This week the ECB released its bi-annual Financial Stability Review in which it cited weak bank profitability, an abrupt repricing of risk premia, and debt sustainability as “medium-level” risks. We do not expect any of these risks to cause a crisis over the next few years.
We think that there are two key points to bear in mind. First, and encouragingly, the euro-zone financial system appears to be in a better position to face a shock than it was ten years ago. Second, and less encouragingly, even if financial risks do not result in a systemic crisis for the bloc, they still present big – and in some cases growing – risks to economic growth further down the line.
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