The European Central Bank (ECB) published its December 2005 Financial Stability Review assessing the stability of the Euro area financial system and concluding among others that the strength and resilience of the Euro area financial system has further improved over the past six months, contributing to a positive outlook for financial stability. At the same time, however, financial imbalances have grown larger and seem likely to continue expanding, primarily at the global, but also at the Euro area, level.
Continued strength in the pace of global economic growth in 2005, low interest rates in the Euro area and indications of a further improvement in corporate sector credit quality provided a favourable environment for financial institutions and markets.
In addition, the conditions for raising funds in equity markets remained favourable, and financial market volatility stayed very low across most asset classes.
Despite recent improvements, the durability of Euro area banking sector profitability could be tested in the period ahead, especially if long-term interest rates remain low for a protracted period.
Overall, with shock-absorption capacities improving, but risks and vulnerabilities rising, the financial stability outlook continues to rest upon a delicate balance. While the probable outcomes could, at this stage, best be described as bi-modal, a positive outcome remains the most likely prospect in the period ahead.
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