While the fallout experienced by euro area banks was limited, these events 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. All the more so in an environment where financing conditions are being tightened to tackle elevated inflation around the world.
Framed by these recent developments, our current assessment is that financial stability vulnerabilities in the euro area remain elevated. Tighter financing conditions to address high inflation have contributed to a reappraisal of the economic outlook alongside an orderly reversal of overly compressed asset price risk premia.