agencies currently expect an increase in default rates by european speculative - grade firms in the period ahead as shown in the left chart of slide 9. another source of vulnerability stems from the euro area commercial property markets where the overall outlook remains uncertain. downside risks have increased and may have started to materialise. higher funding costs and stabilising or, in some cases, falling property prices have reduced investor demand which could further weaken ( as shown in the chart on the right of slide 9 ). demand has fallen most in those countries where investment volumes have grown rapidly during recent years and where property prices have started to stagnate or fall. moreover, the deteriorating economic outlook in some parts of the euro area has the potential to negatively affect demand for rented commercial property, thus increasing vacancy rates and lowering rents. in addition, the market turmoil has had a sizeable impact on the issuance of commercial real estate - backed securities. in our overall assessment, highly - leveraged firms and commercial real estate corporations may entail significant risks to euro area financial stability not only because of potential asset price reversals, but especially because several euro area large and complex banking groups have large lending and investment exposures to these corporations. developments in these sectors therefore need to be closely monitored in the period ahead. for euro area households, the property market is of particular relevance. residential property prices in the euro area as a whole continued to rise at a moderating rate, as is shown in the chart on the left of slide 10. despite the recent moderation in house price inflation in the euro area on average, there are still indications of increasing overvaluation in the residential property market in some member states during the past six months ( as can be derived, for instance, from house price - to - rent ratios ). in those countries where overvaluation appears to be most acute, the housing market represents a source of risk to household sector balance sheets. from a broader financial system perspective, lending to households – even though on a declining path – remains an important business for most euro area banks. for some of them, loans to households represent a sizeable proportion of their overall loan portfolios and total assets, as shown in the chart on the right of slide 10. hence, household sector net worth and creditworthiness – which at the euro area level remain rather comfortable despite the existence of previously identified pockets of vulnerability – are important in assessing the overall risk profile of these institutions. 3 ii. 3 the euro area financial system

suggests that the global and euro area financial systems have undergone further substantial adjustment to the financial turmoil. in the euro area, asset valuation write - downs disclosed by large banking groups in 2007 materially impacted on their profitability, but their capital buffers have been maintained largely intact. some of the risks to euro area financial system stability previously identified have materialised, and risks on balance have increased over the past six months, for several reasons, including : 1. conditions in the us housing market have further deteriorated ; 2. the valuation losses endured by mature economy banking systems were larger than anticipated six months ago ; and 3. banks have tightened their lending standards significantly. the current financial stability outlook is highly uncertain and will depend, inter alia, mainly on the following three factors : first, how conditions in the us housing market develop ; second, how banks respond to a much more challenging operating environment ; and third, the extent to which initiatives and measures aimed at restoring confidence and strengthening financial system resilience are eventually implemented. it is probable that the adjustment process within the financial system will be protracted as banks continue to strengthen their liquidity and capital positions. this means that balance sheet expansion is likely to be somewhat curtailed in the period ahead. in a negative scenario, the adjustment could risk perturbing the smooth intermediation of credit in the economy. so far, however, the availability of bank credit to households and non - financial corporations has not been significantly affected by the financial market turbulence. at the same time, the financial system may be more vulnerable than before to the crystallisation of other risks that have been identified in previous issues of the review and that remain relevant. given the heightened uncertainty and an environment in which balance sheet conditions could change unexpectedly, vigilance by financial institutions and market participants is of the essence and those with relevant exposures will need to step up their efforts to effectively manage the risks that may lie ahead. i would like to conclude on a positive note by recalling that the losses disclosed so far by the financial institutions affected by the turmoil are mostly mark - to - market losses on hard - tovalue assets. if the outturns for implied credit losses ultimately prove less severe than currently expected, then it cannot be ruled out that those financial firms still holding these assets will see some offsetting valuation gains in their portfolios. thank you very much for your attention. i am now at your disposal for questions.