Financial stability vulnerabilities have eased but the outlook remains fragile, ECB finds

Financial stability in the euro area has benefited from an improving economic outlook, with inflation steadily declining and investor confidence recovering, according to the May 2024 Financial Stability Review, which was published today by the European Central Bank. The outlook remains fragile, however, as the scope for economic and financial shocks is high in an environment of elevated geopolitical and global policy uncertainty.

“Geopolitical risks continue to cloud the outlook for financial stability,” said ECB Vice-President Luis de Guindos. “While financial stability conditions have improved in line with reduced recession risks and lower inflation, it remains crucial that we build further on the resilience of the financial system in the light of global economic and geopolitical uncertainty.”

Financial markets remain vulnerable to further adverse shocks. While expectations of monetary policy easing have boosted optimism in investors’ risk assessments, sentiment could change rapidly. For example, acute geopolitical stress could spark volatility, creating the potential for outsized market reactions that could be amplified by non-banks with structural liquidity fragilities.