Efforts are being made both by the financial industry and the policy-making community to address the most important micro issues, including the lack of transparency, product complexity and inappropriate incentives in the  4  BIS Review 75/2010  originate-to-distribute model. However, in recent months there have been some, albeit nascent, signs of improvement in securitisation activity, in part supported by a narrowing of spreads on securitised products (i.e. yield on securitised products over Libor). The narrowing spreads, which reflects the compensation investors are demanding for holding these assets, could bring prices closer to levels where issuance of ABS securities makes economic sense. This has been indicated in the responses to ECB bank lending surveys and in lower retention rates by banks for newly-issued ABS. While it is difficult to disentangle the relative contribution of micro and macro factors to the improvement, it seems clear that the improved economic outlook has played an important role. IV. Overall assessment  Let me now conclude with the overall assessment of the identified risks to euro area financial system stability (slide 15). Although the main risks to euro area financial stability essentially remain the same as those to which attention was drawn in the last issue of the FSR, their relative importance has changed significantly over the past six months.
Given the sizeable decline in projected losses on securities, and the large provisions that had already been made against loan losses by the end of 2009, the potential total future write-downs on securities and loans has fallen quite substantially. BIS Review 75/2010  3  Chart 6 on slide 11 shows the profile of write-downs on securities and loans over time, applying the same methodology as in previous assessments published in the FSR. This time the horizon of the estimates for future losses has been lengthened to 2011 and sizeable loan losses are still expected next year. The expected write-downs on loans will constitute a significant and lasting drag on banking sector profitability and will raise the risk that the recent recovery of profits does not prove durable. At the same time, the pressure on banks to keep leverage under tight control, the disengagement from public support of banks’ balance sheets and the vulnerability of net interest margins of some banks to the prospect of a flattening of the yield curve are likely to contribute to keeping profitability moderate. Regarding the year-by-year distribution of losses by type of exposure, write-downs on securities exposures were the main contributor to the substantial losses for, and capital drains on, euro area banks in 2008. Going forward, while the recovery in securities prices makes valuation write-backs on securities holdings more likely in 2010, write-downs on loans are expected to remain relatively high.