FRANKFURT: The European Central Bank (ECB) said on Thursday that financial stability has increased recently in the euro area, but warned that weak growth in the region and the Greek crisis could pose risks in the future.
“Euro area systemic stress has remained low over the past six months,” the ECB wrote in its regular Financial Stability Review.
“This also reflects ECB action . . . which is beginning to bear fruit,” said ECB vice president Vitor Constancio presenting the report.
Nevertheless, “despite these signs of improving economic conditions, the risk of continuing low nominal growth remains a challenge to financial stability in the euro area,” Constancio said.
The ECB also expressed concern about the absence of any debt agreement with Greece, which could push up financing costs for other countries in the single currency area, particularly those on the periphery.
Another source of potential vulnerability was the so-called shadow banking sector which comprises non-bank financial intermediaries that provide services similar to those of traditional commercial banks, but are not subject to the same strict regulation. This sector “continues to grow robustly, increasing the potential for systemic risks,” the ECB said.
“Despite a generally positive financial market sentiment, there have been repeated moments of tension in global financial markets. Large banks have become less confident about their ability to make markets during periods of stress,” the ECB said.
Banks’ profitability remained weak as a result of the low-interest rate environment.
Greek banks had become particularly vulnerable given the uncertainty over Greece’s future in the euro area.
They had seen substantial withdrawal of deposits by customers, a loss of access to the financial markets and a deterioration in the quality of their assets, the ECB said.