- Though policy responses in Europe have kept the region's financial system from seizing up, the COVID-19's impact on the economy and markets has brought forward new and increased existing vulnerabilities for euro area stability, the European Central Bank said in its May 2020 Financial Stability Review.
- Financial stability risks include richly valued asset prices, fragile investment funds, the sustainability of sovereign and corporate debt, and weak bank profitability.
- "Repercussions of the pandemic on bank profitability prospects and medium-term public finances will need to be addressed so that our financial system can continue to support the economic recovery," said ECB Vice President Luis de Guindos.
- Fiscal measures taken should support economic recovery as they help corporates that are facing cash-flow strains.
- But the fiscal actions come with a cost. Increased public debt levels "could trigger a reassessment of sovereign risk by market participants and reignite pressures on more vulnerable sovereigns," the ECB said.
- As for banks, the ECB sees significantly lower return on equity than before the pandemic.
- Continues to recommend that banks don't pay dividends or buy back stocks until the economic recovery is well established.
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