Overall, looking forward, euro area insurers continue to face challenges mainly due to the subdued economic activity, which is reflected in the uncertainty of their earnings prospects (see Chart 14). At the same time, the disclosed solvency positions of euro area insurers indicate a reasonable amount of remaining shock-absorption capacity to weather the materialisation of the risks they currently face. 6  BIS Review 168/2009  V.  Overall assessment  Let me now conclude by providing an overall assessment of the identified risks to euro area financial system stability. As mentioned at the beginning of my presentation, the extraordinary policy measures taken by central banks and governments since late last year have been successful in restoring confidence in, and improving the resilience of, financial systems around the world. A recovery of risk appetite, underpinned by lowered systemic risk, has contributed to the turnaround in financial markets since March 2009 and supported the trading income of large and complex banking groups. Many of these institutions also benefited from a considerable boost to net interest income on account of very steep yield curves. The significant strengthening of the profitability of many LCBGs enabled them to absorb considerable writedowns on securities and loans while still, on average, reporting profits. Some were even able to return the capital they had received from governments, thus exiting from financial support. Despite the recovery in financial markets and improved financial performance of euro area LCBGs, there are several grounds for caution in assessing the outlook for financial stability in the euro area.

A closer look at LCBGs’ financial results in the first three quarters of 2009 shows that risks of future substantial write-downs, and related liquidity and solvency concerns, remained and might have increased somewhat. While the LCBGs seem to be gradually getting over the valuation losses they have suffered on their securities holdings, the sizeable provisions for loan losses seen lately underscore the significant challenges for banks in managing their distressed loan portfolios. Using the same methodology as in the June 2009 Review, and benefiting from more detailed data on loan and securities exposures of euro area banks, Box 10 presents an update of the estimate and assesses the magnitude of potential write-downs that might be suffered by banks by the end of 2010. The results show that euro area banks could face cumulative total losses of EUR 198 billion on their exposures to securities and losses of EUR 355 billion on their loan book exposures over the period 2007–2010. The total potential write-downs on securities and loans is thus currently estimated at EUR 553 billion over the same period. This figure is EUR 65 billion higher than the June 2009 estimate. The increase is mainly be explained by a further deterioration in the commercial property market, which contributed to a higher estimate of potential write-downs on banks’ commercial property mortgages and commercial mortgage-backed securities, and also by the inclusion of an estimate of writedowns on securities originated in Central and Eastern Europe.