The ECB and other policy-making institutions are currently devoting much time and effort to developing tools and models which can be used to monitor, identify and assess potential threats to the stability of the financial system. This special feature presents three such models recently developed at the ECB, each focusing on a different aspect of systemic risk. The first model uses a framework of multivariate regression quantiles to assess the contribution of individual financial institutions to systemic risk. The second model aims to capture financial institutions’ shared exposure to common observed and unobserved drivers of financial distress using macro and credit risk data, and combines the estimated risk factors into coincident and early warning indicators. The third model relies on standard portfolio theory to aggregate individual financial stress measures into a coincident indicator of systemic stress. Fundamental reforms of regulation and supervision are currently under way – both at international and European level – to address the deficiencies exposed by the financial crisis. In this context, a range of policy approaches have been developed, aimed at mitigating the burden on taxpayers and minimising future reliance on public funds to bail out financial institutions. This special feature examines the recent initiatives undertaken by several EU Member States to implement bank levies and resolution funds, in some cases exploiting synergies with deposit guarantee schemes (DGSs). These financing mechanisms are fully supported by the European Commission in the context of the proposed EU framework for bank recovery and resolution. Valuation losses in the trading books constituted the first wave of losses suffered by euro area LCBGs in the current crisis, triggered by the collapse of the US sub-prime market. More recently, estimating potential losses from banks’ government bond portfolios formed an important part of the EU-wide stress-testing exercise carried out in July 2010. The important role played by trading-book holdings for the profit and loss accounts of many LCBGs has intensified the need for monitoring, stress testing and possibly also forecasting the valuations of banks’ trading books for financial stability purposes. An important impediment to this work is the limited availability of data from public sources which consist mainly of quarterly or annual observations from banks’ published financial reports. This box focuses on the statistical revaluations data collected under Regulation (EC) No 25/2009 of the ECB of 19 December 2008 concerning the balance sheet of the monetary financial institutions sector (recast) (ECB/2008/32) and discusses its usefulness in providing information for the analysis of changes in trading and banking-book valuations at the aggregate banking sector level. The customer funding gap is an indicator that is defined as net loans (i.e. gross lending to the nonfinancial sector minus provisions for non-performing loans) minus customer deposits. It shows whether banks have enough deposits to cover the expansion of their lending activities or whether they have to tap the money and capital markets to finance these activities. A customer funding gap can lead to funding risks in case liquidity unexpectedly ceases to be available, conditions experienced in autumn 2008 as well as the first half of 2010. This box looks at the development of the aggregated liabilities and at the evolution of the funding gap of the set of euro area banks that participated in the EU-wide stress-test exercise. The customer funding gap for this sample has increased in both absolute and relative (i.e. as a percentage of total assets) terms since 2005, although it declined in 2009. The EU-wide stress-testing exercise that was carried out in July 2010 involved, among other features, the disclosure of the exposures of all 91 participating banks to 30 European sovereigns. The reason for this extensive disclosure was to provide a harmonised source of information to market participants and, thereby, to help them in assessing the scope of potential losses by individual institutions that would arise from fluctuations in the value of sovereign debt. The exercise provided evidence that the EU banks’ trading-book holdings of foreign sovereign debt securities are unlikely to be large enough to create a direct channel for the propagation of systemic risk, which is somewhat contrary to the views held by some market participants prior to the disclosure. Net interest income generated by retail customer activities, such as, in particular, the collection of deposits and the granting of loans, is one of the main sources of income for euro area banks. At the current juncture, with short-term interest rates hovering at historical lows and many banks experiencing protracted difficulties in accessing both retail and wholesale funding, banks’ deposit margins have been squeezed significantly. Similarly, in euro area countries where the majority of loans carry a rate of interest that is either floating or has a short period of fixation, lending margins have also come under pressure in light of the sharp decline of short-term market rates over the past two years. By contrast, banks in euro area countries where a significant part of loans are granted at rates that are fixed for a long term have tended to benefit from the relatively steep yield curve observed in 2009 and 2010 (see the chart above). Against this background, this box examines the possible implications of an increase in short-term market rates, as currently expected by market participants, on euro area banks’ retail customer-related net interest income. On 23 September 2010, the ECB published the results of the Euro Money Market Survey 2010, which were based on data collected from banks in 27 European countries and covered developments in various segments of the euro money market in the second quarter of 2010. This box reports on the survey’s main findings. In the EU, the United Kingdom and the United States, new macro-prudential frameworks have been established, including the creation of new official bodies to improve systemic oversight and coordinate macro-prudential interventions. This box briefly describes the structure and responsibilities of these bodies and outlines the main differences. From early 2010 fiscal imbalances in certain euro area countries have been causing tensions in sovereign debt markets. Euro area countries responded by affirming their willingness to take determined and coordinated action, if necessary, to safeguard financial stability in the euro area as a whole. In this context, on 2 May 2010 euro area countries agreed to activate, together with the IMF, a three-year financial support programme for Greece. On 6-7 May 2010, tensions escalated abruptly in financial markets. In line with their earlier commitment, European governments took urgent and unprecedented action to safeguard financial stability. On 9 May 2010, the Member States agreed to establish a comprehensive package of measures, consisting of three elements. The combination of a general economic slowdown and the intensification of the financial crisis in late 2008 resulted in a marked reduction in lending to non-financial corporations in the euro area.