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 Investments following strategies which are reliant on low market volatility have grown over recent years, with varying estimates. Internal estimates suggest that State guarantees for corporate loans could help to reduce losses significantly, and transfer some of the remaining risk to governments. The Tier 1 capital ratio of euro area banks on aggregate has almost doubled over the last decade, from 8.8% at the end of 2008 to 15.5% in the third quarter of 2019, which puts banks in a much better position to absorb potential losses resulting from the economic fallout of the coronavirus. Low liquid asset holdings reduced the capacity of the investment fund sector to absorb these outflows, likely resulting in forced asset sales and the amplification of market dynamics. Looking further ahead, an extension of the low interest rate environment in light of the economic downturn may also weigh on insurers’ profitability and future solvency. Additional powers are needed to ensure a timely and consistent use of liquidity management tools by asset managers in periods of distress. Hence, a further sharp correction in asset prices may materialise if GDP and earnings growth outturns match the more pessimistic scenarios, which have become more probable. Data do not include indirect holdings via insurers’ investment fund portfolios. Banks have increased their solvency positions substantially since the global financial crisis and are hence now much better positioned to absorb potential losses. Euro area growth projections by professional forecasters suggest a strong rebound in 2021 of between 4 and 6 percentage points, but are very uncertain given the exceptional nature of the shock. The spread between investment income and guaranteed rates is expected to narrow further, but to stay positive until 2030. Bond funding costs for euro area banks rose, particularly for riskier instruments. Finland and Estonia announced their intention to fully release the systemic risk buffer (SyRB), while the Netherlands announced the reduction of the SyRB for the three banks to which it applies. Find out how the ECB promotes safe and efficient payment and settlement systems, and helps to integrate the infrastructure for European markets. The global recovery is also uncertain, as EMEs experienced sharp capital outflows and world trade is expected to shrink. Furthermore, governments have directed subsidies towards SMEs to help them manage immediate liquidity shortages. Guaranteed rates are also estimated to decline from about 1.8% currently to 1% in 2030, as old annuity policies expire and because new contracts feature significantly lower rates. The European Central Bank has said if governments withdraw financial support from households and companies too early, it could "set back the economic recovery". The simulation takes account of adverse economic conditions and endogenous reactions of banks to stress and policies. By contrast, growth of consumer credit had been gradually decelerating already, in line with slower economic growth and the associated lower spending on durable goods. Quantity-based measures, such as the suspension of redemptions and redemption gates, were activated by a small number of funds in response to the large outflows. However, the SSM is currently conducting a “desktop” vulnerability analysis of the euro area banking sector. Right panel: the rating shown represents the median of the long-term issuer ratings assigned by Standard & Poor’s, Moody’s, Fitch Ratings and DBRS. The Financial Stability Review provides an overview of potential risks to financial stability in the euro area. Fiscal relief measures reduce the near-term impact of the pandemic, but may reinforce medium-term public debt sustainability concerns. But rapid price movements and volatility in markets triggered considerable margin calls in March (see Chart 2.5, left panel, and Special Feature B). Euro area bank valuations saw outsized declines as global equity market prices fell in March. Look at press releases, speeches and interviews and filter them by date, speaker or activity. The first earnings releases by euro area banks for the first quarter of 2020 show that higher provisioning has contributed substantially to lower bank profitability. Given the heterogeneity in the reporting of the data, the aggregate figure for discretionary measures could be distorted by the impact of automatic stabilisers. Against this backdrop, the May 2020 Financial Stability Review assesses how the financial system has operated so far during the pandemic. Given the significant deterioration in the euro area economic outlook since the coronavirus outbreak, this vulnerability seems of particular relevance. Although the revised timeline does not affect banks’ current capital positions, it may mitigate potential procyclical increases in capital requirements in a stress situation. While previous systemic crises were characterised by a sharper rise in spreads in either the corporate (2008-09) or the sovereign (2011-12) sector, the current episode features a significant increase in both corporate and sovereign bond spreads (see Chart 2.7, left panel). In general, insurers were well capitalised at the onset of the pandemic (see Chart 4.8, left panel). Sources: ECB supervisory statistics and ECB calculations.Note: Based on a sample of 116 SIs. The potential of these vulnerabilities to materialise simultaneously further increases the risks to financial stability. Non-banks are heavily exposed to corporate bonds, including those with BBB ratings and those issued by sectors most sensitive to the coronavirus shock. Equity and bonds issued by the energy sector recorded some of the largest markdowns as extreme volatility extended to commodity prices (see Chart 2.1, sixth panel). Globally, there may be funds with assets under management worth up to USD 2 trillion invested in some form of volatility strategies, with USD 300 billion invested in some 100 risk parity funds, a well-known hedge fund strategy for multi-asset funds. It should also reduce any stigma associated with restrictions on dividend distributions that might normally follow banks drawing down on their capital buffers. The larger estimated impact on Italian and Spanish banks reflects a relatively high weight of corporate exposures and weaker corporate liquidity buffers. Further loss-absorption capacity is available, as banks may operate below the capital level implied by Pillar 2 guidance and may use combined buffer requirements. 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