lucas papademos : ecb financial stability review june 2009 – opening remarks 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 june 2009 ecb financial stability review, frankfurt am main, 15 june 2009. the original speech, which contains various charts to the speech can be found on the european central bank ’ s website. * i. * * introduction my colleagues and i would like to welcome you to today ’ s press briefing on the occasion of the publication of the june 2009 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. the review examines in detail the main trends and events that characterised the euro area financial system over the past six months 1 and it contains 15 boxes and five special feature articles that address topical financial stability issues in a more focused and analytical manner. as done for the first time last december, we have prepared a summary note that highlights some key messages of our analysis and assessment. many of the downside risks to euro area financial stability that were identified in the december 2008 issue of the fsr have crystallised. 2 in particular, the further significant deterioration in global macroeconomic conditions as well as sizeable downward revisions to growth forecasts and expectations have added to the stresses on global and euro area financial systems. the contraction of economic activity and the diminished growth prospects have resulted in a further erosion of the market values of a broad range of assets. the adjustment of bank balance sheets has adversely affected the market pricing of assets and the financial intermediation role of banks in channelling funds from savers to investors. moreover, there have been increasing signs of an adverse feedback loop between the real economy and the financial sector which poses new challenges for the safeguarding of financial stability. ii. sources of risk and vulnerability ii. 1. risks in the global macro - financial environment the primary objective of the financial stability review is to identify the main sources of risk to, and vulnerability for, the financial system stability in the euro area and to provide an assessment of the system ’ s capacity to absorb adverse disturbances. as the global financial and economic turbulence is still ongoing, let me start by examining risks to euro area financial stability stemming from developments in the global macro - financial environment. the analysis and assessment contained in the review is for the most part based on information that was available until the “

relatively high leverage ratio. reduced profits hamper firms ’ ability to generate internal financing while, at the same time, external financing conditions are likely to remain tight, as long as banks continue to de - leverage and other funding markets remain under stress. non - financial corporations ’ default rates for both euro area and european firms have started to increase. the european speculative grade - rated corporations ’ default rate is expected to jump to almost 20 % by the end of 2009, as shown in chart 5. furthermore, credit rating agencies began revising downwards their ratings of non - financial corporations in december 2008. box 6 of the review takes a closer look at the outlook for corporate defaults. it concludes that given the extraordinary nature of recent developments in the financial markets, current forecasts could prove too pessimistic despite the sharp decline in economic activity. the prospect of global and european speculative - grade corporations ’ default rates increasing substantially implies a significant risk to the financial system. another source of risk is the commercial property market where conditions continued to deteriorate over the past six months. in the first quarter of 2009, commercial property prices actually fell in all 13 euro area countries for which data are available. the outlook will remain unfavourable until economic and financial conditions improve and investor appetite for commercial property returns. potential further losses constitute a significant risk for many banks since commercial property loans in the euro area on average account for about 10 % of total loans and, in many cases, exposures are even much larger. euro area household sector turning to the household sector, euro area house price increases continued to ease in 2008, as shown on chart 6. in at least six euro area countries house prices have declined on an annual basis. these developments have been associated with a moderation of both housing demand and supply, but the balance of the changes in demand and supply has been putting downward pressure on prices. the annual rate of growth of loans to the household sector declined sharply in the final quarter of 2008 and in the first quarter of 2009, reflecting the deterioration in housing markets, weakening economic conditions and prospects, and the ongoing tightening in credit standards. according to the results of the april 2009 ecb bank lending survey, a further dampening of households ’ demand for housing loans is expected due to worsened housing market prospects and low consumer confidence. ii. 3. risks in the euro area financial system euro area money markets let me now focus on the euro area financial system. over the past few months, developments in several financial