Financial stability review June 2005

EUROPEAN CENTRAL BANK

FINANCIAL STABILITY REVIEW

JUNE 2005

FINANCIAL STABILITY REVIEW JUNE 2005

In 2005 all ECB publications will feature a motif taken from the

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FINANCIAL STABILITY REVIEW

JUNE 2005

? European Central Bank, 2005

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Unless otherwise stated, this document uses data available as at 6 May 2005.

ISSN 1830-2017 (print) ISSN 1830-2025 (online)

CONTENTS

PREFACE

7

I OVERVIEW OF RISKS TO FINANCIAL

STABILITY

9

II THE MACRO-FINANCIAL ENVIRONMENT 15

1 THE EXTERNAL ENVIRONMENT

15

1.1 Risks and financial imbalances in

the external environment

15

1.2 Key developments in international

financial markets

25

1.3 Conditions of non-euro area

financial institutions

37

2 THE EURO AREA ENVIRONMENT

44

2.1 Economic outlook and risks

44

2.2 Balance sheet conditions of

non-financial corporations

44

2.3 Household sector balance sheets 51

6 STRENGTHENING EURO AREA FINANCIAL

SYSTEM INFRASTRUCTURES

101

6.1 Payment systems

101

6.2 Securities clearing and settlement

systems

106

6.3 Quote-driven electronic trading

platforms

112

IV SPECIAL FEATURES

117

A ASSESSING FINANCIAL STABILITY:

CONCEPTUAL BOUNDARIES AND

CHALLENGES

117

B INDICATORS OF FINANCIAL DISTRESS

IN MATURE ECONOMIES

126

C ASSESSING THE DETERMINANTS

OF FINANCIAL DISTRESS IN FRENCH,

ITALIAN AND SPANISH FIRMS

132

III THE EURO AREA FINANCIAL SYSTEM 59 D HAS THE EUROPEAN COLLATERALISED

DEBT OBLIGATIONS MARKET MATURED? 140

3 EURO AREA FINANCIAL MARKETS

59

3.1 Key developments in the money

STATISTICAL ANNEX

S1

market

59

3.2 Key developments in capital markets

BOXES 59 1 US current account: interaction with

the international investment position

4 THE EURO AREA BANKING SECTOR

69

and adjustment channels

16

4.1 Financial conditions in the

2 Hedge funds and the crowding of

banking sector

69

trades

28

4.2 Risks facing the banking sector 75 3 US government-sponsored

4.3 Shock absorption capacity of the

enterprises and systemic risk

38

banking sector

86 4 Interest rate sensitivity of debt raised

4.4 Overall assessment

91

by non-financial corporations in the

euro area

46

5 OTHER EURO AREA FINANCIAL

5 The external financing conditions

INSTITUTIONS

93

of small and medium-sized enterprises

5.1 Financial conditions in the

in the euro area

49

insurance sector

93 6 Household debt ratios in the euro area

5.2 Risks facing the insurance sector 96

from an international perspective

53

5.3 Overall assessment

99 7 The narrowing of bid-offer spreads

in money market instruments

60

8 The extension of the euro yield

curve to ultra-long maturities

62

9 Corporate bond spreads and default

expectations in the euro area

65

ECB

Financial Stability Review June 2005

3

10 Assessing financing conditions with the

ECB Bank Lending Survey

73

11 Financial stability implications of the

new International Financial Reporting

Standards

76

12 Measuring the interest rate risk of

euro area banks using an asset pricing

model

82

13 Options-based indicators of future risks

in euro area bank stock prices

87

14 Distance to default as a measure of

banking sector fragility

90

15 The reinsurance market and catastrophe

bonds

94

16 The core principles for systemically

important payment systems

102

17 Clearing of over-the-counter (OTC)

derivatives transactions

108

18 ESCB-CESR standards for securities

settlement systems

110

CHARTS

1.1 Net lending/borrowing of the US

economy

15

1.2 US non-farm, non-financial corporate

sector financing gap

19

1.3 Growth of US corporate liabilities 20

1.4 US corporate sector rating

downgrades, upgrades and balance 20

1.5 Share of adjustable rate mortgages

in the US

21

1.6 US personal saving and household

net worth

21

1.7 Growth of MFI credit to the private

sector in the EU10

22

1.8 Euro area banks' consolidated

foreign claims on non-developed

economies

23

1.9 Speculative USD/EUR net positions

and the USD/EUR exchange rate 25

1.10 US six-month TED spread

26

1.11 Magnitude of changes in long-term

bond yields before and during US

monetary policy tightening cycles 27

1.12 Indicators of positioning and leverage

in the US bond markets

27

1.13 US ten-year bond yield and consensus

ten-year nominal GDP growth

expectations

31

1.14 Holdings of US Treasury and agency

securities by foreign official and

institutional investors

31

1.15 Spread of 30-year over ten-year

US Treasury yields

32

1.16 Small, mid and large caps:

total return index in the US

32

1.17 US BAA ? AAA corporate bond

spread

33

1.18 Spread of corporate bonds issued

by US industrial companies

33

1.19 Speculative positions and WTI crude

oil spot and futures prices

34

1.20 Implied risk-neutral density for oil

futures prices

35

1.21 Sovereign bond spreads in major

emerging regions

35

1.22 Equity market indices in major

emerging regions

35

1.23 Trading revenues as a proportion

of total net revenues

37

1.24 Changes in Value at Risk (VaR)

levels between 2003 and 2004

38

2.1 Survey-based estimates of the risk

of weak real GDP growth in the

euro area

44

2.2 Costs, sales and profits of Dow Jones

EURO STOXX 50 companies

45

2.3 Breakdown of the real annual rate

of growth of external financing to

non-financial corporations in the

euro area

45

2.4 Correlation of monthly expected

default frequencies and oil price

changes

48

2.5 European non-financial corporate

sector downgrades, upgrades and

balance

51

2.6 Debt and non-performing loans of

euro area households

52

2.7 Changes in euro area households'

net worth

52

2.8 Euro area households' financial

situation and unemployment

expectations

55

2.9 Building permits and residential

investment in the euro area

56

2.10 House price-to-rent ratio for the

euro area

56

ECB c

4

Financial Stability Review June 2005

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