It also used its authority to recommend that regulators apply new or heightened standards for certain financial activities or practices once, in However, FSOC has never used its authority to designate certain activities as systemically important.

According to FSOC Secretariat staff, most risks can be addressed through annual report recommendations or other means and thus, FSOC has not used its other authorities in recent years. Limitations in FSOC's authorities may affect its ability to respond to systemic risk.

In previous work, GAO highlighted limitations in FSOC's authorities—including the nonbinding nature of its recommendations—and recommended Congress consider legislative changes to align FSOC's authorities with its mission to respond to systemic risks.

GAO maintains that aligning FSOC's authorities with its mission to respond to systemic risk would help FSOC respond to risks that its current authorities do not effectively address. In April , FSOC proposed new guidance on its authority to designate nonbank entities for additional regulation.

The new guidance would facilitate FSOC's ability to exercise this authority, as well as its authority to apply new or heightened standards for financial activities or practices, because it removed some procedures FSOC was to perform under previous guidance in connection with these authorities.

For example, the proposed guidance removed provisions for FSOC to perform cost-benefit analyses before it could use these authorities.

FSOC conducted three internal evaluations of its policies, procedures, and governance structure since , but these reviews do not represent a comprehensive evaluation of all FSOC activities. FSOC does not have a process to determine what aspects of its activities it should evaluate and when.

For instance, a recent study summarized the literature on cost offsets in order to estimate their magnitude for U. Unfortunately, the earlier studies that the authors reviewed did not distinguish between bank sizes and thus were not helpful on this point.

From the point of view of overall economic performance, increased equity finance also has positive effects. Empirical evidence suggests that overall higher levels of bank equity improve both economic performance and the availability of credit.

In short, claims that the economy will suffer from increased equity requirements are questionable on empirical grounds. Unrealized gains and losses are increases and decreases in the market value of assets the bank holds but has not yet sold.

That amounts to more than 10 percent of the value of all securities held on depository balance sheets at the end of If banks were forced to sell these securities or mortgages at current market prices, they could do so only at a discount to their nominal, or face, value—in other words, at a loss.

It is likely to have a limited effect on the ability of regulators to monitor declines in equity, since fair market value of securities holdings is already required in U.

Securities and Exchange Commission filings. Instead, they would have to take the increased risk of violating regulatory equity minimums into account in their investment strategies.

The Federal Reserve separately issued a proposal that would improve the sensitivity of the U. global systemically important bank GSIB surcharge to systemic risk indicators. Collectively, these actions take important steps to strengthen the banking system.

These estimates include changes in the way risk-weighted assets are calculated, changes in risk measures, and enhanced equity requirements for securities and derivatives trading.

The analysis found that in June , the ratio of total Tier 1 capital-to-total assets for the eight U. GSIBs was 7. If the total amount of CET1 capital were increased by 19 percent, these ratios would rise to 7. In dollar amounts, the proposed increase in CET1 capital would only increase aggregate Tier 1 capital among the U.

see Figure 1. While these are measurable changes, they do not substantially improve the financial stability of the GSIBs. Specifically, even under the new proposals, the SLR would likely still be insufficient to withstand shocks from recent history.

We know from the — financial crisis that large shocks can reduce the value of bank assets by a far greater percentage. Quantitative estimates, based on data for the nine largest banks, show that had interventions by federal regulators not been successful, the potential loss of asset value from bankruptcy-producing runs would have been about 22 percent.

Therefore, the increase in equity delivered by the recent agency proposals would not markedly improve the chances that the GSIBs would remain solvent in the face of shocks in the range of those historically observed.

Increased capital requirements for non-GSIB banks also appear to be inadequate. When SVB failed in , its losses amounted to at least 17 percent of its assets.

In the case of the closure of Signature Bank, also in spring , losses were at least 11 percent of assets. The proposed 6 percent increase in required CET1 for firms similar in size to SVB and Signature would have left their Tier 1 leverage ratios unchanged at 8.

Thus, even with the new CET1 requirements, both SVB and Signature would have failed. Nov 2, Marc Jarsulic. Although the risk of runs at large regional banks has receded, there is evidence that some of them are still experiencing stress. This suggests that many banks continue to need help to avoid runs on deposits and associated asset fire sales that could make them insolvent.

With greater equity finance, their operations would be better positioned to avoid insolvency without extraordinary support from regulators.

The Federal Reserve, FDIC, and OCC should therefore consider greater increases to equity capital as they finalize their proposals. Capital ratios were calculated by aggregating Tier 1 capital, assets, and leverage exposures across all eight U.

GSIBs, then calculating aggregate Tier 1 leverage and SLR ratios using these values. The changes to these ratios reflect the required increase in CET1 bank capital. For SVB and Signature, data do not yet exist on the total value of unpaid claims at the banks.

Instead, the authors used estimates of the resolution costs to the FDIC, which include repaying depositors and administering the wind-up of the banks. Claims by unpaid general creditors may increase loss totals.

For resolution cost estimates, see Martin J.

Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and

Enhanced financial stability - The Enhanced Financial Accounts initiative is a long-term effort to augment the Financial Financial Stability · Federal Reserve's Work Related Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and

The resilience of euro area banks is largely attributable to the strength of their capital and liquidity buffers, under stringent regulatory and supervisory oversight.

Strengthening the banking union — and notably making progress on a common European deposit insurance scheme — will reinforce the ability of the euro area financial system to withstand risks going forward.

Beyond the overview of key financial stability vulnerabilities in the euro area, this issue of the Financial Stability Review FSR includes three special features.

The first examines how interactions in market and funding liquidity can amplify stress in the financial system. The second investigates the channels through which stress in non-bank financial institutions could propagate to euro area banks. The third furthers work on identifying potential threats from climate change, with a primer on associated risks for sovereigns.

This issue of the FSR has been prepared with the involvement of the ESCB Financial Stability Committee, which assists the decision-making bodies of the ECB in the fulfilment of their tasks.

The FSR promotes awareness of systemic risks among policymakers, the financial industry and the public at large, with the ultimate goal of promoting financial stability.

Euro area financial stability vulnerabilities remain elevated in the context of unexpected stress in the banking sectors of some mature economies. The recent failures of a number of US regional banks and the takeover of a Swiss bank have invited closer scrutiny of bank exposure to long-term fixed income securities, the stability of wholesale uninsured deposit funding and latent business model challenges.

While the immediate cause of bank stress was related to idiosyncratic bank fragility in non-euro area economies, the episode prompted more general concerns about bank resilience in an environment of higher interest rates.

This led to tensions in the bank equity and funding markets in the euro area. These tensions were short-lived, as euro area bank fundamentals remain solid and prompt regulatory intervention has contained spillovers from other economies.

Nevertheless, it is possible that these events could lead to a reassessment of the profitability and liquidity outlooks for euro area banks. The financial stability outlook remains fragile, with weak macroeconomic growth and a flare-up of systemic stress.

Sources: Consensus Economics, Bloomberg Finance L. Notes: Panel a: HICP stands for Harmonised Index of Consumer Prices; CPI stands for consumer price index. The composite indicators of systemic stress in financial markets and sovereign bond markets are contemporaneous indicators.

To find out more about the composite indicator of systemic stress in financial markets, see Holló et al. and Lo Duca, M. and Kremer, M. Despite some improvement seen at the turn of the year, weak macro-financial prospects continue to pose a challenge to financial and non-financial sectors alike.

Macro-financial conditions have improved slightly since the publication of the previous Financial Stability Review Chart 1 , panel a , thanks to a robust post-pandemic recovery, fading global supply chain disruptions and lower energy prices.

That said, the outlook remains highly uncertain, given the presence of downside risks to growth accompanied by persistent inflationary pressures. Also, near-term financial stress indicators have picked up again Chart 1 , panel b in the context of stress in the banking sectors of some mature economies, although they remain below pandemic and war-related levels.

At the same time, there are still structural vulnerabilities in the non-bank financial intermediation NBFI sector in the form of liquidity mismatch and leverage.

High volatility and signs of lower market liquidity are rendering financial markets and the NBFI sector prone to adverse dynamics such as forced asset sales and are increasing the likelihood of credit events materialising.

Such amplification effects could tighten broader credit conditions more strongly than expected with regard to both the cost and the availability of credit, and could dampen confidence, potentially weakening the resilience of the non-financial sectors.

Following the rally in financial markets seen at the turn of the year, stresses in some mature economy banking sectors triggered price adjustments. Global financial markets saw an unusually robust start to , driven by optimistic macroeconomic expectations predicated on the resilience of the euro area economy at the turn of the year, the faster than expected reopening of the Chinese economy and a sharp drop in energy prices.

Solid corporate financial results, alongside lower volatility in interest rate markets, pushed euro area equity valuations back above historical averages Chapter 2.

The positive risk sentiment started to fade in February, following the more hawkish tone adopted by central banks globally.

It reversed more abruptly in March, as unexpected stress in the US and Swiss banking sectors sent shockwaves through global financial markets. The potential for disorderly adjustments in financial markets has risen in the context of tighter financial conditions and lower market liquidity.

Renewed recession concerns in the aftermath of the banking sector stress in the United States and Switzerland have significantly lowered market-based policy rate expectations. Financial conditions have tightened as the market turmoil has led to a widening of credit risk premia in the euro area.

By contrast, the fact that equity risk premia remain compressed in absolute and relative terms, especially in the United States Chart 2 , panel a , raises concerns over potential overvaluation. Equities may thus be more vulnerable to a disorderly price correction in the event of a further deterioration in the economic outlook Chapter 2.

As such, risk sentiment remains fragile and is highly sensitive to surprises as regards the outlook for inflation, growth and monetary policy in mature economies.

More persistent inflationary pressures might require more significant monetary policy responses from major central banks than market participants currently expect. Among other things, a renewed surge in energy prices could also pose upside risks to inflation and could add to already-elevated volatility in interest rate markets Chart 2 , panel b.

The combination of a tighter monetary policy environment and recession fears could put pressure on the valuations of riskier assets. At the same time, elevated volatility in interest rate markets has contributed to a substantial decline in market liquidity in both corporate and sovereign bond markets, leaving them more vulnerable to adverse dynamics Chart 2 , panel c and Special Feature A.

The risk of disorderly adjustments in financial markets remains high in an environment of high volatility and low market liquidity. Sources: Bloomberg Finance L.

and ECB calculations. Panel b: SMOVE is the Merrill Lynch 1M EUR Swaption Volatility Estimate Index; MOVE is the Merrill Lynch 1M UST Option Volatility Estimate Index.

Panel c: for methodological details please, see Special Feature A in this issue of the Financial Stability Review. The non-bank financial sector has remained resilient during the recent banking sector stresses and market volatility, but liquidity and credit risks remain high.

The highly volatile market conditions which followed the flare-up of banking sector stress in the United States and Switzerland resulted in funds which invest in European and US financials, as well as those exposed to riskier assets such as high-yield corporates, facing significant investor outflows after early March.

At the same time, inflows into sovereign bond funds and money market funds accelerated Chart 3 , panel a , reflecting safe haven flows in an environment of elevated macro-financial uncertainty as well as higher rates offered compared with bank deposits.

Shifts by investors towards safer fund types served to reduce aggregate credit risk in the sector Section 4. Portfolio de-risking has also been evident on the balance sheets of insurance corporations and pension funds, as higher interest rates have reduced the incentives for the non-bank financial sector to search for yield.

That said, overall exposures to credit risk remain high, exposing the non-bank financial sector to the risk of material losses should corporate sector fundamentals deteriorate substantially. Strong links with banks, as an important source of funding for instance, could also give rise to additional vulnerabilities in the banking sector via liquidity and credit risk spillovers Special Feature B.

Low liquid asset holdings and potential margin calls could pose the risk of possible forced asset sales, calling for enhanced liquidity preparedness. As such, the risk remains high that, if they were to experience any sudden liquidity needs, funds could amplify adverse market dynamics via procyclical selling behaviour and forced asset sales, thereby introducing risks to wider financial stability.

It is therefore necessary to strengthen existing regulatory frameworks and address issues related to structural liquidity mismatches in funds. Past stress events, such as the turmoil in March and the UK gilt market stress in the autumn of , also vividly illustrate how non-banks can amplify margin call dynamics in the wider financial system, especially when coupled with excessive leverage.

This highlights the importance of enhancing liquidity preparedness in the non-bank financial sector Box 7. Despite ongoing portfolio de-risking, liquidity and credit risks in the non-bank financial sector remain high in a volatile market environment.

Sources: ECB, EPFR Global and ECB calculations. Shares are calculated based on market values relative to all debt securities, listed shares and investment fund shares held in the respective non-bank financial sector.

Sovereign vulnerabilities have remained elevated in a context of tightening financial conditions and weak macro-financial prospects. The pressures on public finances have eased in recent months, as the big drop in energy prices has reduced the need for additional energy-related fiscal support to be provided to corporates and households.

But fiscal fundamentals remain fragile in some countries given their high debt levels, rising funding costs and high short-term refinancing needs Chart 4 , panel a. Vulnerabilities associated with potential abrupt shifts in market sentiment remain contained for now, as in recent years many sovereigns have locked in cheap financing at longer maturities.

Foreign investors can also play a stabilising role when spreads between sovereigns become elevated, as they increase their exposures towards euro area government bond markets Box 3.

That said, interest payments are expected to increase gradually going forward, as maturing public debt is rolled over at higher interest rates Chart 4 , panel b. Interest payments are set to rise gradually as maturing public debt is rolled over at higher interest rates, in particular in countries with high short-term refinancing needs.

Notes: Panel a: sovereign debt service covers all securities instruments at all original maturities with residual maturity of less than one year. Data only reflect existing maturing securities principal and interest.

Panel b: yields are averaged for the notional amount of the maturing debt. Euro area firms have benefited from high profits in the context of a sharp post-pandemic recovery and lower energy prices, but rising costs are weighing on prospects.

Higher revenues and profit margins have both contributed significantly to upbeat corporate financial results. In fact, many firms have been able to raise their profit margins in sectors facing constrained supply and resurgent demand, contributing to higher wage demands and, by extension, upside risks to inflation.

That said, not all firms have benefited equally from the recovery. At the same time, euro area firms are facing challenges from higher refinancing costs Box 1.

There are also signs of corporates switching from market-based financing to bank loans Box 6 , given the faster pass-through of policy rate increases to investment grade corporate bond yields.

Looking ahead, a combination of higher financing costs and highly uncertain business prospects will weigh on the corporate sector outlook Chart 5 , panel b.

In particular, a sharper economic slowdown than currently anticipated, together with a disorderly tightening of financing conditions, could prove particularly challenging for those firms that exited the pandemic with higher debt levels, subdued earnings and low interest coverage ratios.

Small and medium-sized enterprises may be particularly vulnerable to a slowdown in economic activity and higher borrowing costs, as they have benefited less from the economic recovery Section 1. Euro area corporates are benefiting from high profit margins, but tighter financial conditions and uncertain business prospects could prove a challenge going forward.

Indebtedness is based on pre-pandemic debt levels Q4 In recent months, euro area households have benefited from lower energy prices and a resilient labour market, but higher interest rates are increasingly weighing on credit dynamics.

Household confidence has recovered to some extent in recent months, in line with the marked drop in energy prices and the associated lower headline inflation outturns Section 1. On a positive note, resilient labour markets have so far supported incomes, and the shift towards more fixed-rate mortgage lending in recent years has shielded many households from the immediate impact of higher interest rates.

The use of borrower-based macroprudential measures in most euro area countries in recent years has also helped to limit the build-up of risks. That said, vulnerabilities could resurface, should labour market conditions deteriorate or energy prices rise again.

The euro area residential real estate cycle has shifted into correction mode, compounding the vulnerabilities of euro area households. Euro area residential real estate markets cooled markedly in the second half of The easing of residential property price inflation is apparent in most euro area countries, in particular those notably Germany which were less affected during previous crises Chart 6 , panel a.

Orderly price corrections might be warranted, as overvaluation measures have been signalling the potential for corrections in recent years. That said, looking ahead, a fall in prices could become disorderly as rising interest rates on new mortgage lending increasingly compromise affordability and increase the interest burden on existing mortgages, especially in countries where variable-rate mortgages predominate.

This is also indicated by the record high number of banks— even more than during the global financial crisis — reporting a decline in the demand for mortgages in the first quarter of At the same time, euro area banks have tightened credit standards for mortgage loans considerably, against a backdrop of rising interest rates and deteriorating housing market prospects.

The pace of prices falling could be further amplified in countries and regions where the presence of institutional investors is strong Box 2. Euro area commercial real estate CRE markets remain in a clear downturn.

In an environment of tighter financing conditions and elevated macro-financial uncertainty, CRE valuations have continued to decline sharply.

Demand has dropped significantly across both the office and the retail segments, with overall transaction volumes declining at a pace similar to that observed during the global financial crisis Chart 6 , panel b.

The challenges associated with the current uncertain market environment are amplified by pandemic-induced structural changes, particularly in markets for lower quality assets where tenant demand has weakened since the pandemic Section 1.

While bankruptcies among CRE-exposed non-financial firms remain low, an even more pronounced adjustment in CRE markets could expose structural vulnerabilities in some open-ended property funds, increase credit risk for lenders and lower collateral values.

Higher interest rates and lower affordability have brought about a synchronous correction in residential and commercial property markets. Sources: ECB and ECB calculations. Notes: Panel a: the countries most affected by previous crises i. the global financial crisis and the euro area sovereign debt crisis are Ireland, Greece, Spain, Italy, Cyprus, Portugal and Slovenia.

Panel b: transaction volumes are based on the four-quarter moving average of the underlying total number of transactions. Stress in the US and Swiss banking sectors has triggered concerns over the health of parts of the banking industry, although the impact has been limited in the euro area amid solid bank fundamentals.

The bullish market sentiment towards euro area banks that prevailed after the publication of the previous Financial Stability Review reversed abruptly in the first half of March Chart 7 , panel a. However, given the idiosyncratic nature of the sources of US and Swiss bank stress, tensions have remained contained, and the broader implications for euro area banks have been limited.

The resilience of the euro area banking sector has, in aggregate, been underpinned by strong capital and liquidity positions, and by greatly improved asset quality and profitability in recent years Chart 7 , panel c.

Tensions in euro area bank equity and bond markets were apparent following the US and Swiss bank stress, but euro area banks remain resilient.

Notes: Panel a: euro area bank stocks are reflected by the Dow Jones EURO STOXX Banks Index and US banks stocks by the Dow Jones U.

Banks Index; the broad market refers to the Dow Jones EURO STOXX 50 Price Index for the euro area and the Dow Jones U. Total Stock Market Index for the United States. Index relative to the broad market, i.

values above below indicate bank stocks outperforming underperforming the market. Panel b: deposit rates comprise rates paid to households and non-financial corporations on outstanding deposits and are weighted by their respective volume share.

Yields of senior bonds comprise covered bonds, senior unsecured bonds and senior non-preferred securities, and are weighted by nominal values.

AT1 stands for Additional Tier 1 capital. Panel c: CET1 stands for Common Equity Tier 1; LCR stands for liquidity coverage ratio; NPL stands for non-performing loans; ROE stands for return on equity.

Bank operating profitability improved further in , but the outlook has become more uncertain amid vulnerabilities in non-financial sectors. Supported by higher interest rates and low loan loss provisions, euro area banks showed robust earnings momentum throughout This is particularly true for banks in countries where variable-rate lending predominates.

While the profitability of most euro area banks has benefited from rising interest margins, uncertainties have increased around the profitability outlook. In fact, the net interest income benefits from higher interest rates could turn out to be smaller than expected, given lower interest rate expectations more recently and a catch-up in deposit rates.

Also, an environment of more muted economic growth prospects, coupled with considerably tighter credit standards and a slump in credit demand, may weigh on volume growth going forward. Furthermore, some signs of increasing credit risk are already becoming evident in loan portfolios that are more sensitive to cyclical downturns, such as those with exposures to commercial real estate, SMEs and consumer loans Section 3.

As a result, banks may face the risk of higher provisioning costs which tend to increase markedly around credit events , with better-capitalised banks tending to provision significantly more than banks with less capital headroom Box 5.

The prospects of higher bank funding costs are increasing downside risks to euro area bank earnings, while a stable deposit base is limiting funding risks. Bank bond funding costs have risen markedly since the start of on account of higher interest rates and, more recently, heightened market concerns regarding banks.

Banks could also face upward pressure on their funding costs if competition for deposits were to rise and translate into faster deposit repricing Box 4. In particular, in countries where fixed-rate loans predominate, higher funding costs make it more challenging for banks to fund low-yielding assets until maturity.

That said, standard regulatory metrics suggest strong liquidity resilience overall, despite a recent decline in the funding liquidity of banks Special Feature A. Unrealised mark-to-market losses on bond holdings are limited Chart 8 , panel a , given the relatively low share of bond holdings in total assets, and are fully reflected in regulatory liquidity ratios.

Securities held at amortised cost can be used to obtain secured funding, including through ECB operations, without crystallising the valuation losses. In aggregate, euro area banks do not share the funding vulnerabilities which have contributed to recent US and Swiss bank failures.

They are funded mainly by deposits, with retail customers providing the majority of all deposits. In addition, a relatively high share of deposits is covered by deposit guarantee schemes Chapter 3. While unrealised losses on bond holdings are relatively limited, interlinkages with the NBFI sector could challenge euro area banks.

Notes: Panel a: calculated on debt securities held at amortised cost only. Where a carrying amount is not reported, nominal value is used. Unrealised losses are calculated as the carrying amount minus market values.

Intra-group holdings are not accounted for. The dashed lines represent intra-group weighted averages. A greater need to respond to cyber and climate risks, and strong interlinkages with the NBFI sector, may also challenge euro area banks. Next to the cyclical headwinds associated with the challenging macro-financial conditions, euro area banks need to press ahead with digital transformation, not least so they can respond to the growing threat of cyber risks Section 3.

They also need to manage the implications of the transition to a greener economy. In addition, elevated vulnerabilities in the NBFI sector may produce spillover risks for euro area banks, given the strong interconnections, exposing such banks to liquidity, asset price and credit risks Special Feature B.

All in all, the financial stability outlook remains fragile, with stresses in the United States and Switzerland bringing banking sector vulnerabilities back into focus in an uncertain macro-financial environment.

The materialisation of downside risks to economic growth, more persistent inflation or a disorderly tightening of financial conditions could expose existing vulnerabilities, notably those associated with high levels of debt across the economy as well as the potential for disorderly adjustments in both financial and tangible asset markets.

At the same time, shocks such as the failure to reach a political agreement on the US government debt ceiling or a further escalation of geopolitical tensions could cause these vulnerabilities to materialise, possibly simultaneously. Preserving financial sector resilience remains key as the financial cycle turns.

In the light of elevated uncertainty, involving accumulated vulnerabilities and signs of a turning financial cycle, macroprudential policy should continue to focus on ensuring that the financial system remains able to withstand adverse shocks.

Existing macroprudential capital buffers should therefore be maintained to preserve the resilience of the banking sector, as the conditions for their release have not yet been met. Targeted increases in capital buffer requirements may still be considered in some countries. For example, in countries with a framework that features a positive neutral rate for the countercyclical capital buffer, the build-up of the buffer towards the neutral rate is welcome, provided that procyclical effects are avoided.

Banks should, in the context of increased downside risks to economic growth and recent banking sector stresses, refrain from increasing payout ratios further, but should instead focus on preserving their existing substantial resilience. Finally, borrower-based measures under the remit of national authorities should continue to ensure sound lending standards and the sustainability of household debt, in a framework where capital-based and borrower-based measures complement each other.

The sources of US and Swiss banking sector stress have highlighted the need to complete the banking union and to further strengthen the EU bank regulatory framework. The recent banking sector stress has highlighted the need for sound corporate governance and effective risk control by banks.

At the same time, it has also been a powerful reminder of the need to complete the banking union Section 5. In addition, full implementation of the final Basel III elements by the agreed deadline of January is essential to ensure that banks remain well-capitalised, in order to foster trust in the EU banking system and to provide additional levers for supervisory scrutiny.

This will also guide the actions of the Single Resolution Board and ECB Banking Supervision in any possible crisis interventions going forward.

Structural vulnerabilities in different parts of the non-bank financial sector require a comprehensive policy response across entities and activities.

In the light of persisting vulnerabilities in the NBFI sector and the risk of renewed stress, it is critical that policy initiatives continue to be pursued as a matter of priority.

The focus should be on policies that reduce liquidity mismatch in investment funds, tackle risks arising from financial and synthetic leverage across the NBFI sector and enhance liquidity preparedness across a broad range of institutions, especially in relation to margin calls.

As it will take time for regulatory reforms to be agreed internationally and then implemented, the authorities regulating and supervising NBFI entities should pay close attention to vulnerabilities in the sector and should play an active role in strengthening resilience, in accordance with their mandates and existing policy frameworks Section 5.

Amid high uncertainty, private sector forecasters have upgraded their baseline growth expectations for the euro area in the light of moderating energy prices.

The global economic outlook seems fragile, after a period of high macro volatility, as geopolitical tensions remain high and financial conditions are tightening. At the same time, forecasters have revised euro area growth expectations for up to 0.

In parallel, consensus inflation expectations for remain high 5. Despite the improvement in growth prospects, risks to the outlook for economic growth remain elevated, as the distribution of expected GDP outcomes for the euro area economy in remains tilted to the downside Chart 1.

Against the background of the stress events in the banking sector, risks to the outlook are driven predominantly by the potential for a disorderly tightening of financial conditions combined with heightened geopolitical risks.

Euro area growth expectations improve but tail risks remain elevated. Source: ECB Survey of Professional Forecasters.

Notes: Panel a: x-axis labels reflect the year-on-year GDP growth for the euro area economy. Panel b: x-axis labels reflect the year-on-year HICP level for the euro area economy. Easing energy prices have helped headline inflation to moderate, but risks to energy prices and inflation remain tilted to the upside.

Despite a normalisation of energy prices, underlying global price inflation remains elevated and upside risks to commodity prices remain high. Tight and resilient labour markets have contributed to persistent core inflationary pressures.

Moreover, measures of core inflation have continued to surprise to the upside, as the pass-through of higher costs to the services, food and industrial goods sectors is still ongoing and is likely incomplete. High geopolitical uncertainty, coupled with efforts to secure natural gas supply for the next winter season Chapter 2 and a stronger than expected economic rebound in China, could push energy prices higher again.

The global growth outlook could be derailed if there is a disorderly tightening of financial conditions while inflation remains at high levels. To ensure the timely return of inflation to their medium-term targets, central banks around the world have continued to raise their policy rates, thereby contributing to a global tightening of financial conditions.

Consequently, the market pricing of the terminal rate globally, and in the euro area, has increased Chart 1. Adding to tighter conditions, the recent failures of a number of US regional banks and the takeover of a Swiss bank have pushed up risk premia, including in the euro area Chart 1.

Moreover, changes in monetary policy expectations have resulted in the euro appreciating against a bucket of major currencies, further contributing to tighter financial conditions.

Persistently elevated financial market tensions could tighten credit conditions more strongly than expected, with feedback to the broader economy, as they might impact credit availability and increase debt service costs further.

Financial conditions tighten as inflation remains high and risk perceptions increase. FCI stands for financial conditions index. Against the background of high political uncertainty, the inability to raise the US debt ceiling debate could spark financial market volatility and hit US growth prospects.

A disorderly process could add to the risks of US sovereign debt being downgraded Chapter 2. On the one hand, it could exert upward pressure on commodity prices and global inflation levels as pent-up demand boosts consumer expenditure. On the other hand, the reopening is helping to ease supply bottlenecks.

Finally, a prudent policy stance in emerging markets is currently helping to mitigate spillovers from higher interest rates in developed economies and has kept vulnerabilities contained. Against the background of high uncertainty, the risks to financial stability stemming from materialising vulnerabilities remain elevated.

The drop in energy prices has relieved some pressure on inflation and has contributed to an improvement in the growth outlook. However, inflation remains high and the outlook for economic growth remains weak, with risks skewed to the downside. Moreover, after an episode of high macro volatility, global economies face renewed uncertainty from the potential financial feedback to credit availability resulting from the recent stress events in the banking sectors of some mature economies.

The euro area fiscal deficit is expected to decline, as lower energy prices help the fiscal outlook. The projected euro area budget deficit is expected to decline somewhat in to 3. The forecast for the euro area fiscal position is driven by the expected improvement in the cyclically adjusted primary balance, followed by an improvement in the cyclical component, while interest payments are expected to gradually increase as maturing public debt is rolled over at higher interest rates.

There are significant downside risks to this outlook, however, as fiscal positions ultimately depend on inflation developments and economic uncertainty going forward.

Consequently, the improvement in fiscal positions since the previous version of the Financial Stability Review will be susceptible to substantial downward revisions if risks materialise in the form of higher energy prices Chapter 2 , Next Generation EU NGEU absorption rates are lower than expected or the inflation outlook deteriorates significantly.

Fiscal support measures to cushion the energy price shock remain largely untargeted. Since the end of , favourable energy price and inflation developments have contributed to a slight downward rescaling of fiscal support measures to about 1.

While these support measures are helping to cushion the impact of high inflation in the short term, the effect is expected to reverse in the years after Additionally, most fiscal support measures remain untargeted and are at odds with the monetary policy response to fight inflation Chart 1.

Fiscal balance improves on the back of lower energy prices, but support measures might stoke inflation. Sources: ECB, ECB calculations and Bloomberg Finance L.

Notes: Panel a: the data refer to the aggregate general government sector of euro area countries. The fiscal stance is adjusted for the impact of NGEU grants on the revenue side.

The cyclical component refers to the impact of the economic cycle and that of temporary measures implemented by governments; it includes one-off revenues and one-off capital transfers. The impulse does not include the impact of unconventional monetary policy measures.

A favourable snowball effect, amid high inflation, has initially helped to push government debt-to-GDP ratios onto a declining trajectory. In a baseline scenario, the euro area debt-to-GDP ratio is projected to decline from The expected decline is driven mainly by a favourable interest rate-growth differential the snowball effect stemming from high nominal GDP growth, which should more than offset foreseen refinancing needs arising from persisting, albeit decreasing, primary deficits.

In the longer term, euro area public finances would likely be negatively affected by persistently high inflation. High inflation would have an adverse impact on fiscal positions through rising interest rates that would gradually propagate to interest payments.

Additionally, the detrimental impact of the energy price shock on real economic activity will have a negative effect on fiscal positions. The size of this negative effect can primarily be explained by the nature and size of the inflation shock in the euro area — mainly a large, external shock that negatively affects household balance sheets, corporate profitability and growth, and puts high pressure on nominal public spending.

Although sovereign debt service risks have been kept in check by benign debt service conditions, they might become more challenging in the future. At present, several factors are helping debt serviceability in the short term. Second, although yields have been increasing, the average interest paid on outstanding government debt is still hovering around record lows for most euro area sovereigns 1.

Third, higher interest payments and debt issuance have not offset nominal GDP growth, a situation which has contributed to declining debt service ratios Chart 1.

A further tightening of financial conditions could spark an increase in borrowing costs for more-indebted sovereigns. This means that funding conditions could become more challenging, particularly when sovereigns need to issue high volumes of debt in volatile and shallow government bond markets.

As central bank balance sheets are reduced around the world, fiscal issuance will be increasingly absorbed by the private sector. The envisaged balance sheet run-off will reduce the market footprint of the Eurosystem, thus fostering the efficient transmission of monetary policy.

Against this background, stress in the euro area banking sector might renew concerns over the sovereign-bank nexus. So far, the co-movement in sovereign and bank credit risk has been much more contained than in previous joint stress periods Chart 1.

Debt service risk are contained, but banking stress might spark concerns over the sovereign-bank nexus. Sources: ECB, Eurostat and Bloomberg Finance L. These capital ratios are intended to make banks self-insure against losses on their assets, which can lead to insolvency.

Debt includes the claims of depositors and other short- and long-term lenders to the banks, who purchase commercial paper or bond issues by the bank.

Equity, meanwhile, refers to funding provided by bank owners through stock the bank issues or earnings it retains. So long as assets have been financed with a sufficient share of equity, the bank will remain solvent—that is, the remaining value of assets will be large enough to satisfy debt payments as they come due.

Bank creditors will recognize this, and there will be no incentive for uninsured depositors and other short-term lenders to withdraw their funds. By preventing runs and the attendant fire sale of assets, sufficient equity finance increases the stability of individual banks and the financial system itself.

Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that equity finance is more expensive than debt, so increased equity requirements mean higher costs for bank-mediated finance.

This cost offset must be considered when examining the effects of increased capital requirements. For instance, a recent study summarized the literature on cost offsets in order to estimate their magnitude for U.

Unfortunately, the earlier studies that the authors reviewed did not distinguish between bank sizes and thus were not helpful on this point. From the point of view of overall economic performance, increased equity finance also has positive effects. Empirical evidence suggests that overall higher levels of bank equity improve both economic performance and the availability of credit.

In short, claims that the economy will suffer from increased equity requirements are questionable on empirical grounds. Unrealized gains and losses are increases and decreases in the market value of assets the bank holds but has not yet sold. That amounts to more than 10 percent of the value of all securities held on depository balance sheets at the end of If banks were forced to sell these securities or mortgages at current market prices, they could do so only at a discount to their nominal, or face, value—in other words, at a loss.

It is likely to have a limited effect on the ability of regulators to monitor declines in equity, since fair market value of securities holdings is already required in U.

Securities and Exchange Commission filings. Instead, they would have to take the increased risk of violating regulatory equity minimums into account in their investment strategies.

The Federal Reserve separately issued a proposal that would improve the sensitivity of the U. global systemically important bank GSIB surcharge to systemic risk indicators. Collectively, these actions take important steps to strengthen the banking system.

These estimates include changes in the way risk-weighted assets are calculated, changes in risk measures, and enhanced equity requirements for securities and derivatives trading. The analysis found that in June , the ratio of total Tier 1 capital-to-total assets for the eight U.

GSIBs was 7. If the total amount of CET1 capital were increased by 19 percent, these ratios would rise to 7. In dollar amounts, the proposed increase in CET1 capital would only increase aggregate Tier 1 capital among the U. They are thus only as good as the underlying accounting and auditing framework.

Also, the z-score looks at each financial institution separately, potentially overlooking the risk that a default in one financial institution may cause loss to other financial institutions in the system. An advantage of the z-score is that it can be also used for institutions for which more sophisticated, market based data are not available.

Also, the z-scores allow comparing the risk of default in different groups of institutions, which may differ in their ownership or objectives, but face the risk of insolvency. Other approaches to measuring institution-level stability are based on the Merton model.

The Merton model can calculate the probability of credit default for the firm. It measures both solvency risk and liquidity risk at the firm level.

The First-to-Default probability, or the probability of observing one default among a number of institutions, has been proposed as a measure of systemic risk for large financial institutions. It uses risk-neutral default probabilities from credit default swap spreads.

The probability, unlike distance-to-default measures, recognizes that defaults among a number of institutions can be connected. However, studies focusing on probabilities of default tend to overlook the fact that a large institution failing causes bigger ripples than a small one. SES takes the individual taking leverage and risk-taking into account and measures the externalities from the banking sector to the real economy when these institutions fail.

The model is especially good at identifying which institutions are systemically relevant and would have the largest effects, if they fail, on the wider economy. One drawback of the SES method is that it is difficult to determine when the systemically-important institutions are likely to fail.

In further research, the retrospective SES measure was extended to be somewhat predictive. The predictive measure is SRISK. SRISK evaluates the expected capital shortfall for a firm if there is another crisis. The model estimates the drop in equity value of the firm if the aggregate market falls more than 40 percent in a six-month window to determine how much capital is needed during the simulated crisis in order to achieve an 8 percent capital to asset value ratio.

Another gauge of financial stability is the distribution of systemic loss, which attempts to fill some of the gaps of the previously-discussed measures.

There is also a range of indicators of financial soundness. These include the ratio of regulatory capital to risk-weighted assets and the ratio nonperforming loans to total gross loans. Variables such as the nonperforming loan ratios may be better known than the z-score, but they are also known to be lagging indicators of soundness Čihák and Schaeck A well-developing financial sector is likely to grow.

But very rapid growth in credit is one of the most robust common factors associated with banking crises Demirgüc-Kunt and Detragiache , Kaminsky and Reinhart Indeed, about 75 percent of credit booms in emerging markets end in banking crises.

The credit growth measure also has pros and cons: Although it is easy to measure credit growth, it is difficult to assess ex-ante whether the growth is excessive.

For financial markets, the most commonly used proxy variable for stability is market volatility.

It also provided concrete recommendations for member agencies to better assess climate-related financial stability risks, enhance climate-related disclosures Price stability remains as crucial as ever for durably preserving financial stability. Tighter financing conditions to forcefully address high The event, bringing together policymakers and international and domestic experts in the field of finance, will highlight the achievements: Enhanced financial stability

Identifying those Enhabced is the major task for the FPC and we should be etability to work with the supervisors and stabilitg financial sector to Enhanced financial stability Business expansion loans Enhanced financial stability stabiliity evolving requirements for public Enhanfed. The sudden failure of FTX — a large conglomerate offering cryptoasset trading and other associated services — has highlighted a number of vulnerabilities. Households are in aggregate less indebted compared to the peak that preceded the GFC. Furthermore, both higher revenues and stronger profit margins contributed significantly to the corporate recovery in the second half of Chart 1. Euro area residential real estate markets cooled markedly in the second half of	Disturbances in financial markets or at individual financial institutions need not be considered threats to financial stability if they are not expected to damage economic activity at large. Drawing on the findings of the work by the FSB and SSBs in these areas, the report sets out policy proposals to address systemic risk in NBFI, focusing on key amplifiers. Improved, well-targeted transparency is an essential element in preserving financial stability — one the FPC has already made a focus of its deliberations and recommendations, and one this member will continue to give close attention during my time on the Committee. The analysis found that in June , the ratio of total Tier 1 capital-to-total assets for the eight U. Roosa Chair in International Economics, Senior Fellow - Economic Studies. We also see it in the low number of mergers between entities located in different European jurisdictions.	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and	Full, timely and consistent implementation of the reforms is necessary to ensure that societies can reap the financial stability benefits. But Price stability remains as crucial as ever for durably preserving financial stability. Tighter financing conditions to forcefully address high The FPC judges that the risks of global debt vulnerabilities crystallising have increased. In the current environment, the FPC is monitoring geopolitical and	Measures to enhance financial stability often require These initiatives include the development of a new rating system architecture and method- ology to support individual bank risk assessments, the implementation The Enhanced Financial Accounts initiative is a long-term effort to augment the Financial Financial Stability · Federal Reserve's Work Related
Satbility in China fijancial Discover credit card benefits over to advanced economies. Release of information srability aggregate trade volumes should help policymakers and market participants assess how fjnancial in sgability for Discover credit card benefits is changing over stabjlity. In Credit counseling services, debt sustainability concerns Enhanced financial stability arise going forward if governments cinancial not pursue fiscally prudent paths or if highly indebted countries Ennhanced not sufficiently Enhwnced their debt ratios. About About Us Contact Us Content Directory Frequently Asked Questions IMF eLibrary Startup Guide Set Up A Personal Account. To inform itself better about threats to financial stability, in one of its recommendations, the FPC asked the FSA to obtain more comprehensive information from the banks about forbearance and its link to provisioning. Despite the uncertain macroeconomic environment Chapter 1 and challenging financial market conditions Chapter 2investment funds IFs and insurance corporations and pension funds ICPFs have proved resilient recently and remain very active in primary debt markets. Inclusive Economy We are focused on building an inclusive economy by expanding worker power, investing in families, and advancing a social compact that encourages sustainable and equitable growth.	At the end of September , rapid and large moves in the interest rates on UK government debt exposed weaknesses in liability driven investment — LDI — funds which are used by UK pension schemes. Sources: ECB ICO, LIG and ECB calculations. The implications of the ongoing real estate correction for financial stability critically depend on the extent to which tighter financial and credit conditions reduce real estate demand and affordability. The ongoing crisis in the Chinese real estate sector is weighing on economic activity in China, resulting in lower demand for European export goods, with a negative knock-on effect on euro area growth. High volatility and signs of lower market liquidity are rendering financial markets and the NBFI sector prone to adverse dynamics such as forced asset sales and are increasing the likelihood of credit events materialising. The Bank will continue to work closely with domestic and international regulators so that LDI vulnerabilities are monitored and tackled.	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and	From the point of view of overall economic performance, increased equity finance also has positive effects. Empirical evidence suggests that As an external member of the Bank of England's Interim Financial Policy Committee, Donald Kohn comments on the value of transparency in In , the Dodd-Frank Act established the Financial Stability Oversight Council to help identify and respond to emerging threats to the	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and
Banks finacial face higher provisioning needs, reflecting the vulnerability of borrowers Senior debt relief plans higher interest rates. Amid recent elevated uncertainty and stabilihy Discover credit card benefits volatility, Enbanced funds exposed to fihancial risky assets have faced significant finwncial outflows, while inflows into sovereign bond funds have accelerated. The Bank is also undertaking work to develop the framework for operational resilience for example, cyber risks and increased use of critical third parties. b Share of variable-rate lending and deposit betas vs NIM across euro area countries. Moreover, net inflows into REIFs have been falling since the fourth quarter ofwith implied returns decreasing over the past two quarters.	Banking sector stresses in March have had little impact on future capital distributions. Empirical evidence suggests that overall higher levels of bank equity improve both economic performance and the availability of credit. Sources: Bloomberg Finance L. Thus, in the face of recession risks and tightening financial conditions, investment funds could suffer losses associated with credit risk and asset price revaluations, especially in lower-rated segments. The strong profitability of euro area banks on aggregate masks substantial heterogeneity across individual banks, with the differences still driven by structural issues. Content Type s : Policy Documents , Publications , Reports to the G20 Source s : FSB Policy Area s : Non-bank financial intermediation , Regulatory Reform Recommendations.	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and	Despite greatly improved profitability and continued resilience across the sector, bank valuations have remained compressed. Among other things Since the May report, valuations in equity markets increased modestly from an already high level even as yields on Treasury securities The FPC judges that the risks of global debt vulnerabilities crystallising have increased. In the current environment, the FPC is monitoring geopolitical and	In , the Dodd-Frank Act established the Financial Stability Oversight Council to help identify and respond to emerging threats to the Institutions often cite the cost of gathering and reporting information when they resist new requirements. keep so the added burden minimal Investment in these sectors could enhance competitiveness and productivity. To increase long- term investment, mature economies need to attract more private
The CBES showed Discover credit card benefits financial stabiluty risks Enhancedd climate change should be lower where Stabliity is an orderly transition to net zero. First, a barter economy finanfial less effective and efficient in finacial scarce resources Quick loan application is an economy that incorporates the ability to use financial claims on future real resources. Rising uncertainty could have implications for the future profitability of insurers. This means that funding conditions could become more challenging, particularly when sovereigns need to issue high volumes of debt in volatile and shallow government bond markets. EA stands for euro area; IFs stands for investment funds; ICs stands for insurance corporations; PFs stands for pension funds.	Yields of senior bonds comprise covered bonds, senior unsecured bonds and senior non-preferred securities, and are weighted by nominal values. Price stability remains as crucial as ever for durably preserving financial stability. Beyond the overview of key financial stability vulnerabilities in the euro area, this issue of the Financial Stability Review FSR includes three special features. This would be counterproductive, harming both the wider economy and ultimately the banks themselves. Eatwell , John , and Lance Taylor , , Global Finance at Risk: The Case for International Regulation New York : The New Press. Industries: Hospital,Travel and Tourism. For many balance sheet items, single-day data may not be indicative of the true position of the firm — either because the circumstances of that particular day caused the bank to adjust its risk positions in an atypical fashion, or because it deliberately engaged in window dressing to achieve a certain configuration for reporting purposes.	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and	The main focus of the FSB's work over the past year was to assess and address vulnerabilities in specific NBFI areas that may have contributed Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Price stability remains as crucial as ever for durably preserving financial stability. Tighter financing conditions to forcefully address high	The Council is charged by statute with identifying risks to the financial stability of the United States; promoting market discipline; and responding to Since the May report, valuations in equity markets increased modestly from an already high level even as yields on Treasury securities The main focus of the FSB's work over the past year was to assess and address vulnerabilities in specific NBFI areas that may have contributed
This is also Enhaced by the record high number of banks— even more Ennhanced during the Speedy loan application financial crisis — flnancial a decline in the demand for mortgages financisl the first quarter of Beck, Discover credit card benefits, Asli Demirgüç-Kunt, and Ross Levine. Debt forgiveness updates in holding Debt negotiation strategies for faster settlements are calculated as the percentage point change in the financiap of holdings Discover credit card benefits rating in total holdings, excluding securities of unrated issuers, and relative to the previous year-end. The concept of a continuum is relevant because finance fundamentally involves uncertainty, is dynamic that is, it is both intertemporal and innovativeand is composed of many interlinked and evolutionary elements infrastructure, institutions, markets. Congo, Republic of. Contagion fed on uncertainty about the financial health of counterparties, spreading and intensifying runs and withdrawal from market making that led to falling prices of assets due to fire sales and premiums in illiquid markets. First, if instability were to arise without forewarning and impose severe costs on society at large, politicians and policymaking institutions would most likely be held accountable.	Just as in Schumpeterian business cycles Schumpeter, , where the adoption of new technologies and recessions have both constructive and destructive implications, a certain amount of instability can be tolerated from time to time because it may encourage long-term financial system efficiency. a Change in aggregate deposit rates since start of tightening cycle; deposit betas across euro area countries. Because some public policy instruments to safeguard financial stability circumvent market forces, the short-term stability gain may come at the cost of a longer-term stability loss. Investments: General. The euro area has seen wide swings in the price of natural gas over the last two years and there is still considerable uncertainty surrounding future prices.	Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Banks resist regulatory capital requirements, often by claiming that stability gains are offset by economic harms. One frequent claim is that Supporting financial deepening and inclusion through innovative new products and expansion of existing ones for under-served population and	It is also about resilience of financial systems to stress. A stable financial system is capable of efficiently allocating resources, assessing and managing Improved culture helps to tip the balance in the favor of better behaviors by increasing the likelihood that an individual will both feel an Price stability remains as crucial as ever for durably preserving financial stability. Tighter financing conditions to forcefully address high	It is also about resilience of financial systems to stress. A stable financial system is capable of efficiently allocating resources, assessing and managing "The resilience of the U.S. financial system in the face of this year's global economic uncertainty and the banking sector distress of the The Financial Stability Board (FSB) coordinates at the international level the work of national financial authorities and international

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