1. 9 % in march 2024. banks'profitability has also improved lately, as the net interest income of most lenders benefited from the increase in interest rates. recall that, at some point in time over the previous decade, the average return on equity ( roe ) for eu banks was barely positive. with march 2024 data, the average roe for eu banks reached 10. 6 %. finally, eu banks enjoy ample liquidity with a solid deposit base and full access to the wholesale and capital markets. in march 2024, the average liquidity coverage ratio ( lcr ) of eu banks was 161. 4 %, well above the supervisory minimum of 100 %. the positive macroeconomic environment is also supporting the financial fundamentals of eu lenders. however, risks to financial stability have been rising : geopolitical risk remains high for some time now, since the russian invasion of ukraine, and is further fuelled by the tensions in the middle east. political developments in the us and the eu are also creating uncertainty. geopolitical risk is an exogenous risk factor which could potentially have immense repercussions on the banking sector. a reassessment of risk premia following a sudden shift in market sentiment could put asset prices under strain with potential implications for the sector of non - bank financial institutions ( nbfi ). past events showed us that the non - bank financial sector can amplify worsening markets conditions through forced asset sales to 3 / 4 bis - central bankers'speeches address margin calls or potential liquidity needs. risks and vulnerabilities in the non - bank financial sector could essentially create spillovers to banks ( via loans, securities, etc. ) and to the real economy. the recent rise in interest rates alongside high inflation rates put the balance sheet of some firms and households under strain. against this backdrop - and despite the recent drop in the interest rates -, a deterioration in asset quality and a rise in loan loss provisions for european lenders with a time lag cannot be ruled out. in addition, weakening economic growth along with high interest rates could weigh heavily on the demand for new loans and the implementation of banks'business plans. note that the improved profitability following the rise in interest rates masked structural deficiencies in many banks, such as in terms of cost efficiency and digitalisation. the increase in borrowing costs over the past few quarters has led to a cooling of the real estate market in the euro area, notably the

d., pesenti p. ( 2006 ) “ would protectionism defuse global imbalances and spur economic activity? a scenario analysis ”, nbew working paper 12704, november 2006. • anglo - saxon countries which are very good at producing financial assets have already shown enormous imbalances, with us current account deficit and housing market bubbles as the headline examples ; • emergence of ( long lasting ) asset bubbles and drop in inflation ( and possibly even emergence of deflation ) are market mechanisms to bridge the asset gap ; • bursting an asset bubble makes asset shortages problem worse ; • while financial markets development moves ahead ( think about large listings in china, improving corporate governance or rapid development of credit derivatives ) it is unlikely that excess demand for assets will be eliminated soon, as it seems to have a structural origin, related to demographics ( aging ), or to higher uncertainty for corporations operating in more competitive global economy in xxi century, which probably explains why profits to gdp ratio is at 40 - years high and investments fail to recover to pre - asia - crisis and pre - dot - com - boom levels it does matter to what view of the world you subscribe, as it dramatically alters the subjective likelihood of competing scenarios for 2007. as pimco michael gomez puts it in september emerging markets note titled “ is it safe? ” 19 : “ em has historically been vulnerable to deteriorating economic and financial conditions in the united states and other developed countries. slower growth, tighter liquidity, and heightened risk aversion in mature markets generally mean lower commodity prices, less capital flows, and higher interest rates for em borrowers - conditions that helped produce some spectacular financial crises in the past dozen years. not a pretty picture, and one that begs the question of what lies around the corner “. however, if asset shortages story is correct, then upcoming us slowdown ( or brief recession according to some non - consensual forecasts ) would likely further increase excess saving ( as fading growth prospects will discourage investment projects and encourage more private saving amid rising uncertainty, only partly offset by higher public dissaving due to automatic stabilizers ), and lower valuation of us equities will make the world supply of assets even more scarce. in such situation us economy having hard times may not necessarily lead to higher risk premia for emerging markets ( as it was the case in the past ) rather any increase in risk premia would be used by investors to enhance returns, spread compression