Yesterday, the European Central Bank (ECB) published the June 2009 edition of the ECB Financial Stability Review. The objective of the ECB’s Financial Stability Review, which is published twice a year (in June and December), is to "[r]eview the main sources of risk to, and vulnerability for, financial system stability and to provide a comprehensive assessment of the capacity of the euro area financial system to absorb adverse disturbances." By providing an overview of sources of risk and vulnerability, the review "[s]eeks to play a role in preventing financial crises."
The sources of risk and vulnerabilities identified in the Financial Stability Review, as summarized by ECB Vice-President Lucas Papademos, include:
- The "crystal[ization]" of the downside risks identified in the December 2008 Financial Stability Review, including:
- Further deterioration in the U.S. and the Euro-area housing markets;
- Deeper and more prolonged slowdown in both the global and the Euro-area economy;
- More pronounced de-leveraging by banks, due to persistently high funding costs and concerns about the adequacy of capital buffers; and
- A surge in financial market volatility caused by a further unwinding of positions by hedge funds.
- The concern that the following additional risks could materialize if the global economic downturn proves to be deeper and more prolonged than currently expected:
- A further erosion of capital bases and the risk of a renewed loss of confidence in the financial condition of large and complex banking groups;
- Significant balance sheet strains emerging among insurers;
- More widespread asset price declines coupled with high volatility;
- U.S. house prices falling further than currently expected;
- More severe economic downturn in the Euro area than currently projected; and
- An intensification of the stresses already endured by central and eastern European countries.