The European Union's banking sector is still vulnerable to risks and is recovering from the financial crisis in a slow and uneven fashion, the European Central Bank said today.
In its banking sector stability report, the ECB also said the continued reliance of some parts of the banking sector on ECB refinancing was a concern while there was a risk of renewed negative spillover from sovereign debt problems and the financial system.
"Risks to banking sector stability remain," the ECB said. "In particular, the risks increased in the early months of 2010 with a progressive intensification of market concerns about sovereign credit risk in some euro area countries."
The sovereign debt crisis has highlighted the interdependence of countries' creditworthiness, and banking sector and economic performance, increasing the chance of recurring problems.
The ECB also highlighted the problem of some banks continuing to rely on its funds. "The continued reliance of some banks on central bank refinancing facilities remains a source of concern," it said.
Risks to household income remain significant as unemployment is expected to remain high in many EU countries. "The outlook for household sector credit risk remains challenging," the central bank said.
Corporate sector risks have declined during the last 12 months, but remain substantial due to an expected rise in insolvencies and tight credit conditions, especially for small and medium-sized firms.
But in the end, the stability of the whole system is not threatened even if the economy underperforms expectations.
"The results of the EU-wide stress test suggest that most EU banks have sufficient loss absorption capacity even under a severe adverse scenario," the ECB said, referring to stress tests published in July.
The report, which was finalised before the agreement on the Basel III banking regulation framework, reviewed the entire EU banking sector in 2009 and for large EU banks the coverage was extended to the first half of this year.
It said the earnings of large banks continued to recover in early 2010.
Reuters