Comparing the current assessment with that presented in the December 2006 FSR, the main scenario for euro area financial stability remains broadly favourable:  BIS Review 69/2007  5  •  The current macroeconomic environment is benign and global and euro area economic activity it is expected to remain robust;  •  In February and March 2007, the resilience of the financial system was tested by the third significant burst of market volatility in two years, which it comfortably weathered;  •  Euro area credit quality, overall, remains high and should be underpinned by a favourable economic outlook;  •  Pockets of vulnerability in the euro area household and corporate sectors have most likely increased, but, on average, financial positions remain sound;  •  The profitability of euro area financial institutions further improved and solvency is comfortable relative to regulatory requirements.
For some LCBGs with sizeable capital market operations, the share of trading income accounted for nearly half of net operating income in 2006 and corresponded to more than 45% of their Tier 1 capital, as shown in the chart on the right of slide 10. Special Feature article A looks at the relationship between bank income diversity and systemic risk. It finds that a measure of systemic risk is positively correlated with bank size and the share of trading income, while it is negatively correlated with revenues from (traditional) interest income sources. 4  BIS Review 69/2007  Euro area insurance sector In the euro area insurance sector, there was a broad-based improvement in profitability in 2006 (see the chart on the left of slide 11). The positive assessment is further supported by the fact that the profitability of the weaker performers in 2005 also improved in 2006. Underlying this improvement was a strengthening of investment income, mainly owing to buoyant stock markets and higher interest rates. Moreover, favourable developments in the financial conditions of primary insurers and reinsurers in 2006, together with a greater focus on risk management and risk-adjusted prices, support a positive outlook for the euro area insurance sector as a whole. These positive developments continued to be priced into expected default frequencies (as shown in the chart on the right of slide 11). However, risks and challenges for the sector remain, as greater financial market risks could pose a challenge to the life insurance and non-life insurance sectors. 5.