By Pilar Castrillo, Martin Iseringhausen, Rolf Strauch
Over the coming years, the current tightening of financial conditions could diminish the financial vulnerabilities coming from high asset prices that built up during the period of low interest rates. But there are short-term risks, as recently seen when some banks outside the euro area fell upon troubled times, triggering financial market turmoil that also impacted the euro area.
In this blog, we use a so-called “growth-at-risk” analysis to study the evolution of financial conditions and vulnerabilities in the euro area and compare the severity of risks across three different points in time. We found that while short-term risks to the economy remain high, the ongoing correction of asset prices should reduce vulnerabilities in the medium term. With its more robust institutional architecture of today, the euro area is better equipped to cope with short-term risks than in the past. Still, further progress in improving the resilience of its financial sector is needed.
Link: Financial stability and risks to growth in the euro area: where do we stand?