The euro area financial system was able to absorb the strong turmoil around the turn of the year according to the latest Financial Stability Review of the European Central Bank (ECB).
Global financial market tensions also extended to euro area banks. Volatility increased signifi- cantly in the first months of the year as investors grew increasingly concerned about banks’ abi- lity to generate sustainable profits in a low growth and interest rate environment. ECB monetary policy measures announced in March, coupled with better macroeconomic data, helped to restore market confidence.
Euro area financial institutions have made steady progress in strengthening their balance sheets and building up their resilience to shocks in recent years. Despite this progress, both cyclical and structural challenges remain. Cyclical challenges relate to the economic , while structural challenges relate to high operating costs and a large stock of non- performing loans. In particular, high unresolved stocks of non-performing exposures in some countries are banks’ lending capacity and their profitability.