Just a few weeks ago, before tensions in financial markets emerged on both sides of the Atlantic, the overall improvement in the outlook for growth and inflation was supporting overly benign macro-financial expectations on the part of banks and financial market participants.
Despite rising funding costs, bank profitability has improved, driven by significantly higher net interest income while impairments and provisions have been muted so far. Overall, from a system-wide perspective, euro area banks are moderately exposed to interest rate risk. Most are actually positioned to initially benefit from increasing interest rates, which boost net interest margins.