Eurozone financial stability outlook remains fragile: ECB

Photo taken on July 7, 2022 shows the headquarter of the European Central Bank in Frankfurt, Germany. (Xinhua/Shan Weiyi)

The European Central Bank noted that events like the U.S. banking crisis "could lead to a reassessment of the profitability and liquidity outlooks for eurozone banks" as interest rates are inching higher.

FRANKFURT, May 31 (Xinhua) -- The combination of more restrictive monetary policy and sticky inflation will continue to weigh on financial stability in the zone, the European Central Bank (ECB) said in a report published here on Wednesday.

The Financial Stability Review, which the bank releases twice a year, showed that financial markets "remain vulnerable to less favorable growth and inflation outcomes."

According to the report, banks in the eurozone, whose fundamentals are "solid," turned out to be resilient in the wake of the banking sector crisis in the United States. However, the ECB noted that events like the U.S. banking crisis "could lead to a reassessment of the profitability and liquidity outlooks for eurozone banks" as interest rates are inching higher.

The report also warned of a higher potential for "disorderly adjustments in financial markets" while borrowing costs are soaring.

People wait outside a department store on the first day of winter sales in Paris, France, Jan. 11, 2023. (Xinhua/Gao Jing)

Business prospects of firms in the eurozone are overshadowed by rising costs. The number of bankruptcies in most large eurozone economies has remained low but is starting to pick up. "Corporate vulnerabilities might be higher than the aggregate suggests," the report said.

Tighter financial conditions have driven down the pace of the annual growth of lending to households, which decelerated to 2.8 percent in March.

The average interest rate on loans for house purchases in the eurozone rose sharply to 3.4 percent in March. As higher interest rates reduce mortgage affordability, residential real estate markets in some eurozone countries cooled markedly in the second half of 2022 and the trend will continue in 2023.

"Both mortgage loan origination and house prices have slowed significantly amid higher interest rates," the ECB said.

Customers shop at a store in Berlin, Germany, Jan. 13, 2023. (Xinhua/Ren Pengfei)