At the same time, potential shocks could be transmitted through indirect channels to euro area banks via EMEs’ trade links with euro area countries and a broader financial market confidence channel stemming from uncertainty about growth prospects in EMEs. Such indirect channels are complex. One way of gauging them is by measuring the market perception of the potential for spillovers of financial risk from emerging markets to euro area banks. Banks’ ability to generate adequate profits is relevant for the sustainability of the banking system and, as such, for its ability to provide adequate funding to the economy. Profitable banks are able to attract capital from market investors and to generate capital through retained earnings. Since the financial crisis, euro area banks’ profitability has been low. This has reflected many factors, including the recognition of losses in the wake of the crisis, restructuring efforts with the aim of improving resilience, as well as an environment of low economic growth and low interest rates. The ECB has mitigated risks to euro area price stability stemming from the crisis by lowering policy rates and adopting a wide range of non-conventional monetary policy measures, in particular the negative deposit facility rate, the expanded asset purchase programme and the targeted longerterm refinancing operations (TLTROs). Since the transmission of these measures hinges on the banking system, they have the potential to affect bank profitability. Global financial markets have been marked by a number of short-lived episodes of elevated volatility in recent years. Strong corrections in asset markets can have adverse financial stability implications for the financial system owing to the losses that have to be absorbed, thereby reducing available buffers. A prolonged period of volatile and falling asset prices may also weaken the real economy via wealth effects and confidence channels. While large or persistent shocks to asset price volatility can cause clear harm to financial stability, so too might seemingly more insidious short-lived corrections. Indeed, amid surges in market volatility that are short-lived and quick to fade, investors are more likely to take undue risks. No other macroeconomic segment has been more closely linked to financial stability than residential real estate. Historical evidence shows that financial crises involving housing market imbalances have had severe negative repercussions on the overall financial system and economic growth. Accordingly, policies to contain risks stemming from residential property markets have assumed a key role in the macroprudential toolkit. Judiciously informing their use is, however, challenging given the multitude of factors behind real estate developments. This calls for an encompassing view that goes beyond traditional standardised price and valuation metrics. Financial stress indices have become a common tool to measure the current state of (in)stability in an economy’s financial system as a whole or major parts of it. Recent developments in a particular variant of such an index for the euro area, namely the composite indicator of systemic stress (CISS), reveal three distinct features: First, since mid-2013, the volatility of the CISS has gradually increased, with several large spikes in the last years. This presumably relates to major local and global stress events and may imply heightened risks to financial stability going forward. Second, the euro area CISS has displayed a gradual upward trend over this same period. More recently, the immediate stress following the UK referendum outcome lifted the indicator temporarily to levels last observed at the height of the euro area sovereign debt crisis.