This could bring about further tensions in global capital markets and, if this risk were to materialise, it could pose a challenging test for the risk management and loss-absorption capacities of key financial institutions. All in all, the risks to euro area financial system stability have materially increased over the past 6 months.
There are, however, several mitigating factors: The economic outlook remains broadly favourable and, although pockets of vulnerability can be identified, the balance sheets of households and firms are largely in good shape,  BIS Review 148/2007  7  supporting the overall creditworthiness of the non-financial sector. Moreover, the capital positions of core financial firms are also generally sound.