Papademos provided an overview of the identified risks to the financial system's stability, such as the possibility of vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries.
The opening remarks by Lucas Papademos, Vice President of the European Central Bank, at the press briefing for the publication of ECB’s December 2009 Financial Stability Review, were focused on the current financial system and the recent crisis.
During his speech he provided an overall assessment of the identified risks to euro area financial system stability.
Within the euro area financial system, important risks include the possibility of:
• renewed financial strains and that the recent recovery of bank profitability will not prove durable;
• vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries being unearthed; and
• a setback for the recent recovery of financial markets, if macro-economic outcomes fail to live up to optimistic expectations.
The challenges facing the euro area banking sector in the period ahead call for caution in avoiding timing errors in disengaging from public support.
In particular, exit decisions by governments will need to carefully balance the risks of exiting too early against those of exiting too late. Exiting before the underlying strength of key financial institutions is sufficiently well established and runs the risk of leaving some of them vulnerable to adverse disturbances, possibly even triggering renewed financial system stresses. Late exits, on the other hand, can entail the risk of distorting competition, creating moral hazard risks that come with downside protection – including the possibility of excessive risk-taking – as well as exacerbating risks for public finances.
To cushion the risks that lie ahead, banks will need to be especially mindful that need to ensure that they have adequate capital and liquidity buffers in place.
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