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ECB Financial Stability Review May 2020

According to the ECB Financial Stability Review, decisive policy responses to the Corona-virus pandemic have helped to prevent a seizing-up of the financial system. However, even as infection rates fall in many countries, the impact on the economy and markets has unearthed and increased existing vulnerabilities for euro area financial stability. Financial stability risks could arise as these vulnerabilities interact with the pandemic. These include richly valued asset prices, fragile investment funds, the sustainability of sovereign and corporate debt, and weak bank profitability.

European Central Bank
26 May 2020
Source: European Central Bank

Financial Stability Review May 2020

  • Pandemic greatly amplified existing vulnerabilities of the financial sector, corporates and sovereigns;
  • Policy responses to pandemic essential to preserve financial stability;
  • Euro area banks, although now better capitalised, likely to face significant losses and further pressure on profitability.

Since February 2020, the Corona-virus pandemic has disrupted social and economic life across the euro area and the globe, to an extent unseen in most of our lifetimes and unexpected six months ago. It has caused one of the largest and sharpest economic contractions in recent history. As news unfolded of the spread of the virus, global financial markets responded with sell-offs, volatility and a sharp increase in borrowing costs, which rivalled ‒ and at times exceeded ‒ those seen during the 2008 global financial crisis.

Economic and financial policymakers – fiscal, monetary, micro- and macroprudential – have responded with action on an unparalleled scale to dampen the impact on near-term economic activity where they can, minimise longer-term damage and help our economy to recover quickly as the threat from the virus recedes. A central part of this policy response has been to ensure that the financial system – its intermediaries, markets and infrastructures – withstands the shock and provides the credit and financial services that will help households and businesses through these times, supporting the economic recovery.

Against this backdrop, the May 2020 Financial Stability Review assesses how the financial system has operated so far during the pandemic. It considers the financial stability implications of the potential economic after-effects of the pandemic, taking account of the financial vulnerabilities identified before the pandemic, including those related to financial market functioning, debt sustainability, bank profitability and the non-bank financial sector. It also sets out policy considerations for both the near term and the medium term. It does so to promote awareness of systemic risks among policymakers, the financial industry and the public at large, with the ultimate goal of promoting financial stability. By providing a financial system-wide assessment of risks and vulnerabilities, the Review also provides key input to the ECB’s macroprudential policy stance.