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As financial conditions normalise, this may expose fragilities and fault lines in the financial system. Tighter financing conditions to forcefully address high inflation have contributed to a reappraisal of the economic outlook and to a reversal of overly-compressed asset price risk premia. Price stability remains as crucial as ever for durably preserving financial stability. While the fallout experienced by euro area banks was limited, these events have served as a powerful reminder of the importance of ensuring that banking system fundamentals are sound, in an environment where financial conditions are being tightened to tackle elevated inflation around the world.

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This spring saw considerable financial turbulence, with the spotlight increasingly turning on systemic risk concerns following a series of bank failures outside the euro area. B Key linkages between banks and the non-bank financial sector.

A Gauging the interplay between market liquidity and funding liquidity.5.3 Other ongoing policy initiatives that support euro area financial stability.Box 7 Non-banks’ liquidity preparedness and leverage: insights and policy implications from recent stress events.5.2 Enhancing resilience in the non-bank financial sector.5.1 Preserving banking sector resilience during a turning financial cycle.4.3 Insurers remain resilient, but rising economic uncertainty could pose challenges.4.2 Investment funds remain vulnerable to liquidity risk in a challenging market environment.Box 6 Corporate loans versus market-based finance: substitutes or complements?.4.1 Despite de-risking, the NBFI sector remains vulnerable amid macroeconomic uncertainty and volatile markets.Box 5 IFRS 9, accounting discretion and provisioning behaviour around credit events.3.4 Asset quality concerns rise as economic outlook weakens.3.3 Declining yet robust solvency, and rising cyber risks.3.2 Profits boosted by higher interest rates, as banking sector faces uneven prospects.Box 4 Euro area bank deposit costs in a rising interest rate environment.3.1 Compressing valuations and tighter funding conditions.Box 3 Do global investment funds have a stabilising effect on euro area government bond markets?.2.3 Global vulnerabilities might spill over to the euro area.2.2 Renewed recession fears could challenge risky-asset valuations.2.1 Inflation persistence might trigger renewed market corrections.Box 2 Institutional investors and house price growth.1.5 Vulnerable real estate markets are turning.1.4 A resilient household sector is facing tightening financial conditions.Box 1 Corporate vulnerabilities and the risks of lower growth and higher rates.1.3 Corporates bank on high margins, but vulnerabilities might increase as financial conditions tighten.1.2 Fiscal positions benefit from lower energy prices, while unaddressed challenges lie ahead.1.1 An improved but still fragile economic outlook.1 Macro-financial and credit environment.

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