Papademos highlighted that the main risks for the euro area financial system include the possibility of vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries.
ECB Papademos highlighted that the main risks for euro area financial system include the possibility of:
• Concerns about the sustainability of public finances persisting or even increasing with an associated crowding-out of private investment
• Adverse feedback between the financial sector and public finances continuing
• Heightened financial market volatility if macroeconomic outcomes fail to live up to expectations
• Vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries
• A setback to the recent recovery of the profitability of large and complex banking groups and of adverse feedback with the provision of credit to the economy
• Greater-than-expected euro area household sector credit losses if unemployment rises by more than expected
• Vulnerabilities being revealed in euro area non-financial corporations’ balance sheets, because of high leverage, low profitability and tight financing conditions
He concluded with five policy messages stressed:
· First, the measures taken by the ECB to stabilise markets and restore their functioning, as well as the establishment of the European Financial Stabilisation Mechanism, have lowered tail and contagion risks.
· Second, sizeable fiscal imbalances remain and the responsibility rests on governments to frontload and accelerates fiscal consolidation, so as to ensure the sustainability of public finances, not least to avoid the risk of a crowding out of private investment, while establishing conditions conducive to durable economic growth.
· Third, with pressure on governments to consolidate their balance sheets, disengagement from financial sector intervention means that banks will need to be especially mindful of the risks that lie ahead.
· Fourth, and against this background, the problems of those financial institutions that remained overly-reliant on enhanced credit and government support will have to be tackled decisively.
· Fifth, for the longer-term, a key objective of the agenda for regulatory reform is to strengthen capital and liquidity buffers so as to ensure a safer financial system that is more robust to adverse disturbances.
© ECB - European Central Bank
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