the eba – are using the ongoing stress test to collect data on these portfolios. the prospect of higher funding costs also increases the downside risks to bank earnings. in early 2023, we saw bond issuance volumes picking up amid repayments of the amounts borrowed under the targeted longer - term refinancing operations and banks'efforts to increase or maintain buffers on their minimum requirements for own funds and 2 / 4 bis - central bankers'speeches eligible liabilities ( mrel ). but bond funding costs have also risen markedly since the start of 2022. a faster repricing of deposits, on the back of heightened competition, would increase funding pressures even further. while npls are at record lows, default rates on banks'corporate credit exposures started to increase in the second half of 2022 and early warning signals of future asset quality deterioration have become more pronounced. loans showing a significant increase in credit risk ( so - called " stage 2 " loans ) are on the rise, in particular for consumer and other non - mortgage household loans. within the corporate sector, concerns are mounting about the outlook for commercial real estate ( cre ) loans amid falling valuations and investor demand in cre markets. and while the energy crisis has abated, the risks for european firms from delaying the transition to climate neutrality are still high. finally, elevated vulnerabilities in non - bank financial institutions may spill over to euro area banks – given that they are strongly interconnected – exposing the banks to liquidity, asset price and credit risks. these links appear on both sides of banks'balance sheets and are stronger for large banks. the importance of preserving resilience so what does the current environment imply for macroprudential policy in the euro area? in view of prevailing uncertainties, macroprudential policy should focus on preserving resilience. first, existing macroprudential capital buffers that have been built up in recent years should not be released in the current environment. this is because banks'profitability improved considerably and, as i said earlier, their capital positions are not constraining the supply of bank credit. second, in the current uncertain environment, banks should remain prudent on their payouts to further support the resilience of the euro area banking system. increasing bank payouts should not be seen as a sign of strength. far from it. the best sign of banking system strength continues to be strong capital positions, which ensure sufficient

loan ( npl ) stocks continued last year, with banks'aggregate npl ratio stabilising at 2. 3 % in the fourth quarter. 1 / 4 bis - central bankers'speeches the third area i want to highlight is liquidity and funding. here, euro area banks differ substantially from their global counterparts. their average liquidity coverage ratio exceeded 160 % at the end of 2022, and around half of their high - quality liquid assets are held as cash and deposits with central banks. on aggregate, euro area banks are mainly funded by customer deposits, and a relatively high share of these are covered by deposit guarantee schemes. a challenging outlook there is no room for complacency, however. economic activity in the euro area has held up better than expected and a recession at the turn of the year did not materialise. but growth is still weak and inflation continues to be too high, with underlying price pressures remaining strong. earlier this month, the governing council decided to raise interest rates by 25 basis points, bringing the deposit facility rate to 3. 25 %. the challenging outlook heightens the uncertainties surrounding banks'profitability and resilience. while higher interest rates boost banks'net interest income, the benefits could be somewhat smaller than previously anticipated given a slowdown in lending growth and the inversion of the yield curve. for example, the latest euro area bank lending survey shows that demand for corporate and housing loans has decreased strongly, contributing to a slowdown in lending to firms and households in march. in parallel, banks'credit standards for corporate and housing loans tightened considerably in the first quarter of 2023. as lending slows down, so does the income base banks can rely on. importantly, however, banks'capital positions are not currently seen to be constraining bank credit supply. there are two sides to rising interest rates. certainly, they have a positive impact on earnings. but on the downside, they heighten interest rate risk with larger duration gaps, which vary widely across euro area banks – not least due to differences in the share of fixed - rate mortgages. banks also tend to incur unrealised losses on their fixed - income portfolios during periods of increasing long - term yields. this exerts a negative effect on the value of their equity. preliminary assessments show that, on aggregate, potential unrealised losses on bonds held at amortised cost are limited. but to gain further insights into this risk, we – together with