target some particular capital ratio above the regulatory minima in the pursuit of higher credit ratings, deteriorating capital ratios could have adverse consequences for their credit quality and future funding costs. all in all, it cannot be excluded that the market re - pricing process could become more disorderly, possibly revealing further and, so far hidden, risk exposures. moreover, dividend policies could be adversely affected for several institutions. in addition, those lcbgs that rely on funding from non - deposit sources, and those that are particularly active in the securitisation businesses, could see their revenues decline significantly. reflecting these concerns, forward - looking financial market indicators, such as banks ’ cds spreads and share prices, currently suggest that challenges pertaining to the banking sector are likely to remain in the near future ( see the chart on the right of slide 12 ). the market turbulence has also raised concerns about the extent and nature of euro area insurers ’ exposures to structured credit products. against that background, some insurers have chosen to disclose their exposures to the us sub - prime mortgage asset - backed securities at the end of the first half of 2007 as shown in box 17 in the review. these data shows that the exposures in general are limited, on average less than 1 % of overall invested assets, and that they mostly relate to high - rated investment segments. these rather limited exposures, especially when compared with the us monoline insurers, can be explained by the differences in business models of euro area insures and by the fact that they had limited appetite for high levels of credit risk. nevertheless, while euro area insurers might have fairly limited direct exposure to us sub - prime mortgages or more generally to structured credit products, secondary effects of the ongoing credit market turmoil might be of greater concern. 6. overall assessment of the financial stability outlook let me now provide an overall assessment of the risks to the outlook for the euro area financial stability, as we see it at the current juncture. with financial systems undergoing a process of de - leveraging and re - intermediation, the uncertainty surrounding the financial stability outlook for the euro area has heightened. this uncertainty could persist for a considerable period of time until it becomes clearer how the total valuation and income losses, which could be sizeable, facing the euro area financial system will be spread across individual financial institutions. clarity will also be needed on how liquidity providers intend to deal with their commitments to off - balance sheet

lucas papademos : ecb financial stability review december 2007 opening remarks by mr lucas papademos, vice president of the european central bank, at the press briefing on the occasion of the publication of the december 2007 ecb financial stability review, frankfurt am main, 12 december 2007. * i. * * introduction my colleagues and i would like to welcome you to today ’ s press briefing on the occasion of the publication of the december 2007 edition of the ecb financial stability review. the financial stability assessment contained in the review has been prepared with the close involvement of the escb banking supervision committee. it is for the most part based on information that was available up until 9 november 2007, the “ cut - off ” date for this review. the primary objective of the fsr is to identify and evaluate the main sources of risk and vulnerability to financial stability and to provide a comprehensive assessment of the capacity of the euro area financial system to absorb adverse disturbances. the december 2007 edition of the review places special emphasis on the financial market turmoil, which is also the focus of the overview chapter. this edition of the review addresses several topical issues in 19 boxes and also contains five special feature articles. the choice of the content of some of these boxes and articles has been motivated by the financial market developments over the past few months. in my presentation, i will first devote some time to the ongoing financial market turmoil. second, i will review the risks and vulnerabilities in the external environment as well as in the euro area financial and non - financial sectors, which are partially affected by the re - pricing of financial risk. i will conclude with an overall assessment of the risks to euro area financial stability, as we currently see them. 2. the financial market turmoil 2. 1 causes starting with the market turmoil, the principal and underlying cause for the market tensions and volatility that erupted in august is that, over the past few years, several intertwined vulnerabilities were created by a mutually reinforcing interplay between three developments : ( 1 ) a strengthening investor risk appetite and a search for yield ; ( 2 ) a sizeable expansion of financial market liquidity from mid - 2003 onwards ; and ( 3 ) the increasingly widespread adoption by banks of the “ originate and distribute ” business model. more specifically, in an environment of historically low risk - free asset yields, the search for yield by investors made it necessary to seek and acquire alternative assets offering higher returns but associated with greater risks. these