![]() The resilience of euro area banks is largely attributable to the strength of their capital and liquidity buffers, under stringent regulatory and supervisory oversight. This is especially true for banks, which operate at the core of the system. Recent stresses in the US and Swiss banking sectors have served as a timely reminder of just how much the preservation of financial stability depends on the shock-absorption capacity of the financial system. In all of these challenges, the resilience of euro area banks has been noteworthy, but should not give way to complacency. Such turning is becoming increasingly evident in the real estate sector – in both commercial property markets, where a clear downturn is visible, and their residential counterparts, which are showing signs of correction after several years of expansion. Non-bank financial intermediaries remain heavily exposed to a turning financial cycle, despite ongoing de-risking. As financial conditions normalise, this may expose fragilities and fault lines in the financial system. Tighter financing conditions to forcefully address high inflation have contributed to a reappraisal of the economic outlook and to a reversal of overly-compressed asset price risk premia. Price stability remains as crucial as ever for durably preserving financial stability. While the fallout experienced by euro area banks was limited, these events have served as a powerful reminder of the importance of ensuring that banking system fundamentals are sound, in an environment where financial conditions are being tightened to tackle elevated inflation around the world. This spring saw considerable financial turbulence, with the spotlight increasingly turning on systemic risk concerns following a series of bank failures outside the euro area.
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