerns about global trade outlook add to geopolitical and policy uncertainty

Financial markets have experienced several pronounced but short-lived spikes in volatility in recent months.

High valuations and risk concentration make markets more susceptible to sudden corrections

The outlook for financial stability is clouded by heightened macro-financial and geopolitical uncertainty together with rising trade policy uncertainty

Fiscal fundamentals remain weak in some euro area countries. 

Sovereign debt service costs are expected to continue rising as maturing debt is rolled over at interest rates that are higher than those on outstanding debt. 

Elevated debt levels and high budget deficits, coupled with weak long-term growth-potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability.

High borrowing costs and weak growth prospects continue to weigh on corporate balance sheets, with euro area firms reporting a decline in profits due to high interest payments.

Households are benefiting from a strong labor market and have bolstered their resilience by increasing savings and reducing debt.

While the overall increase in credit risks has so far been gradual, small and medium-sized companies and lower-income households could face strains if growth slows by more than is currently expected, which could, in turn, adversely affect the asset quality of euro area financial intermediaries.

To preserve and strengthen financial system resilience in the current uncertain macro-financial environment, it is advisable for macroprudential authorities to maintain existing capital buffer requirements together with borrower-based measures that ensure sound lending standards.