To this end, the recovery instrument needs to be used to finance transformative and productivity-enhancing investment and promote ambitious structural policies. Euro area banking sector developments and financial stability issues Thanks to the strength of the public support measures, insolvencies have remained remarkably low during this period of economic weakness caused by the pandemic, notwithstanding a widespread deterioration in corporate balance sheets.
At the same time, the banking sector has managed to support the economy by continuing to lend, also to the sectors most affected by the lockdown measures. Euro area banks still have robust capital and liquidity buffers, but they are facing heightened asset quality risks and their profitability remains low.