PRESS RELEASE "Considering the financial stability outlook, although the profile of ECB estimates of the potential write-downs on loans confronting the euro area banking system displays a peak in 2010, it is probable that loan losses will remain considerable in 2011 as well. . . . The main risks for the euro area financial system include the possibility of: concerns about the sustainability of public finances persisting or even increasing with an associated crowding-out of private investment; and adverse feedback between the financial sector and public finances continuing. Other, albeit less material, risks identified outside the euro area financial system include the possibility of: vulnerabilities being revealed in euro area non-financial corporationsâ balance sheets, because of high leverage, low profitability and tight financing conditions; and greater-than-expected euro area household sector credit losses if unemployment rises by more than expected. Within the euro area financial system, important risks include the possibility of: a setback to the recent recovery of the profitability of large and complex banking groups and of adverse feedback with the provision of credit to the economy; vulnerabilities of financial institutions associated with concentrations of lending exposures to commercial property markets and to central and eastern European countries; and heightened financial market volatility if macroeconomic outcomes fail to live up to expectations. A key concern is that many of the vulnerabilities highlighted in this FSR could be unearthed by a scenario involving weaker-than-expected economic growth. The measures taken by the ECB to stabilise markets and restore their functioning as well as the establishment of the European Financial Stabilisation Mechanism have considerably lowered tail and contagion risks. However, sizeable fiscal imbalances remain, and the responsibility rests on governments to frontload and accelerate fiscal consolidation so as to ensure the sustainability of public finances, not least to avoid the risk of a crowding-out of private investment while establishing conditions conducive to durable economic growth. With pressure on governments to consolidate their balance sheets, disengagement from financial sector intervention means that banks will need to be especially mindful of the risks that lie ahead. In particular, they should ensure that they have adequate capital and liquidity buffers in place to cushion the risks should they materialise. Against this background, the problems of those financial institutions that remain overly reliant on enhanced credit measures and government support will have to be tackled decisively. At the same time, fundamental restructuring will be needed when long-term viability is likely to be threatened by the taking away of state support. This could involve the shrinking of balance sheets through the shedding of unviable businesses with a view to enhancing profit-generating capacities." http://www.ecb.int/press/pr/date/2010/html/pr100531.en.html download full report 4.91mb pdf: http://www.ecb.int/pub/fsr/html/index.en.html