Euro area bank fundamentals are solid, thanks to the strength of banks' capital and liquidity buffers under stringent regulation and supervision. At the same time, continued improvements in asset quality and profitability are contributing to bank resilience. But there is no room for complacency. Bank liquidity challenges could yet intensify.
Rolling over maturing bonds is pushing up banks' market funding costs, while competition for deposits is likely to rise and translate into faster deposit repricing. Haircut and margining risk has also increased due to higher volatility in government bond markets. Muted economic growth and signs of weakening credit quality pose downside risks to bank earnings.