ECB Financial Stability Review: Challenges to financial stability increase amid downside risks to the economic outlook

Materialisation of downside risks to economic growth could spark greater financial market volatility

Persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments

Bank profitability prospects subdued given slow progress in addressing structural issues

Uncertainty about global economic growth prospects has contributed to bouts of high volatility in financial markets.

Weaker than expected growth and a possible escalation of trade tensions could trigger further falls in asset prices

Repricing risks appear particularly high in riskier segments of the corporate sector.

The global leveraged loan sector, which has grown significantly in recent years, is susceptible to weaker corporate earnings.

Should downside risks to growth materialise, financing costs for vulnerable sovereigns are likely to increase which may unearth debt sustainability concerns.

Bank profitability is expected to remain low in the euro area. ECB estimates point to an aggregate return on equity of around 6% over the next 2-3 years.

A large share of euro area banks will not be able to meet the expected returns required by investors (of around 8-10%).