Euro Area Policies: Financial System Stability Assessment
IMF Staff Country Reports, July 19, 2018
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- Published: July 19, 2018
- Series: IMF Staff Country Reports
Key findings: resilience and vulnerabilities
- Overall the resilience of large euro area banks has improved, but important vulnerabilities remain.
- Capital buffers are in aggregate sizeable relative to immediate threats, but some banks are especially vulnerable to credit risk and others to market risks, including a substantial rise in risk premia.
- The banking system as a whole has ample liquidity, against a backdrop of ECB support.
- At a structural level, low profitability is found in many banks across all business models, despite improving conjunctural conditions.
- The interconnectedness analysis shows that strong buffers are effective in dampening both vulnerabilities and onward transmission.
Main risks to financial stability
- Risks relate mainly to tighter financial conditions, weaker growth, and policy and geopolitical uncertainties.
- The withdrawal of the United Kingdom from the EU (Brexit) could potentially disrupt financial market and services, and thus the wider economy.
- Policy reversals could hurt debt sustainability and test the cohesion of policy making in the union.
Policy implications and areas for attention
- Maintain and strengthen capital buffers where banks are vulnerable to credit and market risks.
- Ensure continued liquidity support mechanisms in coordination with ECB policies to uphold system-wide liquidity.
- Address structural profitability weaknesses across business models to bolster long-term resilience.
- Monitor interconnectedness and reinforce buffers to limit contagion and onward transmission.
- Prepare for potential Brexit-related disruptions to financial markets and services; assess contingency plans and cross-border arrangements.
- Guard against policy reversals that could undermine debt sustainability and policy cohesion within the union.
Subjects and keywords (as provided)
- Subject: Asset and liability management, Bank resolution, Bank resolution framework, Banking, Collateral, Financial crises, Financial institutions, Liquidity, Nonperforming loans
- Keywords: bank crisis preparedness, Bank resolution, Bank resolution framework, banking system, cash flow, central bank, Collateral, compromise bank resolvability, CR, ECB banking supervision, Europe, financial system, funding cost, Global, interest rate, ISCR, liquidation tool, Liquidity, liquidity operations, monetary policy, national bank, Nonperforming loans, resolution plan
Euro Area Policies: Financial System Stability Assessment, July 19, 2018.