The ECB just published its Financial Stability Review, a great source of information about the European financial system. The beginning of financial instability is well documented, but of course it’s a process that is ongoing and will intensify ecb.europa.eu/pub/pdf/fsr/ec… 1/n
Four key vulnerabilities..i) tighter financial conditions and fragile functioning in some markets; ii) a significant increase in debt burdens..;(iii) weaker bank intermediation capacity and profitability; (iv) amplification of market dynamics by the non-bank financial sector 2/n
Sizable drops in assets valuations with the banks particularly under market pressure despite much stronger capital and liquidity positions than in 2008. Average Price to Book value slightly above 0.3 and expected ROE at 2.4%. Difficult to raise capital. 3/n 
International comparisons of Price-to-Book values not flattering for European. In most countries, crisis related potential losses and the prohibition of dividend distribution led to declines of stock prices above the market as a whole. 4/n.
A recession close to -10% GDP implies capital losses. A second wave of the virus would worsen the situation that could again require the later use of public capital and the possible suspension of BRRD like the SGP had to be suspended 5/n
There won’t be EBA stress tests, but the ECB has good analytical tools to make internal top-down stress tests to assess the risks. See, e.g. the docs: ecb.europa.eu/pub/pdf/scpops… and “ Macroprudential stress test of the euro area banking system” ecb.europa.eu/pub/pdf/scpops… 6/n
Another recent ECB wp on “Cyclical systemic risk and downside risks to bank profitability” uses the properties of the Systemic Risk Indicator(created in 2018) to anticipate, years in advance, banking vulnerabilities and to calculate “capital at risk”. ecb.europa.eu/pub/pdf/scpwps… 7/n
“Widespread cash-flow challenges put the corporate sector under stress” . Credit spreads increased as well as rating downgrades . The high-yielders may face defaults down the road 8/n
The low liquidity buffers and the loss of revenues by non-financial firms may imply significant NPLs and losses for banks. See chart for estimates that exclude the activation of Governments loan guarantees which will come to impact this and next year budgets. 9/n.
“Forced asset sales by non-banks amplified market dynamics” “.. funds investing in illiquid assets experienced outflows in excess of liquidity buffers..“.a substantial share of euro area funds with derivative exposures faced a liquidity squeeze from the high margin calls” 10/n
The ECB measures contributed to mitigate the effects of the crisis by improving financial market conditions, alleviating liquidity strains and supporting credit supply. The European fiscal policy just stepped-up, but there is much more work ahead to overcome the crisis 11/11
