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CONTENTS<br />
Foreword5<br />
Overview7<br />
1 Macro-Financial and credit Environment 15<br />
1.1 Ongoing economic recovery, but downside risks remain 15<br />
Box 1 Financial stability challenges posed by very low rates of consumer<br />
price inflation 18<br />
Box 2 Global corporate bond issuance and quantitative easing 20<br />
Box 3 Financial stability implications of the crisis in Ukraine 25<br />
1.2 A further marked fall in sovereign stress amid continued adjustment of underlying<br />
vulnerabilities 29<br />
1.3 Improved earnings outlook to support ongoing balance sheet adjustment<br />
in the non-financial private sector 33<br />
2 Financial markets 43<br />
2.1 Risk premia and fragmentation in euro area money markets decline as the investor<br />
base expands 43<br />
2.2 Further compression of risk premia as search for yield persists within<br />
advanced markets 46<br />
Box 4 Co-movements in euro area bond market indices 50<br />
Box 5 Distinguishing risk aversion from uncertainty 55<br />
3 Euro area Financial Institutions 61<br />
3.1 Balance sheet repair continues in the euro area banking sector 61<br />
Box 6 Provisioning and expected loss at European banks 64<br />
Box 7 Recent balance sheet strengthening by euro area banks 68<br />
Box 8 To what extent has banks’ reduction in assets been a de-risking<br />
of balance sheets? 70<br />
Box 9 Developments in markets for contingent capital instruments 80<br />
3.2 The euro area insurance sector: still robust but faced with multiple challenges 84<br />
3.3 A quantitative assessment of the impact of selected macro-financial shocks<br />
on financial institutions 90<br />
3.4 Reshaping the regulatory and supervisory framework for financial institutions,<br />
markets and infrastructures 100<br />
Box 10 Forthcoming implementation of the bail-in tool 105<br />
Box 11 Revival of “qualifying” securitisation, main hurdles and regulatory framework 110<br />
SPECIAL FEATURES 113<br />
A Recent experience of European countries with macro-prudential policy 113<br />
B Identifying excessive credit growth and leverage 127<br />
C Micro- versus macro-prudential supervision: potential differences, tensions<br />
and complementarities 135<br />
D Risks from euro area banks’ emerging market exposures 141<br />
STATISTICAL ANNEX<br />
S1<br />
ECB<br />
Financial Stability Review<br />
May 2014<br />
3
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