However, concerns remain about the sustainability of unprecedented levels of mortgage-related leverage in those parts of the euro area where, ceteris paribus, housing valuations appear stretched, where the debt build-up has been pronounced, and where the majority of debt is financed at variable interest rates. While measures of leverage compared to income can provide a rough indication of the ability to service debt, it is also important to evaluate the sustainability vis-à-vis assets, as this can provide an indication of the capacity of households to repay their debts in full at an aggregate level. The value of household assets – which is much larger than that of their debt – has grown more than their liabilities, especially after 2002, as the stock market has recovered the losses from the bursting of the high-tech bubble and as house prices have also risen. As a result, as shown in the chart on the right of slide 9, households have seen a notable rise in their net wealth over this period, driven in particular by the housing wealth component, which accounted for about 60% of total household wealth in 2006. Euro area large and complex banking groups The financial soundness of large and complex banking groups (LCBGs) in the euro area strengthened further in the second half of 2006, consolidating on the steady and broad-based improvement from 2003 onwards. Profitability continued to rise, underpinned by favourable macroeconomic conditions and, for the most part, very low levels of financial market volatility.

As a result of these developments along with the globalization of financial markets, every trading institution has become more exposed to changes all over the world economies and financial markets. This has led all institutions including central banks to develop new processes in their organizations to manage the risks in a more systematic way, although they used to have had implicit risk management practice. Parallel to these developments in risk management, the practice of reserve management by most of the central banks has changed significantly over the last decade. Once characterized by passive short-term investment strategies to preserve principal value and maintain maximum liquidity, many central banks now use a broad range of instruments, extend their portfolio duration and develop performance benchmarks. This increased attention to risk management and new approach to reserve management by central banks has come about not because of any change in central bank missions, but because of the growing recognition that the conduct of core businesses inevitably involve exposure to financial risks and also because of increased attention to the contribution of central bank profits to national treasuries. Advances in financial risk management brought more scope for central banks to consider increasing their portfolio returns together with maintaining the desired level of liquidity, which is the primary target for central banks. 1  BIS Review 38/2000  Then, the important question of how an effective risk management system can be developed, comes out. The answer to this question does not change depending on the objectives and the size of the institution.