Vulnerabilities for financial stability in the euro zone have been mitigated thanks to the improving economic outlook, with inflation in constant decline and the recovery of investor confidence, according to the Financial Stability Report published by the European Central Bank ( ECB), which warns that the outlook remains fragile mainly as a result of geopolitical risks.

“Geopolitical risks continue to cloud the prospects for financial stability,” said ECB Vice President Luis de Guindos.

In this way, the report warns that financial markets remain vulnerable to further adverse shocks and notes that, while expectations of rate cuts have boosted optimism in investors’ risk assessments, sentiment could change quickly.

In this sense, the ECB warns that “acute geopolitical tension” could cause volatility, creating the possibility of excessive reactions in the market that could be amplified by non-banking entities with structural liquidity fragilities.

On the other hand, the institution points out that strict financial conditions continue to test the resilience of a group of vulnerable households, companies and governments in the eurozone, although it highlights that, as a whole, the debt/GDP ratios of households and companies have decreased to below pre-pandemic levels, helping to alleviate concerns about debt sustainability.

However, sovereign debt is expected to stabilize at higher levels than before the pandemic, making public finances more vulnerable to adverse shocks, while, more broadly, debt servicing costs may still rise across all economic sectors in the future, as maturing liabilities continue to be repriced at significantly higher prevailing interest rates.

Likewise, the ECB emphasizes that a slowdown is taking place in the real estate markets, with particular intensity in the commercial segment, where “a significant price correction continues and further falls cannot be ruled out”, while the residential real estate markets are showing some signs of stabilization after what, until now, has been an orderly price correction.

“While financial stability conditions have improved in line with reduced recession risks and lower inflation, it remains crucial that we continue to leverage the resilience of the financial system in light of global economic and geopolitical uncertainty,” he added. Guindos.

Thus, the ECB highlights that euro zone banks have remained resilient, although it points out that the sector’s low valuations suggest that investors are concerned about the durability of bank profitability.

In this sense, he considers that the challenges for eurozone banks may arise from increased concerns about the quality of banking assets; higher bank financing costs, even if official interest rates begin to fall; and the potential impact on banks’ revenues as operating income weakens due to still moderate loan growth and lower income from floating rate loans in the future.

“Overall, the euro area banking system is well equipped to deal with these risks, given its solid capital and liquidity positions,” concludes the ECB, for whom it is necessary to preserve and strengthen the resilience of the entities in a uncertain macrofinancial context.

In this environment, the institution considers it advisable for macroprudential authorities to maintain existing capital buffers to ensure that they are available to banks in the event of difficulties, together with borrower-based measures that ensure sound credit standards.

Likewise, it points out that the implementation of a comprehensive macroprudential framework for non-banking entities and a more integrated supervision of these entities at EU level would play an important role in mitigating risks to financial stability, since a financial sector does not Resilient banking would support progress towards a capital markets union in Europe, helping to ensure that non-banks provide a stable source of financing for the real economy throughout the cycle.