Financial Stability Report – November 2024

The financial sector is on a favourable path

Previous risks associated with surging costs and higher interest rates are easing gradually. This shift should in time bring welcome relief to many borrowers. Looking at future risks, attention is turning from inflation to an uncertain outlook for economic growth.

While the mortgage market is showing signs of recovery, firms’ demand for loans remains subdued

The shift in interest rate movements is gradually implying a partial recovery in the mortgage market. While there are several signs of recovery, they remain only very mild for now. In the corporate segment, by contrast, there are still no signs of recovery, with the outstanding amount of loans to non-financial corporations (NFCs) continuing to decline on a year-on-year basis. This is due mainly to firms’ decreasing demand for loans.

Although some loan portfolios are more sensitive to shocks, the outlook is positive

Borrowers have so far managed the period of higher interest rates, with no significant increase in non-performing loans. Signs of deterioration are visible only in the commercial real estate (CRE) portfolio, where there has been a slight increase in loan rescheduling rather than actual defaults.

The previous period resulted, however, in an increase in the riskiness of loan portfolios, particularly the mortgage and CRE portfolios. Both of them are now more sensitive to external shocks than they were in the past. The main reasons for this are the previous decline in real household incomes, rising interest expenses, and the declining value of real estate collateral. Looking ahead, however, the outlook is positive.

Owing to the increased sensitivity of loan portfolios, the macroprudential policy stance remains unchanged for now

This aligns with the ECB’s statement recommending against easing capital buffer requirements or borrower-based limits for the time being.

Banks continue to demonstrate strong resilience

This enables them to adapt to new challenges. The banking sector’s strong risk resilience is confirmed by its robust profitability. Total capital and liquidity ratios have risen to near historical highs.

The Report also looks at other topical issues:

• Insurers’ profits have increased, and assets of pension funds and investment funds have risen significantly.
• The new fiscal consolidation package will contribute to the sustainability of public finances and, by extension, to financial stability. It is not expected to weigh too heavily on the debt servicing capacity of households and firms.
• The digital euro is not foreseen to have a major impact on banks’ liquidity positions.